S-1 1 d345519ds1.htm FORM S-1 Form S-1
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on July 6, 2012

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Hi-Crush Partners LP

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   1400  

90-0840530

(State or Other Jurisdiction of Incorporation or Organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)

Three Riverway, Suite 1550

Houston, Texas 77056

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Robert E. Rasmus/James M. Whipkey

Three Riverway, Suite 1550

Houston, Texas 77056

(713) 963-0099

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

David Palmer Oelman

E. Ramey Layne

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

Tel: (713) 758-2222

Fax: (713) 758-2346

 

Charles L. Strauss

P. Kevin Trautner

Fulbright & Jaworski L.L.P.

Fulbright Tower

1301 McKinney, Suite 5100

Houston, Texas 77010

Tel: (713) 651-5151

Fax: (713) 651-5246

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

 

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities To Be Registered
  Proposed
Maximum Aggregate
Offering Price(1)(2)
  Amount of Registration
Fee

Common units representing limited partner interests

  $200,000,000   $22,920

 

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

Subject to Completion, dated July 6, 2012

 

PR OSPECTUS

 

 

 

LOGO

Hi-Crush Partners LP

Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of our common units representing limited partner interests. We are offering              common units, and Hi-Crush Proppants LLC, or the selling unitholder, is offering              common units. We will not receive any proceeds from the sale of common units by Hi-Crush Proppants LLC. Prior to this offering, there has been no public market for our common units. We currently expect the initial public offering price to be between $         and $         per common unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “HCLP.”

 

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 25.

These risks include the following:

 

 

We may not have sufficient cash from operations following the payment of costs and expenses to enable us to pay the minimum quarterly distribution to our unitholders.

 

 

On a pro forma basis we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all units for the twelve months ended March 31, 2012.

 

 

Inaccuracies in estimates of volumes and qualities of our sand reserves could result in lower than expected sales and higher than expected production costs.

 

 

Substantially all of our sales are generated under contracts with four customers, and the loss of or reduced purchasing by any of them could adversely affect our results of operations.

 

 

Hi-Crush Proppants LLC controls our general partner, which has sole responsibility for managing our operations. Our general partner and Hi-Crush Proppants LLC have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

 

 

The board of directors of our general partner may modify our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all.

 

 

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

 

Unitholders will experience immediate and substantial dilution of $         per common unit.

 

 

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

 

 

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, then our cash available for distribution to you could be substantially reduced.

 

 

You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933 and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Risk Factors” and “Summary—Emerging Growth Company Status.”

 

 

 

     Per Common Unit      Total  

Public Offering Price

   $                    $                

Underwriting Discount(1)

   $         $     

Proceeds to Hi-Crush Partners LP (before expenses)(2)

   $         $     

Proceeds to Hi-Crush Proppants LLC

   $         $     

 

(1) Excludes a structuring fee of     % of the gross proceeds of this offering payable to Barclays Capital Inc. Please read “Underwriting.”
(2) Of these proceeds, we will retain approximately $4.1 million to fund capital expenditures and for general partnership purposes. The balance of the proceeds will be used to repay debt assumed by us from the selling unitholder and to make a distribution to the selling unitholder.

The underwriters may purchase up to an additional              common units from Hi-Crush Proppants LLC at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units to purchasers on or about                     , 2012 through the book-entry facilities of The Depository Trust Company.

 

 

 

Barclays   Morgan Stanley

 

 

Prospectus dated                     , 2012


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Index to Financial Statements

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by or on behalf of us and the selling unitholder or any other information to which we have referred you in connection with this offering. Neither we, nor the selling unitholder nor the underwriters have authorized any other person to provide you with additional or different information. Neither the delivery of this prospectus nor sale of our common units means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy our common units in any circumstances under which the offer or solicitation is unlawful.

TABLE OF CONTENTS

 

SUMMARY

     1   

Hi-Crush Partners LP

     1   

Our Business and Properties

     2   

Industry Dynamics

     4   

Business Strategies

     5   

Competitive Strengths

     6   

Risk Factors

     7   

Our Management

     9   

Our Relationship with Our Sponsor

     10   

Principal Executive Offices

     12   

Emerging Growth Company Status

     12   

Formation Transactions and Partnership Structure

     13   

Organizational Structure

     14   

The Offering

     15   

Summary Historical and Pro Forma Financial and Operating Data

     20   

Non-GAAP Financial Measures

     23   

RISK FACTORS

     25   

Risks Inherent in Our Business

     25   

Risks Related to Environmental, Mining and Other Regulation

     37   

Risks Inherent in an Investment in Us

     40   

Tax Risks to Common Unitholders

     51   

USE OF PROCEEDS

     55   

CAPITALIZATION

     56   

DILUTION

     57   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     59   

General

     59   

Our Minimum Quarterly Distribution

     61   

Subordinated Units

     61   

Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013

     64   

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

     71   

General

     71   

Operating Surplus and Capital Surplus

     71   

Capital Expenditures

     73   

Subordination Period

     75   

Distributions From Operating Surplus During the Subordination Period

     76   

Distributions From Operating Surplus After the Subordination Period

     77   

General Partner Interest

     77   

Incentive Distribution Rights

     77   

Percentage Allocations of Distributions From Operating Surplus

     77   

 

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Index to Financial Statements

Our Sponsor’s Right to Reset Incentive Distribution Levels

     78   

Distributions From Capital Surplus

     80   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     81   

Distributions of Cash Upon Liquidation

     81   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     84   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     88   

Basis of Presentation

     88   

Overview

     88   

Overall Trends and Outlook

     89   

How We Generate Revenue

     90   

Costs of Conducting Our Business

     91   

How We Evaluate Our Operations

     92   

Factors Impacting Comparability of Our Financial Results

     93   

Results of Operations

     94   

Liquidity and Capital Resources

     96   

Customer Concentration

     100   

Contractual Obligations

     100   

Quantitative and Qualitative Disclosure of Market Risks

     101   

Recent Accounting Pronouncements

     102   

New and Revised Financial Accounting Standards

     103   

Critical Accounting Policies and Estimates

     103   

Environmental Matters

     104   

PROPPANT INDUSTRY OVERVIEW

     105   

Our Industry

     105   

Historical and Projected Proppant Demand

     108   

Historical and Projected North American Rig Count

     109   

Historical and Projected North American Wells and Proppant Intensity

     109   

BUSINESS

     112   

Overview

     112   

Business Strategies

     113   

Competitive Strengths

     114   

Assets and Business Operations

     115   

Quality Control

     121   

Customers

     121   

Contracts

     122   

Competition

     123   

Our History and Relationship with Our Sponsor

     123   

Our Management and Employees

     125   

Environmental and Occupational Safety and Health Regulation

     125   

Safety and Maintenance

     129   

Seasonality

     129   

Principal Executive Offices

     129   

Legal Proceedings

     129   

MANAGEMENT

     130   

Management of Hi-Crush Partners LP

     130   

Executive Officers and Directors of Our General Partner

     131   

Director Independence

     134   

Committees of the Board of Directors

     134   

 

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Index to Financial Statements

EXECUTIVE COMPENSATION AND OTHER INFORMATION

     135   

Summary Compensation Table

     135   

Narrative Disclosure to the Summary Compensation Table

     135   

Outstanding Equity Awards at 2011 Fiscal Year-End

     136   

Additional Narrative Disclosure

     136   

Director Compensation

     137   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     138   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     139   

Distributions and Payments to Our General Partner and Its Affiliates

     139   

Agreements with Affiliates in Connection with the Transactions

     140   

Other Transactions with Related Persons

     143   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     145   

Conflicts of Interest

     145   

DESCRIPTION OF THE COMMON UNITS

     152   

The Units

     152   

Transfer Agent and Registrar

     152   

Transfer of Common Units

     152   

THE PARTNERSHIP AGREEMENT

     154   

Organization and Duration

     154   

Purpose

     154   

Cash Distributions

     154   

Capital Contributions

     154   

Voting Rights

     155   

Applicable Law; Forum, Venue and Jurisdiction

     156   

Limited Liability

     156   

Issuance of Additional Interests

     157   

Amendment of the Partnership Agreement

     158   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     160   

Dissolution

     160   

Liquidation and Distribution of Proceeds

     161   

Withdrawal or Removal of Our General Partner

     161   

Transfer of General Partner Interest

     162   

Transfer of Ownership Interests in the General Partner

     162   

Transfer of Subordinated Units and Incentive Distribution Rights

     162   

Change of Management Provisions

     163   

Limited Call Right

     163   

Non-Taxpaying Holders; Redemption

     163   

Non-Citizen Assignees; Redemption

     164   

Meetings; Voting

     164   

Voting Rights of Incentive Distribution Rights

     165   

Status as Limited Partner

     165   

Indemnification

     165   

Reimbursement of Expenses

     166   

Books and Reports

     166   

Right to Inspect Our Books and Records

     166   

Registration Rights

     167   

UNITS ELIGIBLE FOR FUTURE SALE

     168   

 

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Index to Financial Statements

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     170   

Taxation of the Partnership

     170   

Tax Consequences of Unit Ownership

     171   

Tax Treatment of Operations

     176   

Disposition of Units

     178   

Uniformity of Units

     180   

Tax-Exempt Organizations and Other Investors

     180   

Administrative Matters

     181   

State, Local and Other Tax Considerations

     182   

INVESTMENT IN HI-CRUSH PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     183   

UNDERWRITING

     184   

Commissions and Expenses

     184   

Option to Purchase Additional Common Units

     185   

Lock-Up Agreements

     185   

Offering Price Determination

     186   

Indemnification

     186   

Stabilization, Short Positions and Penalty Bids

     186   

Electronic Distribution

     187   

New York Stock Exchange

     188   

Discretionary Sales

     188   

Stamp Taxes

     188   

Relationships

     188   

FINRA

     188   

Selling Restrictions

     188   

VALIDITY OF OUR COMMON UNITS

     191   

EXPERTS

     191   

WHERE YOU CAN FIND MORE INFORMATION

     191   

FORWARD-LOOKING STATEMENTS

     192   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HI-CRUSH PARTNERS LP

     A-1   

APPENDIX B—GLOSSARY OF TERMS.

     B-1   

Industry and Market Data

This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Statements as to our market position and market estimates are based on management’s estimates and assumptions about our markets and our internal research, together with the following industry publications and surveys:

 

   

The Freedonia Group, Inc., Industry Study #2867, Well Stimulation Materials, March 2012;

 

   

Baker Hughes North America Rotary Rig Count; and

 

   

Spears & Associates, Inc., Oilfield Market Report 1999-2012, March 2012.

While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

iv


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Index to Financial Statements

SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements, before investing in our common units. The information presented in this prospectus assumes an initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and, unless otherwise indicated, that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” for information about important risks that you should consider before buying our common units.

References in this prospectus to “Hi-Crush Partners LP,” “we,” “our,” “us” or like terms when used in a historical context refer to the business of Hi-Crush Proppants LLC, which is our accounting predecessor and is contributing certain of its subsidiaries to Hi-Crush Partners LP in connection with this offering. When used in the present tense or prospectively, those terms refer to Hi-Crush Partners LP and its subsidiaries. References in this prospectus to “Hi-Crush Proppants LLC,” “our predecessor,” “our sponsor” and “the selling unitholder” refer to Hi-Crush Proppants LLC. We include a glossary of some of the terms used in this prospectus as Appendix B.

Hi-Crush Partners LP

Overview

We are a pure play, low-cost, domestic producer of premium monocrystalline sand, a specialized mineral that is used as a “proppant” to enhance the recovery rates of hydrocarbons from oil and natural gas wells. Our reserves consist of “Northern White” sand, a resource existing predominately in Wisconsin and limited portions of the upper Midwest region of the United States, which is highly valued as a preferred proppant because it exceeds all American Petroleum Institute (“API”) specifications. We own, operate and develop sand reserves and related excavation and processing facilities and will seek to acquire or develop additional facilities. Our 561-acre facility with integrated rail infrastructure, located near Wyeville, Wisconsin, enables us to process and cost-effectively deliver approximately 1,600,000 tons of frac sand per year. Substantially all of our frac sand production is sold to leading investment grade-rated pressure pumping service providers under long-term, take-or-pay contracts that require our customers to pay a specified price for a specified volume of frac sand each month.

Over the past decade, exploration and production companies have increasingly focused on exploiting the vast hydrocarbon reserves contained in North America’s unconventional oil and natural gas reservoirs through advanced techniques, such as horizontal drilling and hydraulic fracturing. In recent years, this focus has resulted in exploration and production companies drilling more and longer horizontal wells, completing more hydraulic fracturing stages per well and utilizing more proppant per stage in an attempt to efficiently maximize the volume of hydrocarbon recoveries per wellbore. As a result, North American demand for proppant has increased rapidly, growing at an average annual rate of 28.0% from 2006 to 2011, with total annual sales of $3.7 billion in 2011, according to The Freedonia Group, a leading international business research company. We believe that the market for raw frac sand will continue to grow based on the expected long-term development of North America’s unconventional oil and natural gas reservoirs.

We intend to utilize the significant oil and natural gas industry experience of our management team to take advantage of what we believe are favorable, long-term market dynamics as we execute our growth strategy, which includes both the acquisition of additional frac sand reserves and the development of new excavation and processing facilities. We expect to have the opportunity to acquire significant additional acreage and reserves currently owned or under an agreement to be acquired by our sponsor, Hi-Crush Proppants LLC, including approximately 1,700 acres of additional land and associated reserves in western Wisconsin to which we have a

 

 

1


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Index to Financial Statements

right of first offer, in addition to potential acquisitions from third parties. Our sponsor will not, however, be required to accept any offer we make, and may, following good faith negotiations with us, sell the assets subject to our right of first offer to third parties that may compete with us. Our sponsor may also elect to develop, retain and operate properties in competition with us or develop new assets that are not subject to our right of first offer.

We intend to remain solely focused on the frac sand market as we believe it offers attractive long-term growth fundamentals.

Our Business and Properties

Assets and Operations

We own and operate the Wyeville facility, which is located in Monroe County, Wisconsin and, as of December 31, 2011, contained 48.4 million tons of proven recoverable sand reserves of mesh sizes we have currently contracted to sell. According to John T. Boyd Company, a leading mining consulting firm focused on the mineral and natural gas industries (“John T. Boyd”), our proven reserves consist entirely of coarse grade Northern White sand (which is also referred to as “Ottawa” sand) exceeding API specifications. Analysis of our sand by independent third-party testing companies indicates that it demonstrates characteristics in excess of API specifications with regard to crush strength (ability to withstand high pressures), turbidity (low levels of contaminants) and roundness and sphericity (facilitates hydrocarbon flow, or conductivity). For more information regarding the evaluation and estimation of our sand reserves, please read “Business—Assets and Business Operations—Sand Reserves.”

We acquired the Wyeville acreage and commenced construction of the Wyeville facility in January 2011. We completed construction of the Wyeville facility and commenced sand excavation and processing in June 2011 with an initial plant processing capacity of 950,000 tons per year, and customer shipments were initiated in July 2011. From the Wyeville in-service date to March 31, 2012, we have processed and sold 555,250 tons of frac sand. We completed an expansion in March 2012 that increased our annual expected processing capacity to approximately 1,600,000 tons per year. We have contracted approximately 91% of this capacity for the remainder of 2012 and through the second quarter of 2014, and approximately 71% of this capacity for the remainder of 2014 and through the second quarter 2016. Based on currently contracted production rates and a reserve report prepared by John T. Boyd, our Wyeville facility has an implied 33-year reserve life as of December 31, 2011.

All of our product is shipped by rail from our three 5,000-foot rail spurs that connect our processing and storage facilities to a Union Pacific Railroad mainline. The length of these rail spurs and the capacity of the associated product storage silos allow us to accommodate a large number of rail cars. It also enables us to accommodate unit trains, which significantly increases our efficiency in meeting our customers’ frac sand transportation needs. Unit trains, typically 80 rail cars in length or longer, are dedicated trains chartered for a single delivery destination. Generally, unit trains receive priority scheduling and do not switch cars at various intermediate junctions, which results in a more cost-effective and efficient method of shipping than the standard method of rail shipment.

Customers and Contracts

Our current customer base is comprised of subsidiaries of four of North America’s largest providers of pressure pumping services: Baker Hughes Incorporated (“Baker Hughes”), FTS International, LLC. (“FTS International”), Halliburton Company (“Halliburton”) and Weatherford International Ltd. (“Weatherford”). Our largest customers based on current contracts, Baker Hughes and Halliburton, are each rated A2 / A by Moody’s and Standard & Poor’s, respectively, and Weatherford is rated Baa2 / BBB by these agencies. FTS International

 

 

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Index to Financial Statements

is rated B1 / B by these agencies. Spears and Associates estimates that these four companies controlled 47% of North American pressure pumping fleet in 2011 and accounted for greater than 50% of the North American pressure pumping market, based on 2011 revenue. For the year ended December 31, 2011, sales to Halliburton and Weatherford accounted for 64% and 36% of our total revenues, respectively. Sales under our contracts with Baker Hughes and FTS International commenced in May 2012.

We sell substantially all of the frac sand we produce under long-term, take-or-pay contracts that significantly reduce our exposure to short-term fluctuations in the price of and demand for frac sand. For the year ended December 31, 2011 and the first quarter of 2012, we generated 99% of our revenues from frac sand delivered under our long-term sand sales contracts, and we expect to continue selling a significant majority of our sand under long-term contracts. As of May 10, 2012, we had four long-term sand sales contracts with a weighted average remaining life of approximately 4.7 years. The following table presents a summary of our contracted volumes and revenues from 2011 through 2015, as well as the average contract sales price and make-whole price our customers are obligated to pay in the event they decline to accept delivery of the required product volumes under their respective contracts.

 

    Year Ended December 31,  
    2011     2012     2013     2014     2015  

Contracted Volumes (tons)

    331,667        1,216,667        1,460,000        1,295,000        1,130,000   

% of Processing Capacity(1)

    79     85     91     81     71

Contracted Revenue

  $ 19,916,667      $ 78,966,667      $ 96,466,667      $ 88,350,000      $ 80,100,000   

Average Sales Price per ton

    $60        $65        $66        $68        $71   

Average Make-Whole Price per ton

    $60        $49        $49        $51        $51   

 

(1) Percentage of processing capacity for 2011 and 2012 based on weighted average processing capacity for such periods.

As the above table illustrates, when one of our contracts expires in 2014, the average contracted price per ton will increase. The expiring contract provides for sales prices lower than current market prices. Prior to this contract’s expiration, we will seek to renew or replace this contract on pricing terms more comparable to market prices at the time. Occasionally, if we have excess production and market conditions are favorable, we may elect to sell frac sand in spot market transactions.

The terms of our customer contracts, including sand quality requirements, quantity parameters, permitted sources of supply, effects of future regulatory changes, force majeure and termination and assignment provisions, vary by customer. As indicated in the above table, our customer contracts contain penalties for non-performance by our customers, with make-whole prices averaging approximately $49 per ton in 2012. If one of our customers fails to meet its minimum obligations to us, we would expect that the make-whole payment, combined with a decrease in our variable costs (such as royalty payments and excavation costs), would substantially mitigate any adverse impact on our cash flow from such failure. We would also have the ability to sell the sand volumes for which we receive make-whole payments to third parties. Our customer contracts also contain penalties for our non-performance. If we are unable to deliver contracted volumes within three months of contract year end, or otherwise arrange for delivery from a third party, we are required to pay make-whole payments averaging approximately $49 per ton in 2012. We believe our expanded Wyeville facility, substantial reserves and our on-site processing and logistics capabilities reduce our risk of non-performance. In addition, we intentionally maintain long-term contracted volume commitments to our customers at less than 100% of our processing capacity to provide excess capacity to further reduce the likelihood of failing to meet the requirements of our contracts. We believe our levels of inventory combined with our three month cure period starting at contract year end should be more than sufficient to prevent us from paying make-whole payments as a result of plant shutdowns due to repairs to our facilities necessitated by reasonably foreseeable mechanical interruptions.

 

 

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Index to Financial Statements

Industry Dynamics

Demand Trends

The North American proppant market, including raw frac sand, ceramic and resin-coated proppants, was approximately 22 million tons in 2011. Industry estimates for 2011 indicate that the raw frac sand market represented approximately 17 million tons, or 77.2% of the total proppant market by weight. Over the past five years, proppant demand by weight has increased by 28.0% annually, and the market is projected to continue growing by 7.2% per year through 2016, representing an increase of approximately nine million tons in annual proppant demand over that time period. The total North American proppant market size in dollars was $3.7 billion in 2011 and is projected to grow 10.5% annually through 2016, according to The Freedonia Group. The following chart illustrates historical and forecasted proppant demand for certain years from 2001 to 2021.

Historical and Projected Proppant Demand

 

LOGO

Source: The Freedonia Group

Demand growth for frac sand and other proppants is primarily due to advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing. These advancements have made the extraction of oil and natural gas increasingly cost-effective in formations that historically would have been uneconomic to develop. Over the past five years, North American rig count has increased by 2.6% annually, while the demand for proppant by weight has grown at a rate of 28.0% annually. We believe that demand for proppant has and will continue to increase at a rate greater than rig count as a result of the following additional demand drivers:

 

   

improved drilling rig productivity, resulting in more wells drilled per rig per year;

 

   

increases in the percentage of rigs that are drilling horizontal wells;

 

   

increases in the length of the typical horizontal wellbore;

 

   

increases in the number of fracture stages per foot in the typical completed horizontal wellbore;

 

   

increases in the volume of proppant used per fracturing stage; and

 

   

recurring efforts to offset steep production declines in unconventional oil and natural gas reservoirs, including the drilling of new wells and secondary hydraulic fracturing of existing wells.

Furthermore, recent growth in demand for raw frac sand has outpaced growth in demand for other proppants, and industry analysts predict that this trend will continue. According to The Freedonia Group, North American demand for all types of proppants, in dollar terms, is projected to increase 10.5% annually from 2011 through 2016, while demand for raw frac sand is projected to increase 12.1% annually over that time period. As well completion costs have increased as a proportion of total well costs, operators have increasingly looked for ways to improve per well economics by lowering costs without sacrificing production performance. To this end,

 

 

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the oil and natural gas industry is shifting away from the use of higher-cost proppants towards more cost-effective proppants, such as raw frac sand. The substantial increase in activity in North American oil and liquids-rich resource plays has further accelerated the demand growth for raw frac sand. Within these oil and liquids-rich basins, Northern White sand with coarser mesh sizes is often preferred due to its performance characteristics.

Supply Trends

As demand for raw frac sand has increased dramatically in recent years, the supply of raw frac sand has failed to keep pace, resulting in a supply-demand disparity. While a number of existing and new competitors have announced supply expansions and greenfield projects, we do not expect the magnitude of these expansions to meet expected demand. There are several key constraints to increasing raw frac sand production on an industry-wide basis, including:

 

   

the difficulty of finding frac sand reserves that meet API specifications;

 

   

the difficulty of securing contiguous frac sand reserves large enough to justify the capital investment required to develop a processing facility;

 

   

the challenges of identifying reserves with the above characteristics that either are located in close proximity to oil and natural gas reservoirs or have rail access needed for low-cost transportation to major shale basins;

 

   

the hurdles of securing mining, production, water, air, refuse and other federal, state and local operating permits from the proper authorities;

 

   

local opposition to development of facilities, especially those that require the use of on-road transportation, including moratoria on raw frac sand facilities in multiple counties in Wisconsin which hold potential sand reserves; and

 

   

the long lead time required to design and construct sand processing facilities that can efficiently process large quantities of high quality frac sand.

Business Strategies

Our primary business objective is to increase our cash distributions per unit over time. We intend to accomplish this objective by executing the following strategies:

 

   

Focusing on stable, long-term, take-or-pay contracts with key customers. A key component of our business model is our contracting strategy, which seeks to secure a high percentage of our cash flows under long-term, fixed price contracts with take-or-pay provisions, while also staggering the tenors of our contracts so that they expire at different times. We believe this contracting strategy significantly mitigates our exposure to the potential price volatility of the spot market for frac sand in the short-term, allows us to take advantage of any increase in frac sand prices over the medium-term and provides us with long-term cash flow stability. As current contracts expire or as we add new processing capacity, we intend to pursue similar long-term contracts with our current customers and with other leading pressure pumping service providers. We intend to utilize nearly all of our processing capacity to fulfill these contracts, with any excess processed frac sand first offered to existing customers and the remaining amount sold opportunistically in the spot market.

 

   

Pursuing accretive acquisitions from our sponsor and third parties. We expect to pursue accretive acquisitions of frac sand facilities from our sponsor, including through our right of first offer to acquire an aggregate of 1,700 acres of additional land in western Wisconsin with approximately 79.2 million tons of proven recoverable reserves of frac sand according to John T. Boyd, as well as from third-party frac sand producers. As we evaluate acquisition opportunities, we intend to remain focused on

 

 

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operations that complement our reserves of premium frac sand and that provide or would accommodate the development and construction of rail or other advantaged logistics capabilities. We believe these factors are critical to our business model and are important characteristics for any potential acquisitions.

 

   

Expanding our proved reserve base and processing capacity. We seek to identify and evaluate economically attractive expansion and facility enhancement opportunities to increase our proved reserves and processing capacity. At Wyeville and any future sites, we expect to pursue add-on acreage acquisitions near our facilities to expand our reserve base and increase our reserve life. In March 2012, we completed an expansion of our Wyeville facility, increasing annual processing capacity from 950,000 tons per year to approximately 1,600,000 tons per year by adding wet and dry plant capacity and additional sand storage silos. We will continue to analyze and pursue other organic expansion efforts that will similarly allow us to cost-effectively optimize our existing assets and meet the customer demand for our high quality frac sand.

 

   

Capitalizing on compelling industry fundamentals. We intend to continue to position ourselves as a pure play producer of high quality frac sand, as we believe the frac sand market offers attractive long-term growth fundamentals. The growth of horizontal drilling in shale and other unconventional oil and natural gas plays has resulted in greater demand for frac sand. This demand growth is underpinned by increased horizontal drilling, higher proppant use per well and cost advantages over resin-coated sand and manufactured ceramics. We believe frac sand supply will continue to be constrained by the difficulty in finding reserves that meet the technical specifications of the API in contiguous quantities large enough to justify the capital investment required and the challenges associated with successfully obtaining the necessary local, state and federal permits required for operations.

 

   

Maintaining financial flexibility and conservative leverage. We plan to pursue a disciplined financial policy and maintain a conservative capital structure. We expect to have no indebtedness at the closing of this offering and $         million of liquidity in the form of cash on hand and undrawn borrowing capacity under our new $         million revolving credit facility. We believe that our borrowing capacity and ability to access debt and equity capital markets after this offering will provide us with the financial flexibility necessary to achieve our organic expansion and acquisition strategy.

Competitive Strengths

We believe that we are well positioned to successfully execute our strategy and achieve our primary business objective because of the following competitive strengths:

 

   

Long-term contracted cash flow stability. We will generate substantially all of our revenues from the sale of frac sand under long-term contracts that require subsidiaries of Baker Hughes, FTS International, Halliburton and Weatherford to pay specified prices for specified volumes of product each month. We believe that the take-or-pay volume and pricing provisions and the long-term nature of our contracts will provide us with a stable base of cash flows and limit the risks associated with price movements in the spot market and any changes in product demand during the contract period. We are currently contracted to sell 1,460,000 tons of frac sand annually from our Wyeville facility, and as of May 10, 2012, our contracts had a weighted average remaining life of approximately 4.7 years.

 

   

Long-lived, high quality reserve base. Our Wyeville facility contains approximately 48.4 million tons of proven recoverable coarse grade reserves as of December 31, 2011, based on a third-party reserve report by John T. Boyd and has an implied 33-year reserve life at currently contracted production rates. These reserves consist of high quality Northern White frac sand. Analysis by independent third-party testing companies indicates that our sand demonstrates characteristics in excess of API specifications with regard to crush strength, turbidity and sphericity. As a result, our raw frac sand is particularly well suited for and is experiencing significant demand from customers for use in the hydraulic fracturing of unconventional oil and natural gas wells.

 

 

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Intrinsic logistics and infrastructure advantage. The strategic location and logistics capabilities of our Wyeville facility enable us to serve all major U.S. oil and natural gas producing basins. Our on-site transportation assets include three 5,000-foot rail spurs off a Union Pacific Railroad mainline that are capable of accommodating unit trains, allowing our customers to receive priority scheduling, expedited delivery and a more cost-effective shipping alternative. Our logistics capabilities enable efficient loading of sand and minimize rail car turnaround times at the facility, and we expect to acquire or develop similar logistics capabilities at any facilities we own in the future. We believe we are one of the few frac sand producers with a facility initially designed to deliver frac sand meeting API specifications to all of the major U.S. oil and natural gas producing basins by on-site rail facilities, including on-site storage capacity accommodating unit trains.

 

   

Competitive operating cost structure. Our operations have been strategically designed to provide low per-unit production costs with a significant variable component for the excavation and processing of our sand. Our sand reserves do not require blasting or crushing to be processed and, due to the shallow overburden at our Wyeville facility, we are able to use surface mining equipment in our operations, which provides for a lower cost structure than underground mining operations. Our mining operations are subcontracted to Gerke Excavating, Inc. at a fixed cost of $2.09 per ton excavated, subject to a diesel fuel surcharge, under a three-year contract. Unlike some competitors, our processing and rail loading facilities are located on-site, which eliminates the requirement for on-road transportation, lowers product movement costs and minimizes the reduction in sand quality due to handling.

 

   

Experienced and incentivized management team. Our management team has extensive experience investing and operating in the oil and natural gas industry and will be focused on optimizing our current business and expanding our operations through disciplined development and accretive acquisitions. We believe our management team’s substantial experience and relationships with participants in the oilfield services and exploration and production industries provide us with an extensive operational and commercial understanding of the markets in which our customers operate. The expertise of our management and operations teams covers a wide range of disciplines, with an emphasis on development, construction and operation of frac sand processing facilities, frac sand supply chain management and consulting and bulk solids material handling. Members of our management team are strongly incentivized to profitably grow our business and cash flows through their 39% interest in our sponsor, which will own              of our common units and all of our subordinated units and incentive distribution rights following this offering.

Risk Factors

An investment in our common units involves risks. You should carefully consider the following risk factors, those other risks described in “Risk Factors” and the other information in this prospectus, before deciding whether to invest in our common units. The following risks and others are discussed in more detail in “Risk Factors.”

Risks Inherent in Our Business

 

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

On a pro forma basis we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all units for the twelve months ended March 31, 2012.

 

   

The amount of cash we have available for distribution to holders of our units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.

 

 

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Only approximately $4.1 million of the proceeds from the sale of common units in this offering will be available to us to fund our operations or to pay distributions to public unitholders.

 

   

The assumptions underlying our forecast of cash available for distribution included in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from those estimates.

 

   

Inaccuracies in estimates of volumes and qualities of our sand reserves could result in lower than expected sales and higher than expected production costs.

 

   

Substantially all of our sales are generated under contracts with four customers, and the loss of, or significant reduction in purchases by, any of them could adversely affect our business, financial condition and results of operations.

 

   

If we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.

 

   

Our long-term business and financial performance depends on the level of drilling and completion activity in the oil and natural gas industry.

 

   

All of our sales are generated at one facility. Any adverse developments at our Wyeville facility could have a material adverse effect on our financial condition and results of operations.

 

   

An increase in the supply of raw frac sand having similar characteristics as the raw frac sand we produce could make it more difficult for us to renew or replace our existing contracts on favorable terms or at all.

 

   

Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related litigation could result in increased costs, additional operating restrictions or delays for our customers, which could cause a decline in the demand for our frac sand and negatively impact our business, financial condition and results of operations.

 

   

Because we have a limited operating history, you may not be able to evaluate our current business and future earnings prospects accurately.

Risks Related to Environmental, Mining and Other Regulations

 

   

We and our customers are subject to extensive environmental and health and safety regulations that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.

 

   

Silica-related legislation, health issues and litigation could have a material adverse effect on our business, reputation or results of operations.

 

   

We are subject to the Federal Mine Safety and Health Act of 1977, which imposes stringent health and safety standards on numerous aspects of our operations.

 

   

We and our customers are subject to other extensive regulations, including licensing, plant and wildlife protection and reclamation regulation, that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.

 

   

Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business, financial condition and results of operations.

 

 

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Risks Inherent in an Investment in Us

 

   

Our sponsor owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including our sponsor, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

 

   

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all.

 

   

Our sponsor and other affiliates of our general partner will have the ability to compete with us, and we expect that our sponsor will compete with us once operations at its processing facility in Augusta, Wisconsin commence in the third quarter of 2012.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.

 

   

Unitholders will experience immediate and substantial dilution of $         per common unit.

 

   

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

 

   

Our sponsor, which is our accounting predecessor for financial reporting purposes, has a material weakness in its internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

Tax Risks to Common Unitholders

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for federal income tax purposes or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could be substantially reduced.

 

   

The tax treatment of publicly-traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

   

You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

Our Management

We are managed and operated by the board of directors and executive officers of our general partner, Hi-Crush GP LLC, a wholly owned subsidiary of our sponsor. As a result of owning our general partner, our sponsor will have the right to appoint all members of the board of directors of our general partner, including at least three independent directors meeting the independence standards established by the NYSE. At least one of our independent directors will be appointed prior to the date our common units are listed for trading on the NYSE. Our unitholders will not be entitled to elect our general partner or its directors or otherwise directly participate in our management or operations. For more information about the executive officers and directors of our general partner, please read “Management.”

 

 

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Our Relationship with Our Sponsor

Overview and History

Hi-Crush Proppants LLC, our sponsor, was formed in 2010 in Houston, Texas. Members of our sponsor’s management team have, on average, more than 20 years of experience investing in and operating businesses in the oil and natural gas and sand mining industries. Members of our management team have partnered with major oilfield services companies and exploration and production companies in the development of oil and natural gas reservoirs. In this capacity, members of our management team gained valuable expertise and developed strong relationships in the oilfield services industry. Recognizing the increasing demand for proppants as a result of rapidly evolving hydraulic fracturing techniques, members of our management team chose to leverage their expertise and relationships to capitalize on this increasing demand by developing raw frac sand reserves and facilities. In addition, our Chief Operating Officer has overseen the design, construction and staffing for multiple sand mining and processing facilities. The expertise of our management and operations teams covers a wide range of disciplines, with an emphasis on development, construction and operation of frac sand processing facilities, frac sand supply chain management and consulting and bulk solids material handling.

Our sponsor’s lead investor is Avista Capital Partners, a leading private equity firm with significant investing and operating expertise in the energy industry. Founded in 2005 by senior investment professionals who worked together at DLJ Merchant Banking Partners (“DLJMB”), then one of the world’s largest and most successful private equity franchises, Avista makes controlling or influential minority investments in connection with various transaction structures. The energy team at Avista is comprised of experienced professionals and industry executives with relevant expertise in the energy sector. Avista principals have led over $2.7 billion in equity investments in energy companies while at Avista and DLJMB, including Basic Energy Services, Inc., Brigham Exploration Company, Copano Energy, L.L.C., Seabulk International, Inc., and joint-ventures with Carrizo Oil & Gas, Inc.

Our Sponsor’s Assets and Our Right of First Offer

In connection with this offering, our sponsor is contributing to us its sand reserves and related excavation and processing facilities located in Wyeville, Wisconsin, which are being contributed to us because of Wyeville’s established operating history and the fact that it is our sponsor’s most fully-contracted facility. In addition to the Wyeville facility, our sponsor owns or has options to acquire several other sand mining locations where it could develop similar logistics capabilities as the Wyeville facility, and it will retain these assets following this offering. Pursuant to the terms of an omnibus agreement we expect to enter into with our sponsor, we will have a right of first offer with respect to certain of our sponsor’s current assets, which are located in Augusta, Wisconsin and Tomah, Wisconsin, and are described in more detail below. Our sponsor’s success in identifying and acquiring these locations resulted from its expertise in identifying quality sand reserves, as well as its efficient construction of the Wyeville facility and its on-site approach to excavation and logistics, which minimizes community impact during the production process.

The Augusta excavation and processing facility in Eau Claire County, Wisconsin is currently under construction and is expected to be operational in the third quarter of 2012. John T. Boyd estimated that, as of December 31, 2011, the Augusta site had 46.2 million tons of proven recoverable coarse grade sand reserves located on approximately 1,000 acres. Our sponsor is building a 1,600,000 ton per year processing facility, and John T. Boyd estimates that the site has a reserve life of approximately 39 years based on currently contracted production levels. After taking into account our sponsor’s agreement to assume one of our customer contracts, our sponsor has contracted for the sale of 1,200,000 tons of sand per year from the Augusta facility with two of our existing customers under take-or-pay contracts with a weighted average life of approximately 4.8 years that specify both volumes and price. The customers will take delivery of the sand at on-site rail facilities that, like the Wyeville facility, can accommodate unit trains.

 

 

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Our sponsor has agreed to acquire approximately 700 acres in Tomah, Wisconsin, which is six miles south of the Wyeville facility in Monroe County. The Tomah site has access to the same Union Pacific Railroad mainline as the Wyeville facility, which runs adjacent to the property, and could accommodate similar rail logistics as the Wyeville facility. Extensive core samples have been taken at Tomah and independently tested with results indicating a high quality sand reserve similar to the Wyeville site. According to a John T. Boyd reserve report, the Tomah site had proven recoverable sand reserves of 33 million tons as of December 31, 2011, which represents a 51-year reserve life assuming construction of a 650,000 ton per year processing facility.

In addition, our sponsor is evaluating a number of additional development locations and adds potential projects to its development backlog regularly.

Our sponsor’s retained sand facilities represent a significant potential growth opportunity for us. Our sponsor continually evaluates acquisitions and may elect to acquire, construct or dispose of assets in the future, including sales of assets to us. As the owner of our general partner,              of our common units, all              of our subordinated units and all of our incentive distribution rights following this offering, our sponsor is well aligned and highly motivated to promote and support the successful execution of our business strategies, including utilizing our partnership as a growth vehicle for its sand mining operations. Although we expect to have the opportunity to make additional acquisitions directly from our sponsor in the future, including the sand excavation and processing facilities described above that are subject to our right of first offer, our sponsor is under no obligation to accept any offer we make, and may, following good faith negotiations with us, sell the assets subject to our right of first offer to third parties that may compete with us. Our sponsor may also elect to develop, retain and operate properties in competition with us or develop new assets that are not subject to our right of first offer.

In addition, while we believe our relationship with our sponsor is a significant positive attribute, it may also be a source of conflict. For example, our sponsor is not restricted in its ability to compete with us, and beginning with the commencement of operations at our sponsor’s Augusta facility scheduled for the third quarter of 2012, our sponsor will operate frac sand excavation and processing facilities that will compete directly with us for new and existing customers. We expect that our sponsor will develop additional frac sand excavation and processing facilities in the future, which may also compete with us. While we expect that our management team, which also manages our sponsor’s retained assets, and our sponsor will allocate new and replacement customer contracts between us and our sponsor in a manner that balances the interests of both parties, they are under no obligation to do so. Please read “Conflicts of Interest and Fiduciary Duties.”

Summary of Conflicts of Interest and Fiduciary Duties

Our general partner has a legal duty to manage us in a manner it believes is in our best interest. However, the officers and directors of our general partner also have fiduciary duties to manage our general partner in a manner beneficial to our sponsor, the owner of our general partner. As a result, conflicts of interest may arise in the future between us or our unitholders, on the one hand, and our sponsor and our general partner, on the other hand.

Our partnership agreement limits the liability of and replaces the duties owed by our general partner to our unitholders. Our partnership agreement also restricts the remedies available to our unitholders for actions that might otherwise constitute a breach of our general partner’s duties. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and each unitholder is treated as having consented to various actions and potential conflicts of interest contemplated in the partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law.

We expect that the board of directors of our general partner will delegate to a conflicts committee of the board of directors the authority to approve material transactions with related parties.

 

 

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For a more detailed description of the conflicts of interest and duties of our general partner, please read “Conflicts of Interest and Fiduciary Duties.” For a description of other relationships with our affiliates, please read “Certain Relationships and Related Transactions.”

Principal Executive Offices

We are a Delaware limited partnership formed in May 2012. Our principal executive offices are located at Three Riverway, Suite 1550, Houston, Texas 77056, and our telephone number is (713) 963-0099. Our website address will be www.hicrushpartners.com. We intend to make our periodic reports and other information filed with or furnished to the U.S. Securities and Exchange Commission, or SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or “JOBS Act.” For as long as we are an emerging growth company, unlike other public companies, we will not be required to:

 

   

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002;

 

   

comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the Securities and Exchange Commission determines otherwise;

 

   

provide certain disclosure regarding executive compensation required of larger public companies; or

 

   

obtain shareholder approval of any golden parachute payments not previously approved.

We will cease to be an “emerging growth company” upon the earliest of:

 

   

when we have $1.0 billion or more in annual revenues;

 

   

when we have at least $700 million in market value of our common units held by non-affiliates;

 

   

when we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

   

the last day of the fiscal year following the fifth anniversary of our initial public offering.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

 

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Formation Transactions and Partnership Structure

We are a Delaware limited partnership formed in May 2012 by our sponsor, Hi-Crush Proppants LLC, to own and operate certain of the businesses that have historically been conducted by Hi-Crush Proppants LLC.

In connection with the closing of this offering, the following will occur:

 

   

Hi-Crush Proppants LLC will contribute Hi-Crush Chambers LLC, Hi-Crush Railroad LLC, Hi-Crush Wyeville LLC and Hi-Crush Operating LLC to us;

 

   

we will assume the obligations of Hi-Crush Proppants LLC under certain subordinated promissory notes, under which $57.1 million of indebtedness was outstanding as of May 31, 2012;

 

   

we will issue to Hi-Crush Proppants LLC              common units and              subordinated units;

 

   

we will issue              common units to the public;

 

   

we will receive gross proceeds of $         million from the issuance and sale of              common units at an assumed initial offering price of $         per unit;

 

   

we will use a portion of the proceeds we receive from this offering to pay underwriting discounts and our portion of the structuring fee totaling approximately $         million and other estimated offering expenses of $         million;

 

   

a portion of the remaining proceeds we receive from this offering will be used to repay in full all indebtedness outstanding under the subordinated promissory notes assumed by us in connection with this offering and to reimburse capital expenditures of, and pay a distribution to, Hi-Crush Proppants LLC;

 

   

Hi-Crush Proppants LLC will sell          common units to the public in this offering and will receive gross proceeds of $         million from the sale of such units at an assumed initial public offering price of $         per unit;

 

   

Hi-Crush Proppants LLC will use a portion of the proceeds received by it from this offering to pay underwriting discounts and its portion of the structuring fee totaling approximately $         million;

 

   

to the extent the underwriters exercise their option to purchase          additional common units, Hi-Crush Proppants LLC will sell such units to the public, pay the related underwriting discounts and structuring fee and retain the net proceeds; and

 

   

we will enter into an omnibus agreement with Hi-Crush Proppants LLC, our general partner and certain of its affiliates pursuant to which:

 

   

we will agree to reimburse Hi-Crush Proppants LLC and its affiliates for the payment of certain capital expenditures, operating expenses and for providing various general and administrative services;

 

   

Hi-Crush Proppants LLC will indemnify us for certain environmental, toxic tort, title and right-of-way defects and other matters;

 

   

Hi-Crush Proppants LLC will assume our customer contract with FTS International beginning on May 1, 2013; and

 

   

Hi-Crush Proppants LLC will grant us a right of first offer with respect to its Augusta and Tomah acreage and related assets, which are being retained by Hi-Crush Proppants LLC in connection with this offering.

 

 

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Organizational Structure

The following is a simplified diagram of our ownership structure after giving effect to this offering and the related transactions.

 

LOGO

 

Public Common Units

          %(1) 

Interests of Hi-Crush Proppants LLC:

  

Common Units

          %(1) 

Subordinated Units

         

Incentive Distribution Rights

        (2) 

Non-Economic General Partner Interest

     0.0 %(3) 
  

 

 

 
     100.0
  

 

 

 

 

(1) Assumes no exercise of the underwriters’ option to purchase additional common units. If and to the extent the underwriters exercise their option to purchase additional common units from the selling unitholder, the units purchased pursuant to such exercise will be sold to the public.
(2) Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage. Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.” Distributions with respect to the incentive distribution rights will be classified as distributions with respect to equity interests. Incentive distribution rights will be issued to Hi-Crush Proppants LLC.
(3) Our general partner owns a non-economic general partner interest in us. Please read “How We Make Distributions To Our Partners—General Partner Interest.”

 

 

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The Offering

 

Common units offered to the public by us

             common units.

 

Common units offered to the public by the selling unitholder

             common units.

 

Option to purchase additional common units from the selling unitholder

If the underwriters exercise their option to purchase additional common units in full, the selling unitholder will sell an additional              common units to the public.

 

Units outstanding after this offering

             common units and              subordinated units for a total of              limited partner units. If and to the extent the underwriters exercise their option to purchase additional common units, the selling unitholder, Hi-Crush Proppants LLC, will sell the number of common units purchased by the underwriters pursuant to such exercise and the remainder, if any, will be retained by Hi-Crush Proppants LLC. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding. In addition, our general partner will own a non-economic general partner interest in us.

 

Use of proceeds

We expect to receive net proceeds of approximately $         million from this offering (based on an assumed initial public offering price of $         per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts, our portion of the structuring fee and estimated offering expenses. We intend to use approximately $         million of the net proceeds we receive from this offering to repay in full debt we intend to assume from our sponsor in connection with this offering. We intend to use approximately $         million of the net proceeds we receive from this offering to reimburse capital expenditures of, and pay a distribution to, our sponsor. The remaining net proceeds of approximately $4.1 million will be available to fund capital expenditures and for general partnership purposes. Please read “Use of Proceeds.”

 

  We will not receive any proceeds from the sale of common units by the selling unitholder in this offering, including proceeds from the sale of additional common units by the selling unitholder pursuant to the underwriters’ option to purchase additional common units.

 

Cash distributions

We expect to make a minimum quarterly distribution of $         per common unit and subordinated unit ($         per common unit and subordinated unit on an annualized basis) to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.”

 

 

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  For the first quarter that we are publicly-traded, we will pay a prorated distribution covering the period from the completion of this offering through                     , 2012, based on the actual length of that period.

 

  Our partnership agreement generally provides that we will distribute cash each quarter in the following manner:

 

   

first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $        , and

 

   

third, to the holders of common and subordinated units pro rata, until each has received a distribution of $        .

 

  If cash distributions to our unitholders exceed $         per common unit and subordinated unit in any quarter, our unitholders and our sponsor (as the holder of our incentive distribution rights) will receive distributions according to the following percentage allocations:

 

Total Quarterly Distribution
Target Amount

   Marginal Percentage Interest
in Distributions
 
   Unitholders     Sponsor
(as Holder of
Our Incentive
Distribution Rights)
 

above $             up to $            

     100.0     0.0

above $             up to $            

     85.0     15.0

above $             up to $            

     75.0     25.0

above $            

     50.0     50.0

 

  We refer to the additional increasing distributions to our sponsor as “incentive distributions.” Please read “How We Make Distributions To Our Partners—Incentive Distribution Rights.”

 

  Our pro forma cash available for distribution for the three months ended March 31, 2012 was approximately $7.4 million (or $         per common unit). This amount would have been insufficient to pay the full minimum quarterly distribution on all of our common and subordinated units for the three months ended March 31, 2012 by approximately $         million. As a result, for the three months ended March 31, 2012 we would have generated cash available for distribution sufficient to pay 100% of the minimum quarterly distribution on all of our common units, but only approximately         % of the minimum quarterly distribution on our subordinated units during that period.

 

 

We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on

 

 

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Distributions,” that we will have sufficient cash available for distribution to pay the minimum quarterly distribution of $         on all of our common units and subordinated units for each quarter in the twelve months ending September 30, 2013. However, we do not have a legal or contractual obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate and there is no guarantee that we will pay distributions to our unitholders in any quarter. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

Our sponsor will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid at least (1) $         (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit for each of three consecutive, non-overlapping four quarter periods ending on or after                     , 2015 or (2) $         (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the related distribution on the incentive distribution rights for a four-quarter period ending on or after                     , 2013, in each case provided there are no arrearages on our common units at that time.

 

  The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holder(s) of subordinated units or their affiliates are voted in favor of that removal.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages.

 

Our sponsor’s right to reset the target distribution levels

Our sponsor, as the initial holder of our incentive distribution rights, has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50.0%) for the prior four consecutive whole fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. If our sponsor transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following assumes that our sponsor holds all of the incentive distribution rights at

 

 

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Index to Financial Statements
 

the time that a reset election is made. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution as the current target distribution levels.

 

  If our sponsor elects to reset the target distribution levels, it will be entitled to receive a number of common units. The number of common units to be issued to our sponsor will equal the number of common units that would have entitled the holder to an aggregate quarterly cash distribution in the quarter prior to the reset election equal to the distribution to our sponsor on the incentive distribution rights in the quarter prior to the reset election. Please read “How We Make Distributions To Our Partners—Our Sponsor’s Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Interests.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, our sponsor will own an aggregate of     % of our outstanding units (or     % of our outstanding units, if the underwriters exercise their option to purchase additional common units in full). This will give our sponsor the ability to prevent the removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Please read “The Partnership Agreement—Limited Call Right.”

 

 

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Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2014, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than     % of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $         per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership” beginning on page 170 for the basis of this estimate.

 

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences.”

 

Exchange listing

We intend to apply to list our common units on the New York Stock Exchange, or NYSE, under the symbol “HCLP.”

 

 

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Summary Historical and Pro Forma Financial and Operating Data

The partnership was formed in May 2012 and does not have historical financial statements. Therefore, in this prospectus we present the historical financial statements of our sponsor, Hi-Crush Proppants LLC, which is our accounting predecessor for financial reporting purposes. In connection with the closing of this offering, our sponsor will contribute all of the outstanding equity interests in certain of its operating subsidiaries, which account for substantially all of our sponsor’s historical business, to us. The following table presents summary historical financial and operating data of our sponsor and summary pro forma financial and operating data of Hi-Crush Partners LP as of the dates and for the periods indicated.

Our sponsor was formed in October 2010 to develop excavation, processing and logistics facilities for raw frac sand used in hydraulic fracturing operations in oil and natural gas wells. Since its formation, our sponsor acquired our assets in a number of separate acquisitions. As a result of our sponsor’s recent formation, we have limited operating history upon which you can base an evaluation of our current business and our future earnings prospects. This prospectus includes audited financial statements only as of December 31, 2011 and for the period from inception (October 28, 2010) to December 31, 2010 and unaudited financial information as of and for the three-month periods ended March 31, 2012 and 2011. In this prospectus, we refer to the period from inception to December 31, 2010 as the two-month period ended December 31, 2010. We have not completed or provided in this prospectus any stand-alone pre-acquisition financial statements for the assets we acquired in the transactions described above. As a result, and given our recent date of formation, we have not provided in this prospectus three years of audited financial statements that normally would be included in a prospectus forming part of an SEC registration statement or two years of audited financial statements as would normally be included in a prospectus forming part of an SEC registration statement filed by an emerging growth company.

The summary historical financial data presented as of December 31, 2010 and 2011, for the two-month period ended December 31, 2010 and for the year ended December 31, 2011 is derived from the audited historical financial statements of Hi-Crush Proppants LLC that are included elsewhere in this prospectus. The summary historical financial data presented as of and for the three months ended March 31, 2011 and 2012 are derived from the unaudited historical financial statements of Hi-Crush Proppants LLC included elsewhere in this prospectus.

The summary pro forma financial data presented as of and for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012 is derived from our unaudited pro forma financial statements included elsewhere in this prospectus. Our unaudited pro forma financial statements give pro forma effect to the following:

 

   

the contribution of Hi-Crush Chambers LLC, Hi-Crush Railroad LLC, Hi-Crush Wyeville LLC and Hi-Crush Operating LLC to us by our sponsor;

 

   

the assumption by us from our sponsor of debt outstanding under its subordinated promissory notes;

 

   

a reduction in general and administrative expenses as a result of allocations between our Wyeville facility and our sponsor’s other assets and activities that will not be contributed to us in connection with this offering;

 

   

the removal of other operating expenses of our sponsor related to assets and operations that will be retained by our sponsor following the completion of this offering;

 

   

the issuance of              common units and              subordinated units to our sponsor;

 

   

the issuance and sale by us and the sale by Hi-Crush Proppants LLC of             and             common units, respectively, to the public; and

 

   

the application of the net proceeds from the issuance and sale of              common units by us as described in “Use of Proceeds.”

 

 

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Each of the adjustments described above are either directly related to this offering or are required by or are a consequence of the contribution to us by our sponsor of the Wyeville facility and related assets, the closing of which is a condition precedent to the closing of this offering.

The unaudited pro forma balance sheet as of March 31, 2012 assumes the events listed above occurred as of March 31, 2012. The unaudited pro forma statements of income data for the year ended December 31, 2011 and the three months ended March 31, 2012 assume the events listed above occurred as of January 1, 2011.

We have not given pro forma effect to incremental general and administrative expenses of approximately $2.1 million that we expect to incur annually as a result of operating as a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer insurance expenses; and director and officer compensation expenses. We also have not given pro forma effect to additional general and administrative expenses that we expect to incur to support our recent expansion, including management level positions in operations, human resources, legal, accounting and reporting, as well as license fees associated with upgrading accounting and reporting software. We expect these incremental growth associated expenses to gradually increase over time as we hire additional personnel, from about $0.7 million for the year ending December 31, 2012 to $1.7 million on an annualized basis by September 30, 2013.

For a detailed discussion of the summary historical financial information contained in the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table should also be read in conjunction with “Use of Proceeds,” “Business—Our History and Relationship with Our Sponsor” and the audited and unaudited historical financial statements of Hi-Crush Proppants LLC and our unaudited pro forma financial statements included elsewhere in this prospectus. Among other things, the historical and unaudited pro forma financial statements include more detailed information regarding the basis of presentation for the information in the following table.

 

 

21


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The following table presents non-GAAP financial measures, EBITDA and production costs, which we use in our business as important supplemental measures of our performance. EBITDA represents net income (loss) before interest expense, income taxes and depreciation and depletion. Production costs represents costs of goods sold, excluding depreciation and depletion. EBITDA and production costs are not calculated or presented in accordance with generally accepted accounting principles, or GAAP. We explain these measures under “—Non-GAAP Financial Measures” below and reconcile them to their most directly comparable financial measures calculated and presented in accordance with GAAP.

 

    Predecessor Historical     Hi-Crush Partners LP
Pro Forma
 
    Inception
to
December 31,
2010
    Year Ended
December 31,
2011
    Three Months Ended
March 31,
    Year Ended
December 31,
2011
    Three Months
Ended
March 31,
2012
 
        2011     2012      
    (in thousands, except per unit and operating information)  

Statement of Operations Data:

           

Revenues

  $      $ 20,353      $      $ 13,532      $ 20,353      $ 13,532   

Production costs (1)

           5,998               4,597        5,998        4,597   

Depreciation and depletion

           449               179        449        179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of goods sold

           6,447               4,776        6,447        4,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

           13,906               8,756        13,906        8,756   

General and administrative

    26        2,324        174        1,487        1,689        646   

Other operating expenses

           381               199                 

Accretion of asset retirement obligations

           28               6        28        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (26     11,173        (174     7,064        12,189        8,104   

Other expense:

           

Interest expense, net

           (1,893            (928     (1,893     (928

Other

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

           (1,893            (928     (1,893     (928

Income (loss) before tax expense

    (26     9,280        (174     6,136        10,296        7,176   

Income tax expense

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (26   $ 9,280      $ (174   $ 6,136      $ 10,296      $ 7,176   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per limited partner unit:

           

Common unit

           

Subordinated unit

           

Statement of Cash Flow Data:

           

Net cash provided by (used in):

           

Operating activities

  $ (14   $ 18,788      $ 16,137      $ 3,983       

Investing activities

    (322     (50,199     (16,153     (12,815    

Financing activities

    336        42,465        10        8,305       

Other Financial Data:

           

EBITDA (1)

  $ (26   $ 11,622      $ (174   $ 7,243      $ 12,638      $ 8,283   

Capital expenditures (2)

    72        50,169        16,123        12,815       

Operating Data:

           

Total tons sold

           332,593               222,657        332,593        222,657   

Average realized price (per ton)

  $      $ 61.19      $      $ 60.77      $ 61.19      $ 60.77   

Production costs (per ton) (1)

         $ 18.03             $ 20.65      $ 18.03      $ 20.65   

Balance Sheet Data (at period end):

           

Cash and cash equivalents

  $      $ 11,054      $ 175      $ 10,527        $ 3,884   

Total assets

    614        72,229        21,320        90,469          66,629   

Long-term debt (including current portion)

           46,112               55,973            

Total liabilities

    304        61,942        21,173        74,046          65,163   

Members’/Partners’ capital

    310        10,287        147        16,423          1,466   

 

 

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(1) For more information, please read “—Non-GAAP Financial Measures” below.
(2) Expansion capital expenditures are capital expenditures made to increase the long-term operating capacity of our asset base whether through construction or acquisitions. Please read “How We Make Distributions to Our Partners—Capital Expenditures.”

Non-GAAP Financial Measures

EBITDA

We define EBITDA as net income (loss) before net interest expense, income tax expense and depreciation and depletion expense. EBITDA is not a presentation made in accordance with GAAP.

EBITDA is a non-GAAP supplemental financial measure that management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:

 

   

our operating performance as compared to other publicly-traded companies in the proppants industry, without regard to historical cost basis or financing methods; and

 

   

the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of EBITDA will provide useful information to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to EBITDA is net income. Our non-GAAP financial measure of EBITDA should not be considered as an alternative to GAAP net income. EBITDA has important limitations as an analytical tool because it excludes some but not all items that affect net income. You should not consider EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because EBITDA may be defined differently by other companies in our industry, our definition of EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

The following table presents a reconciliation of EBITDA to the most directly comparable GAAP financial measure, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

    Predecessor Historical     Hi-Crush Partners LP
Pro Forma
 
    Inception
to
December 31,
2010
    Year Ended
December 31,
2011
    Three Months Ended
March 31,
    Year Ended
December 31,
2011
    Three Months
Ended
March 31, 2012
 
            2011             2012          
    (in thousands)  

Reconciliation of EBITDA to net income (loss):

           

Net income (loss)

  $   (26   $ 9,280      $ (174   $ 6,136      $ 10,296      $ 7,176   

Depreciation and depletion expense

           449               179        449        179   

Income tax expense

                                         

Interest expense, net

           1,893               928        1,893        928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $   (26   $ 11,622      $ (174   $ 7,243      $ 12,638      $ 8,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Production Costs

We define production costs as costs of goods sold, excluding depreciation and depletion. We believe production costs is a meaningful measure because it provides a measure of operating performance that is unaffected by historical cost basis. The GAAP measure most directly comparable to production costs is costs of goods sold. Our non-GAAP financial measure of production costs should not be considered as an alternative to GAAP costs of goods sold. Production costs has important limitations as an analytical tool because it excludes some but not all items that affect costs of goods sold. You should not consider production costs in isolation or as a substitute for analysis of our results as reported under GAAP. Because production costs may be defined differently by other companies in our industry, our definition of production costs may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

The following table presents a reconciliation of production costs to the most directly comparable GAAP financial measure, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

    Predecessor Historical     Hi-Crush Partners LP
Pro Forma
 
    Inception
to
December 31,
2010
    Year Ended
December 31,
2011
    Three Months Ended
March 31,
    Year Ended
December 31,
2011
    Three Months
Ended
March 31, 2012
 
            2011             2012          
    (in thousands, except operating information)  

Reconciliation of production costs to costs of goods sold:

           

Costs of goods sold

  $   —      $ 6,447      $   —      $ 4,776      $ 6,447      $ 4,776   

Depreciation and depletion expense

           449               179        449        179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Production costs

  $   —      $ 5,998      $   —      $ 4,597      $ 5,998      $ 4,597   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs of goods sold per ton

    $ 19.38        $ 21.45      $ 19.38      $ 21.45   
   

 

 

     

 

 

   

 

 

   

 

 

 

Production costs per ton

    $ 18.03        $ 20.65      $ 18.03      $ 20.65   
   

 

 

     

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition, results of operations and cash available for distribution could be materially adversely affected. In that case, we might not be able to make distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.

Risks Inherent in Our Business

We may not have sufficient cash from operations following the establishment of cash reserves and payment of costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

We may not have sufficient cash each quarter to pay the full amount of our minimum quarterly distribution of $         per unit, or $         per unit per year, which will require us to have cash available for distribution of approximately $         million per quarter, or $         million per year, based on the number of common and subordinated units that will be outstanding after the completion of this offering. The amount of cash we can distribute on our common and subordinated units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on the following factors, some of which are beyond our control:

 

   

the 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 price and availability of natural gas or electricity;

 

   

changes in prevailing economic conditions;

 

   

unanticipated ground, grade or water conditions;

 

   

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;

 

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difficulty collecting receivables;

 

   

inability of our customers to take delivery;

 

   

changes in the price and availability of transportation;

 

   

fires, explosions or other accidents; and

 

   

cave-ins, pit wall failures or rock falls.

In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:

 

   

the level of capital expenditures we make;

 

   

the cost of acquisitions;

 

   

our debt service requirements and other liabilities;

 

   

fluctuations in our working capital needs;

 

   

our ability to borrow funds and access capital markets;

 

   

restrictions contained in debt agreements to which we are a party; and

 

   

the amount of cash reserves established by our general partner.

For a description of additional restrictions and factors that may affect our ability to pay cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

On a pro forma basis we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all units for the twelve months ended March 31, 2012.

The amount of cash we need to pay the minimum quarterly distribution for four quarters on all of our units to be outstanding immediately after this offering is approximately $         million. The amount of pro forma cash available for distribution generated during the twelve months ended March 31, 2012 would have been insufficient to allow us to pay the full minimum quarterly distribution on all of our common units during that period. For a calculation of our ability to make distributions to unitholders based on our pro forma results for the twelve months ended March 31, 2012, please read “Cash Distribution Policy and Restrictions on Distributions.”

The amount of cash we have available for distribution to holders of our units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.

The amount of cash we have available for distribution depends primarily upon our cash flow, including cash flow from reserves and working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may pay cash distributions during periods when we record net losses for financial accounting purposes and may not pay cash distributions during periods when we record net income.

Only approximately $4.1 million of the proceeds from the sale of common units in this offering will be available to us to fund our operations or to pay distributions to public unitholders.

We expect to receive net proceeds of approximately $         million from this offering (based on an assumed initial public offering price of $         per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts, our portion of the structuring fee and estimated offering expenses. We intend to use approximately $         million of the net proceeds we receive from this offering to repay in full debt we intend to assume from our sponsor in connection with this offering and to

 

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reimburse capital expenditures of, and pay a distribution to, our sponsor. We will not receive any proceeds from the sale of common units by the selling unitholder in this offering, including proceeds from the sale of additional common units by the selling unitholder pursuant to the underwriters’ option to purchase additional common units. Consequently, only approximately $4.1 million of the proceeds from this offering will be available to us to fund our operations or to pay distributions to the public unitholders. Please read “Use of Proceeds.”

The assumptions underlying our forecast of cash available for distribution included in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from those estimates.

The forecast of cash available for distribution set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations and cash available for distribution for the twelve months ending September 30, 2013. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct, which are discussed in “Cash Distribution Policy and Restrictions on Distributions.”

Our forecast of cash available for distribution has been prepared by management, and we have not received an opinion or report on it from any independent registered public accountants. The assumptions underlying our forecast of cash available for distribution are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause cash available for distribution to differ materially from that which is forecasted. If we do not achieve our forecasted results, we may not be able to pay the minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially. Please read “Cash Distribution Policy and Restrictions on Distributions.”

Inaccuracies in estimates of volumes and qualities of our sand reserves could result in lower than expected sales and higher than expected production costs.

John T. Boyd, our independent reserve engineers, prepared estimates of our reserves based on engineering, economic and geological data assembled and analyzed by our engineers and geologists. However, frac sand reserve estimates are by nature imprecise and depend to some extent on statistical inferences drawn from available data, which may prove unreliable. There are numerous uncertainties inherent in estimating quantities and qualities of reserves and non-reserve frac sand deposits and costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable frac sand reserves necessarily depend on a number of factors and assumptions, all of which may vary considerably from actual results, such as:

 

   

geological and mining conditions and/or effects from prior mining that may not be fully identified by available data or that may differ from experience;

 

   

assumptions concerning future prices of frac sand, operating costs, mining technology improvements, development costs and reclamation costs; and

 

   

assumptions concerning future effects of regulation, including the issuance of required permits and taxes by governmental agencies.

Any inaccuracy in John T. Boyd’s estimates related to our frac sand reserves and non-reserve frac sand deposits could result in lower than expected sales and higher than expected costs. For example, John T. Boyd’s estimates of our proven reserves assume that our revenue and cost structure will remain relatively constant over the life of our reserves. If these assumptions prove to be inaccurate, some or all of our reserves may not be economically mineable, which could have a material adverse effect on our results of operations and cash flows. In addition, we pay a fixed price per ton of sand excavated regardless of the quality of the frac sand, and our current customer contracts require us to deliver frac sand that meets certain specifications. If John T. Boyd’s estimates of the quality of our reserves, including the volumes of the various specifications of those reserves, prove to be inaccurate, we may incur significantly higher excavation costs without corresponding increases in revenues, we may not be able to meet

 

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our contractual obligations, or our facilities may have a shorter than expected reserve life, which could have a material adverse effect on our results of operations and cash flows.

Substantially all of our sales are generated under contracts with four customers, and the loss of, or significant reduction in purchases by, any of them could adversely affect our business, financial condition and results of operations.

During the year ended December 31, 2011, subsidiaries of Weatherford and Halliburton accounted for 100% of our sales. We commenced sales under our new contracts with subsidiaries of Baker Hughes and FTS International in May 2012, and expect that our four customers will represent all of our sales in 2012. We have fixed price, take-or-pay supply agreements with each of these customers, with remaining terms ranging from 12 to 72 months, as of May 10, 2012. Upon the expiration of these current supply agreements, however, our customers may not continue to purchase the same levels of our frac sand due to a variety of reasons. In addition, we may choose to renegotiate our existing contracts on less favorable terms and at reduced volumes in order to preserve relationships with our customers. Furthermore, some of our customers could exit the pressure pumping business or be acquired by other companies that purchase the same products and services we provide from other third-party providers. Our current customers also may seek to acquire frac sand from other providers that offer more competitive pricing or superior logistics or to capture and develop their own sources of frac sand.

In addition, upon the expiration of our current contract terms, we may be unable to renew our existing contracts or enter into new contracts on terms favorable to us, or at all. The demand for frac sand or prevailing prices at the time our current supply agreements expire may render entry into new long-term supply agreements difficult or impossible. Any reduction in the amount of frac sand purchased by our customers, renegotiation on less favorable terms, or inability to enter into new contracts on economically acceptable terms upon the expiration of our current contracts could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we make may reduce, rather than increase, our cash generated from operations on a per unit basis.

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in our cash available for distribution per unit. If we are unable to make acquisitions from third parties, including from our sponsor and its affiliates, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in our cash available for distribution per unit. Any acquisition involves potential risks, some of which are beyond our control, including, among other things:

 

   

mistaken assumptions about revenues and costs, including synergies;

 

   

inability to integrate successfully the businesses we acquire;

 

   

inability to hire, train or retain qualified personnel to manage and operate our business and newly acquired assets;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of management’s attention from other business concerns;

 

   

unforeseen difficulties operating in new product areas or new geographic areas; and

 

   

customer or key employee losses at the acquired businesses.

 

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If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

Our right of first offer to acquire certain of our sponsor’s existing assets is subject to risks and uncertainty, and ultimately we may not acquire any of those assets.

Our omnibus agreement will provide us with a right of first offer on our sponsor’s sand reserves and any related assets that have been or will be constructed on its acreage in Augusta, Wisconsin and Tomah, Wisconsin for a period of three years after the closing of this offering. The consummation and timing of any future acquisitions of these assets will depend upon, among other things, our sponsor’s willingness to offer these assets for sale, our ability to negotiate acceptable customer contracts and other agreements with respect to the assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and our sponsor is under no obligation to accept any offer that we may choose to make. For these or a variety of other reasons, we may decide not to exercise our right of first offer if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Right of First Offer with Respect to Augusta and Tomah Assets.”

Our long-term business and financial performance depends on the level of drilling and completion activity in the oil and natural gas industry.

Our primary exposure to market risk occurs at the time existing customer contracts expire and are subject to renegotiation, renewal or replacement. Our ability to renew existing customer contracts or enter into new customer contracts on favorable terms is dependent on the market for frac sand at such times. Demand for frac sand is materially dependent on the levels of activity in natural gas and oil exploration, development and production, and more specifically, the number of natural gas and oil wells completed in geological formations where sand-based proppants are used in hydraulic fracturing treatments and the amount of frac sand customarily used in the completion of such wells.

While the aggregate rig count has exhibited consistent growth, the number of rigs drilling for natural gas has recently declined to its lowest level in 13 years as a result of low natural gas prices, while the number of rigs drilling for oil has more than offset this decline as a result of relatively high prices for oil. To the extent that the recent fluctuations in global crude oil prices develop into a prolonged decline, this drop could result in a reduction in the growth rate of active oil rigs and a decline in the number of active oil rigs from current levels.

Oil and natural gas producers’ expectations for lower market prices for oil and natural gas, as well as the availability of capital for operating and capital expenditures, may cause them to curtail spending, thereby reducing hydraulic fracturing activity and the demand for frac sand. Industry conditions that impact the activity levels of oil and natural gas producers are influenced by numerous factors over which we have no control, including:

 

   

governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves;

 

   

global weather conditions and natural disasters;

 

   

worldwide political, military, and economic conditions;

 

   

the cost of producing and delivering oil and natural gas;

 

   

commodity prices; and

 

   

potential acceleration of development of alternative energy sources.

A prolonged reduction in natural gas and oil prices would generally depress the level of natural gas and oil exploration, development, production and well completion activity and result in a corresponding decline in the

 

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demand for the frac sand we produce. In addition, any future decreases in the rate at which oil and natural gas reserves are developed, whether due to increased governmental regulation, limitations on exploration and drilling activity or other factors, could have a material adverse effect on our business, even in a stronger natural gas and oil price environment. If there is a sustained decrease in the demand for frac sand, we may be unable to renew contracts for our products, be forced to renegotiate our existing contracts, or be forced to reduce the prices at which we enter into new contracts, any of which would reduce the amount of cash we generate.

In addition, to the extent we make spot sales of our frac sand, the price we receive for those sales will be impacted by short term fluctuations in the market for frac sand, and any negative fluctuations in this market could have an adverse effect on our results of operations and cash flows.

All of our sales are generated at one facility. Any adverse developments at our Wyeville facility could have a material adverse effect on our financial condition and results of operations.

All of our sales are currently derived from our Wyeville facility located in Wyeville, Wisconsin. Any adverse development at this facility due to catastrophic events or weather, or any other event that would cause us to curtail, suspend or terminate operations at our Wyeville facility, could result in us being unable to meet our contracted sand deliveries. If we are unable to deliver contracted volumes within three months of contract year end, or otherwise arrange for delivery from a third party, we will be required to pay make-whole payments to our customers that could have a material adverse effect on our financial condition and results of operations.

We may be adversely affected by decreased demand for raw frac sand due to the development of either effective alternative proppants or new processes to replace hydraulic fracturing.

Raw frac sand is a proppant used in the completion and re-completion of oil and natural gas wells to stimulate and maintain oil and natural gas production through the process of hydraulic fracturing. Raw frac sand is the most commonly used proppant and is less expensive than other proppants, such as resin-coated sand and manufactured ceramics. A significant shift in demand from frac sand to other proppants, or the development of new processes to replace hydraulic fracturing altogether, could cause a decline in the demand for the frac sand we produce and result in a material adverse effect on our financial condition and results of operations.

An increase in the supply of raw frac sand having similar characteristics as the raw frac sand we produce could make it more difficult for us to renew or replace our existing contracts on favorable terms or at all.

We believe that the supply of raw frac sand has not kept pace with the increasing demand for raw frac sand, which has been a contributing factor to steadily increasing prices for raw frac sand over the last decade. If significant new reserves of raw frac sand are discovered and developed, and those frac sands have similar characteristics to the raw frac sand we produce, we may be unable to renew or replace our existing contracts on favorable terms or at all. Specifically, if high quality frac sand becomes more readily available, our customers may not be willing to enter into long-term, take-or-pay contracts, may demand lower prices or both, which could have a material adverse effect on our results of operations and cash flows over the long-term.

Federal, state, and local legislative and regulatory initiatives relating to hydraulic fracturing and the potential for related litigation could result in increased costs, additional operating restrictions or delays for our customers, which could cause a decline in the demand for our frac sand and negatively impact our business, financial condition and results of operations.

We supply frac sand to hydraulic fracturing operators in the oil and natural gas industry. Hydraulic fracturing is an important and increasingly common practice that is used to stimulate production of natural gas and/or oil from low permeability hydrocarbon bearing subsurface rock formations. The hydraulic fracturing process involves the injection of water, proppants, and chemicals under pressure into the formation to fracture the

 

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surrounding rock, increase permeability and stimulate production. Increased regulation of hydraulic fracturing may adversely impact our business, financial condition, and results of operations.

Although we do not directly engage in hydraulic fracturing activities, our customers purchase our frac sand for use in their hydraulic fracturing activities. The federal Safe Drinking Water Act (“SDWA”) regulates the underground injection of substances through the Underground Injection Control Program (“UIC Program”). Currently, with the exception of certain hydraulic fracturing activities involving the use of diesel, hydraulic fracturing is exempt from federal regulation under the UIC Program, and the hydraulic fracturing process is typically regulated by state or local governmental authorities. However, the practice of hydraulic fracturing has become controversial and is undergoing increased political and regulatory scrutiny. Several federal agencies, regulatory authorities, and legislative entities are investigating the potential environmental impacts of hydraulic fracturing and whether additional regulation may be necessary. On April 13, 2012, President Obama issued an executive order creating a task force to coordinate federal oversight over domestic natural gas production and hydraulic fracturing. The U.S. Department of the Interior proposed new regulations on May 4, 2012, which would require oil and natural gas operators to disclose the chemicals they use during hydraulic fracturing on federal lands. It would also strengthen standards for wellbore integrity and the management of fluids that return to the surface during and after fracturing operations on federal lands. These proposed changes are partially in response to recommendations issued by a subcommittee of the Secretary of Energy Advisory Board (the “SEAB”) of the U.S. Department of Energy. The SEAB had been tasked with recommending steps to improve the safety and environmental performance of hydraulic fracturing. The SEAB subcommittee had issued a preliminary report in August 2011 recommending, among other things, measures to improve and protect air and water quality, improvements in communication among state and federal regulators, disclosure of fracturing fluid composition, and the creation of a publicly accessible database organizing all publicly disclosed information with respect to hydraulic fracturing operations. The SEAB subcommittee subsequently issued a report in November 2011 on how federal agencies, states, and others can implement its August 2011 recommendations. In addition, the U.S. Environmental Protection Agency continues to study the potential environmental impacts of hydraulic fracturing activities and has announced plans to propose standards for the treatment and discharge of wastewater resulting from hydraulic fracturing by 2014. These studies and activities, depending on their results, could spur proposals or initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Legislation is currently before Congress to provide for federal regulation of hydraulic fracturing under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process. If this or similar legislation becomes law, the legislation could establish an additional level of regulation that may lead to additional permitting requirements or other operating restrictions applicable to our customers, making it more difficult for them to complete unconventional oil and natural gas wells. This could increase our customers’ costs of compliance and doing business or otherwise adversely affect the hydraulic fracturing services they perform, which may negatively impact demand for our frac sand.

In addition, various state, local, and foreign governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing through additional permitting requirements, operational restrictions, disclosure requirements, and temporary or permanent bans on hydraulic fracturing in certain areas such as environmentally sensitive watersheds. For example, eleven states—Arkansas, Colorado, Louisiana, Michigan, Montana, New Mexico, North Dakota, Ohio, Pennsylvania, Texas, and Wyoming—have imposed disclosure requirements on hydraulic fracturing well owners and operators. In addition, many local governments have adopted ordinances to severely restrict or prohibit hydraulic fracturing activities within their jurisdictions.

The adoption of new laws or regulations at the federal, state, local, or foreign levels imposing reporting obligations on, or otherwise limiting or delaying, the hydraulic fracturing process could make it more difficult to complete natural gas wells, increase our customers’ costs of compliance and doing business, and otherwise adversely affect the hydraulic fracturing services they perform, which could negatively impact demand for our frac sand. In addition, heightened political, regulatory, and public scrutiny of hydraulic fracturing practices could expose us or our customers to increased legal and regulatory proceedings, which could be time-consuming, costly, or result in substantial legal liability or significant reputational harm. We could be directly affected by

 

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adverse litigation involving us, or indirectly affected if the cost of compliance limits the ability of our customers to operate. Such costs and scrutiny could directly or indirectly, through reduced demand for our frac sand, have a material adverse effect on our business, financial condition and results of operations.

Our long-term, fixed price contracts may preclude us from taking advantage of increasing prices for frac sand or mitigating the effect of increased operational costs during the term of our long-term, fixed price contracts.

The long-term supply contracts we have may negatively impact our results of operations. All of our long-term contracts are for sales at fixed prices. As a result, in periods with increasing prices our sales will grow at a slower rate than industry spot prices.

Additionally, if our operational costs increase during the terms of our long-term supply contracts, we will not be able to pass any of those increased costs to our customers. If we are unable to otherwise mitigate these increased operational costs, our net income and available cash for distributions could decline.

We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results and cash available for distribution.

We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, whose operations are concentrated in a single industry, the global oilfield services industry. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use the production could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our unitholders.

Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.

Our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods and earthquakes. If any of these events were to occur, we could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of our operations.

We are not fully insured against all risks incident to our business, including the risk of our operations being interrupted due to severe weather and natural disasters. Certain of the insurance policies covering entities that will be contributed to us and their operations also provide coverage to entities that will not be contributed to us as a part of our initial public offering. The coverage available under those insurance policies has historically been allocated among the entities that will be contributed to us and those entities that will not be contributed to us. This allocation may result in limiting the amount of recovery available to us for purposes of covered losses.

Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition sub-limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our financial condition, results of operations and cash available for distribution to unitholders.

Because we have a limited operating history, you may not be able to evaluate our current business and future earnings prospects accurately.

Our sponsor, which is our accounting predecessor for financial reporting purposes, was formed in October 2010 to develop excavation, processing and logistics facilities for raw frac sands used in hydraulic

 

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fracturing operations in oil and natural gas wells. We did not commence commercial operations until the third quarter of 2011, when our Wyeville facility became operational. As a result, we have limited operating history upon which you can base an evaluation of our current business and our future earnings prospects.

In addition, this prospectus includes audited financial statements only as of and for the year ended December 31, 2011 and as of and for the period from inception (October 28, 2010) to December 31, 2010. As a result, and given our recent date of formation, you have limited information upon which to make your decision to invest in our common units.

Our future performance will depend on our ability to succeed in competitive markets, and on our ability to appropriately react to potential fluctuations in the demand for and supply of frac sand.

We operate in a highly competitive market that is characterized by a small number of large, national producers and a larger number of small, regional or local producers. Competition in the industry is based on price, consistency and quality of product, site location, distribution and logistics capabilities, customer service, reliability of supply and breadth of product offering.

We compete with large, national producers such as Badger Mining Corporation, Fairmount Minerals, Ltd., Preferred Proppants LLC, Unimin Corporation and U.S. Silica Holdings Inc. Our larger competitors may have greater financial and other resources than we do, may develop technology superior to ours or may have production facilities that are located closer to key customers than ours. Should the demand for hydraulic fracturing services decrease, prices in the frac sand market could materially decrease as smaller, regional producers may exit the market, selling frac sand at below market prices. In addition, oil and natural gas exploration and production companies and other providers of hydraulic fracturing services could acquire their own frac sand reserves, expand their existing frac sand production capacity or otherwise fulfill their own proppant requirements and existing or new frac sand producers could add to or expand their frac sand production capacity, which may negatively impact pricing and demand for our frac sand. We may not be able to compete successfully against either our larger or smaller competitors in the future, and competition could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Fluctuations in transportation costs and the availability or reliability of rail transportation could reduce revenues by causing us to reduce our production or by impairing the ability of our customers to take delivery.

Transportation costs represent a significant portion of the total cost of frac sand for our customers and, as a result, the cost of transportation is a critical factor in a customer’s purchasing decision. Disruption of transportation services due to shortages of rail cars, weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts, bottlenecks or other events could temporarily impair the ability of our customers to take delivery and, in certain circumstances, constitute a force majeure event under our customer contracts, permitting our customers to suspend taking delivery of and paying for our frac sand. Accordingly, if there are disruptions of the rail transportation services utilized by our customers, and they are unable to find alternative transportation providers to transport frac sand, our business could be adversely affected.

Our production process consumes large amounts of natural gas and electricity. An increase in the price or a significant interruption in the supply of these or any other energy sources could have a material adverse effect on our financial condition or results of operations.

Energy costs, primarily natural gas and electricity, represented approximately 2.9% of our total sales and 9.8% of our total production costs in 2011. Natural gas is the primary fuel source used for drying in the frac sand production process and, as such, our profitability is impacted by the price and availability of natural gas we purchase from third parties. Because we have not contracted for the provision of natural gas on a fixed-price basis, our costs and profitability will be impacted by fluctuations in prices for natural gas. The price and supply of natural gas are unpredictable and can fluctuate significantly based on international, political and economic

 

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circumstances, as well as other events outside our control, such as changes in supply and demand due to weather conditions, actions by OPEC and other oil and natural gas producers, regional production patterns and environmental concerns. In addition, potential climate change regulations or carbon or emissions taxes could result in higher production costs for energy, which may be passed on to us in whole or in part. The price of natural gas has been extremely volatile over the last two years, from a high of $4.92 per million British Thermal Units (“BTUs”) in June 2011 to a low of $1.82 per million BTUs in April 2012, and this volatility may continue. In order to manage this risk, we may hedge natural gas prices through the use of derivative financial instruments, such as forwards, swaps and futures. However, these measures carry risk (including nonperformance by counterparties) and do not in any event entirely eliminate the risk of decreased margins as a result of natural gas price increases. A significant increase in the price of energy that is not recovered through an increase in the price of our products or covered through our hedging arrangements or an extended interruption in the supply of natural gas or electricity to our production facilities could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

Increases in the price of diesel fuel may adversely affect our results of operations.

Diesel fuel costs generally fluctuate with increasing and decreasing world crude oil prices, and accordingly are subject to political, economic and market factors that are outside of our control. Our operations are dependent on earthmoving equipment, railcars and tractor trailers, and diesel fuel costs are a significant component of the operating expense of these vehicles. We contract with a third party to excavate raw frac sand, deliver the raw frac sand to our processing facility and move the sand from our wet plant to our dry plant, and pay a fixed price per ton of sand delivered to our wet plant, subject to a fuel surcharge based on the price of diesel fuel. Accordingly, increased diesel fuel costs could have an adverse effect on our results of operations and cash flows.

We may be required to make substantial capital expenditures to maintain, develop and increase our asset base. The inability to obtain needed capital or financing on satisfactory terms, or at all, could have an adverse effect on our growth and profitability.

Although we currently use a significant amount of our cash reserves and cash generated from our operations to fund the development of our existing frac sand reserves, we may depend on the availability of credit to fund future capital expenditures. Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering, the covenants contained in the credit facility we expect to enter into in connection with this offering or other future debt agreements, adverse market conditions or other contingencies and uncertainties that are beyond our control. Our failure to obtain the funds necessary to maintain, develop and increase our asset base could adversely impact our growth and profitability.

Even if we are able to obtain financing or access the capital markets, incurring additional debt may significantly increase our interest expense and financial leverage, and our level of indebtedness could restrict our ability to fund future development and acquisition activities. In addition, the issuance of additional equity interests may result in significant dilution to our existing unitholders.

We expect to enter into a new credit facility in connection with this offering that will likely contain restrictions and financial covenants that may restrict our business and financing activities.

The credit facility that we expect to enter into in connection with this offering, and any other future financing agreements that we may enter into will likely contain, operating and financial restrictions and covenants that may restrict our ability to finance future operations or capital needs, to engage in, expand or pursue our business activities or to make distributions to our unitholders.

Our ability to comply with any such restrictions and covenants is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. If market or other economic

 

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conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in the credit facility that we expect to enter into, a significant portion of our indebtedness may become immediately due and payable and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments.

A facility closure entails substantial costs, and if we close our facility sooner than anticipated, our results of operations may be adversely affected.

We base our assumptions regarding the life of our Wyeville excavation facility on detailed studies that we perform from time to time, but our studies and assumptions may not prove to be accurate. If we close our Wyeville facility sooner than expected, sales will decline unless we are able to acquire and develop additional facilities, which may not be possible. The closure of our Wyeville facility would involve significant fixed closure costs, including accelerated employment legacy costs, severance-related obligations, reclamation and other environmental costs and the costs of terminating long-term obligations, including energy contracts and equipment leases. We accrue for the costs of reclaiming open pits, stockpiles, non-saleable sand, ponds, roads and other mining support areas over the estimated mining life of our property. If we were to reduce the estimated life of our Wyeville facility, the fixed facility closure costs would be applied to a shorter period of production, which would increase production costs per ton produced and could materially and adversely affect our results of operations and financial condition.

Applicable statutes and regulations require that mining property be reclaimed following a mine closure in accordance with specified standards and an approved reclamation plan. The plan addresses matters such as removal of facilities and equipment, regrading, prevention of erosion and other forms of water pollution, re-vegetation and post-mining land use. We may be required to post a surety bond or other form of financial assurance equal to the cost of reclamation as set forth in the approved reclamation plan. The establishment of the final mine closure reclamation liability is based on permit requirements and requires various estimates and assumptions, principally associated with reclamation costs and production levels. If our accruals for expected reclamation and other costs associated with facility closures for which we will be responsible were later determined to be insufficient, our business, results of operations and financial condition would be adversely affected.

Our operations are dependent on our rights and ability to mine our properties and on our having renewed or received the required permits and approvals from governmental authorities and other third parties.

We hold numerous governmental, environmental, mining, and other permits, water rights, and approvals authorizing operations at our facility. For our extraction and processing in Wisconsin, the permitting process is subject to federal, state and local authority. For example, on the federal level, a Mine Identification Request (MSHA Form 7000-51) must be filed and obtained before mining commences. If wetlands are implicated, a U.S. Army Corps of Engineers Wetland Permit is required. At the state level, a series of permits are required related to air quality, wetlands, water quality (waste water, storm water), grading permits, endangered species, archeological assessments, and high capacity wells in addition to others depending upon site specific factors and operational detail. At the local level, zoning, building, storm water, erosion control, wellhead protection, road usage and access are all regulated and require permitting to some degree. A non-metallic mining reclamation permit is required. A decision by a governmental agency or other third party to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations.

Title to, and the area of, mineral properties and water rights may also be disputed. Mineral properties sometimes contain claims or transfer histories that examiners cannot verify. A successful claim that we do not have title to our property or lack appropriate water rights could cause us to lose any rights to explore, develop, and extract minerals, without compensation for our prior expenditures relating to such property. Our business may suffer a material adverse effect in the event we have title deficiencies.

 

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In some instances, we have received access rights or easements from third parties, which allow for a more efficient operation than would exist without the access or easement. A third party could take action to suspend the access or easement, and any such action could be materially adverse to our results of operations or financial condition.

A shortage of skilled labor together with rising labor costs in the excavation industry may further increase operating costs, which could adversely affect our results of operations.

Efficient sand excavation using modern techniques and equipment requires skilled laborers, preferably with several years of experience and proficiency in multiple tasks, including processing of mined minerals. Our mining operations are subcontracted to Gerke Excavating, Inc., but there is a shortage of skilled mining labor in Wisconsin. If the shortage of experienced labor continues or worsens, we may find it difficult to renew or replace that contract upon its expiration on acceptable terms, and we may be unable to hire or train the necessary number of skilled laborers to perform our own operations. In either event, there could be an adverse impact on our labor productivity and costs and our ability to expand production.

Our business may suffer if we lose, or are unable to attract and retain, key personnel.

We depend to a large extent on the services of our senior management team and other key personnel, and we are seeking to hire several key management personnel in the near term. Members of our senior management and other key employees have extensive experience and expertise in evaluating and analyzing sand reserves, maximizing production from such properties, marketing frac sand production and developing and executing financing strategies, as well as substantial experience and relationships with participants in the oilfield services and exploration and production industries. Competition for management and key personnel is intense, and the pool of qualified candidates is limited. The loss of any of these individuals or the failure to attract additional personnel, as needed, could have a material adverse effect on our operations and could lead to higher labor costs or the use of less-qualified personnel. In addition, if any of our executives or other key employees were to join a competitor or form a competing company, we could lose customers, suppliers, know-how and key personnel. We do not maintain key-man life insurance with respect to any of our employees. Our success will be dependent on our ability to continue to attract, employ and retain highly skilled personnel.

Failure to maintain effective quality control systems at our mining, processing and production facilities could have a material adverse effect on our business and operations.

The performance and quality of our products are critical to the success of our business. These factors depend significantly on the effectiveness of our quality control systems, which, in turn, depends on a number of factors, including the design of our quality control systems, our quality-training program and our ability to ensure that our employees adhere to our quality control policies and guidelines. Any significant failure or deterioration of our quality control systems could have a material adverse effect on our business, financial condition, results of operations and reputation.

Seasonal and severe weather conditions could have a material adverse impact on our business.

Our business could be materially adversely affected by severe weather conditions. Severe weather conditions may affect our customers’ operations, thus reducing their need for our products, impact our operations by resulting in weather-related damage to our facilities and equipment and impact our customers’ ability to take delivery of our products at our plant site. Any weather-related interference with our operations could force us to delay or curtail services and potentially breach our contractual obligations to delivery minimum volumes or result in a loss of productivity and an increase in our operating costs.

In addition, severe winter weather conditions impact our operations by causing us to halt our excavation and wet plant related production activities during the winter months. During non-winter months, we excavate excess

 

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sand to build a stockpile that will feed the dry plant which continues to operate during the winter months. Unexpected winter conditions (e.g., if winter comes earlier than expected or lasts longer than expected) may result in us not having a sufficient sand stockpile to supply feedstock for our dry plant during winter months, which could result in us being unable to meet our contracted sand deliveries during such time and lead to a material adverse effect on our business, financial condition, results of operation and reputation.

Our cash flow fluctuates on a seasonal basis.

Our cash flow is affected by a variety of factors, including weather conditions and seasonal periods. Seasonal fluctuations in weather impact the production levels at our wet processing plant. While our sales and finished product production levels are contracted evenly throughout the year, our mining and wet sand processing activities are limited to non-winter months. As a consequence, we experience lower cash costs in the first and fourth quarter of each calendar year.

Diminished access to water may adversely affect our operations.

The excavation and processing activities in which we engage require significant amounts of water. As a result, securing water rights and water access is necessary for the operation of our processing facilities. If future excavation and processing activities are located in an area that is water-constrained, there may be additional costs associated with securing water access. We have obtained water rights that we currently use to service the activities on our property, and we plan to obtain all required water rights to service other properties we may develop or acquire in the future. However, the amount of water that we are entitled to use pursuant to our water rights must be determined by the appropriate regulatory authorities in the jurisdictions in which we operate. Such regulatory authorities may amend the regulations regarding such water rights, increase the cost of maintaining such water rights or eliminate our current water rights, and we may be unable to retain all or a portion of such water rights. These new regulations, which could also affect local municipalities and other industrial operations, could have a material adverse effect on our operating costs if implemented. Such changes in laws, regulations or government policy and related interpretations pertaining to water rights may alter the environment in which we do business, which may have an adverse effect on our financial condition and results of operations. Additionally, a water discharge permit may be required to properly dispose of water at our processing site. The water discharge permitting process is also subject to regulatory discretion, and any inability to obtain the necessary permits could have an adverse effect on financial condition and results of operations.

A terrorist attack or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States could adversely affect the U.S. and global economies and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants or refineries are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas, which, in turn, could also reduce the demand for our frac sand. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.

Risks Related to Environmental, Mining and Other Regulation

We and our customers are subject to extensive environmental and health and safety regulations that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.

We are subject to a variety of federal, state, and local regulatory environmental requirements affecting the mining and mineral processing industry, including among others, those relating to employee health and safety,

 

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environmental permitting and licensing, air and water emissions, water pollution, waste management, remediation of soil and groundwater contamination, land use, reclamation and restoration of properties, hazardous materials, and natural resources. These laws, regulations, and permits have had, and will continue to have, a significant effect on our business. Some environmental laws impose substantial penalties for noncompliance, and others, such as the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), impose strict, retroactive, and joint and several liability for the remediation of releases of hazardous substances. Liability under CERCLA, or similar state and local laws, may be imposed as a result of conduct that was lawful at the time it occurred or for the conduct of, or conditions caused by, prior operators or other third parties. Failure to properly handle, transport, store, or dispose of hazardous materials or otherwise conduct our operations in compliance with environmental laws could expose us to liability for governmental penalties, cleanup costs, and civil or criminal liability associated with releases of such materials into the environment, damages to property, or natural resources and other damages, as well as potentially impair our ability to conduct our operations. In addition, future environmental laws and regulations could restrict our ability to expand our facilities or extract our mineral deposits or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Future events, including changes in any environmental requirements (or their interpretation or enforcement) and the costs associated with complying with such requirements, could have a material adverse effect on us.

Any failure by us to comply with applicable environmental laws and regulations may cause governmental authorities to take actions that could adversely impact our operations and financial condition, including:

 

   

issuance of administrative, civil, or criminal penalties;

 

   

denial, modification, or revocation of permits or other authorizations;

 

   

imposition of injunctive obligations or other limitations on our operations, including cessation of operations; and

 

   

requirements to perform site investigatory, remedial, or other corrective actions.

Any such regulations could require us to modify existing permits or obtain new permits, implement additional pollution control technology, curtail operations, increase significantly our operating costs, or impose additional operating restrictions among our customers that reduce demand for our services.

We may not be able to comply with any new laws and regulations that are adopted, and any new laws and regulations could have a material adverse effect on our operating results by requiring us to modify our operations or equipment or shut down our facility. Additionally, our customers may not be able to comply with any new laws and regulations, which could cause our customers to curtail or cease operations. We cannot at this time reasonably estimate our costs of compliance or the timing of any costs associated with any new laws and regulations, or any material adverse effect that any new standards will have on our customers and, consequently, on our operations.

Silica-related legislation, health issues and litigation could have a material adverse effect on our business, reputation or results of operations.

We are subject to laws and regulations relating to human exposure to crystalline silica. Several federal and state regulatory authorities, including the U.S. Mining Safety and Health Administration, may continue to propose changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment. We may not be able to comply with any new laws and regulations that are adopted, and any new laws and regulations could have a material adverse effect on our operating results by requiring us to modify or cease our operations.

In addition, the inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is recent evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible

 

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association with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the frac sand industry. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability from the use of frac sand, may have the effect of discouraging our customers’ use of our frac sand. The actual or perceived health risks of mining, processing and handling frac sand could materially and adversely affect frac sand producers, including us, through reduced use of frac sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of us and our customers or reduced financing sources available to the frac sand industry.

We are subject to the Federal Mine Safety and Health Act of 1977, which imposes stringent health and safety standards on numerous aspects of our operations.

Our operations are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment, and other matters. Our failure to comply with such standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on our business and financial condition or otherwise impose significant restrictions on our ability to conduct mineral extraction and processing operations.

We and our customers are subject to other extensive regulations, including licensing, plant and wildlife protection and reclamation regulation, that impose, and will continue to impose, significant costs and liabilities. In addition, future regulations, or more stringent enforcement of existing regulations, could increase those costs and liabilities, which could adversely affect our results of operations.

In addition to the regulatory matters described above, we and our customers are subject to extensive governmental regulation on matters such as permitting and licensing requirements, plant and wildlife protection, wetlands protection, reclamation and restoration activities at mining properties after mining is completed, the discharge of materials into the environment, and the effects that mining and hydraulic fracturing have on groundwater quality and availability. Our future success depends, among other things, on the quantity and quality of our frac sand deposits, our ability to extract these deposits profitably, and our customers being able to operate their businesses as they currently do.

In order to obtain permits and renewals of permits in the future, we may be required to prepare and present data to governmental authorities pertaining to the potential adverse impact that any proposed excavation or production activities, individually or in the aggregate, may have on the environment. Certain approval procedures may require preparation of archaeological surveys, endangered species studies, and other studies to assess the environmental impact of new sites or the expansion of existing sites. Compliance with these regulatory requirements is expensive and significantly lengthens the time needed to develop a site. Finally, obtaining or renewing required permits is sometimes delayed or prevented due to community opposition and other factors beyond our control. The denial of a permit essential to our operations or the imposition of conditions with which it is not practicable or feasible to comply could impair or prevent our ability to develop or expand a site. Significant opposition to a permit by neighboring property owners, members of the public, or other third parties, or delay in the environmental review and permitting process also could delay or impair our ability to develop or expand a site. New legal requirements, including those related to the protection of the environment, could be adopted that could materially adversely affect our mining operations (including our ability to extract or the pace of extraction of mineral deposits), our cost structure, or our customers’ ability to use our frac sand. Such current or future regulations could have a material adverse effect on our business and we may not be able to obtain or renew permits in the future.

 

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Our inability to acquire, maintain or renew financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business, financial condition and results of operations.

We are generally obligated to restore property in accordance with regulatory standards and our approved reclamation plan after it has been mined. We are required under federal, state, and local laws to maintain financial assurances, such as surety bonds, to secure such obligations. The inability to acquire, maintain or renew such assurances, as required by federal, state, and local laws, could subject us to fines and penalties as well as the revocation of our operating permits. Such inability could result from a variety of factors, including:

 

   

the lack of availability, higher expense, or unreasonable terms of such financial assurances;

 

   

the ability of current and future financial assurance counterparties to increase required collateral; and

 

   

the exercise by financial assurance counterparties of any rights to refuse to renew the financial assurance instruments.

Our inability to acquire, maintain, or renew necessary financial assurances related to the reclamation and restoration of mining property could have a material adverse effect on our business, financial condition, and results of operations.

Risks Inherent in an Investment in Us

Our sponsor owns and controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including our sponsor, have conflicts of interest with us and limited duties, and they may favor their own interests to the detriment of us and our unitholders.

Following the offering, our sponsor, Hi-Crush Proppants LLC, will own and control our general partner and will appoint all of the directors of our general partner. Although our general partner has a duty to manage us in a manner it believes to be in our best interests, the executive officers and directors of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to our sponsor. Therefore, conflicts of interest may arise between our sponsor or any of its affiliates, including our general partner, on the one hand, and us or any of our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our common unitholders. These conflicts include the following situations, among others:

 

   

our general partner is allowed to take into account the interests of parties other than us, such as our sponsor, in exercising certain rights under our partnership agreement, which has the effect of limiting its duty to our unitholders;

 

   

neither our partnership agreement nor any other agreement requires our sponsor to pursue a business strategy that favors us;

 

   

our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty;

 

   

except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

   

our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

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our general partner determines the amount and timing of any capital expenditure and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. Please read “How We Make Distributions to Our Partners—Capital Expenditures” for a discussion on when a capital expenditure constitutes a maintenance capital expenditure or an expansion capital expenditure. This determination can affect the amount of cash that is distributed to our unitholders which, in turn, may affect the ability of the subordinated units to convert. Please read “How We Make Distributions to Our Partners—Subordination Period”;

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;

 

   

our partnership agreement permits us to distribute up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or the incentive distribution rights;

 

   

our general partner determines which costs incurred by it and its affiliates are reimbursable by us;

 

   

our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with its affiliates on our behalf;

 

   

our general partner intends to limit its liability regarding our contractual and other obligations;

 

   

our general partner may exercise its right to call and purchase common units if it and its affiliates own more than 80% of the common units;

 

   

our general partner controls the enforcement of obligations that it and its affiliates owe to us;

 

   

our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and

 

   

our sponsor may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our sponsor’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or the unitholders. This election may result in lower distributions to the common unitholders in certain situations.

In addition, we may compete directly with entities in which our sponsor has an interest for acquisition opportunities and potentially will compete with these entities for new and existing customers. In particular, we expect that our sponsor will compete with us for new and existing frac sand customers once operations at its processing facility in Augusta, Wisconsin commence in the third quarter of 2012. Please read “—Our sponsor and other affiliates of our general partner may compete with us.” and “Conflicts of Interest and Fiduciary Duties.”

The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion. Our partnership agreement does not require us to pay any distributions at all.

The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute quarterly at least $         per unit on all of our units to the extent we have sufficient cash after the establishment of cash reserves and the payment of our expenses, including payments to our general partner and its affiliates. However, the board may change such policy at any time at its discretion and could elect not to pay distributions for one or more quarters. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

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In addition, our partnership agreement does not require us to pay any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders. The amount of distributions we make, if any, and the decision to make any distribution at all will be determined by the board of directors of our general partner, whose interests may differ from those of our common unitholders. Our general partner has limited duties to our unitholders, which may permit it to favor its own interests or the interests of our sponsor to the detriment of our common unitholders.

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements between us and third parties so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Our sponsor and other affiliates of our general partner have the ability to compete with us, and we expect that our sponsor will compete with us once operations at its processing facility in Augusta, Wisconsin commence in the third quarter of 2012.

Affiliates of our general partner, including our sponsor, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. Our sponsor has investments in entities that acquire, own and operate frac sand excavation and processing facilities and may make additional investments in the future. These investments and acquisitions may include entities or assets that we would have been interested in acquiring. Therefore, our sponsor may compete with us for investment opportunities. In addition, we expect that our sponsor will own an interest in entities that will compete with us following the offering. For example, our sponsor is currently constructing the Augusta excavation and processing facility in Eau Claire County, Wisconsin, which is expected to be operational in the third quarter of 2012. Our sponsor has contracted for the sale of 1,200,000 tons per year of coarse grain Northern White sand from the Augusta facility with two of our existing customers and may seek additional contracts from other of our current and potential customers in direct competition with us as we seek to renew or replace our existing contracts. We share our management team with our sponsor, and despite our sponsor’s and management team’s meaningful economic interest in us, the shared management team is under no obligation to offer new and replacement customer contracts to us before offering them to our sponsor, which could have a material adverse impact on our ability to renew or replace existing customer contracts on favorable terms or at all.

Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and our sponsor. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual or potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Conflicts of Interest and Fiduciary Duties.”

 

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It is our policy to distribute a significant portion of our cash available for distribution to our partners, which could limit our ability to grow and make acquisitions.

We plan to distribute most of our cash available for distribution, which may cause our growth to proceed at a slower pace than that of businesses that reinvest their cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units.

Our partnership agreement contains provisions that eliminate and replace the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

   

how to allocate business opportunities among us and its affiliates;

 

   

whether to exercise its call right;

 

   

how to exercise its voting rights with respect to the units it owns;

 

   

whether to exercise its registration rights;

 

   

whether to elect to reset target distribution levels; and

 

   

whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

Our partnership agreement restricts the remedies available to holders of our units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:

 

   

whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning that it believed that the decision was in the best interest of our partnership;

 

   

our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable

 

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judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

   

our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:

 

  (1) approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or

 

  (2) approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties.”

Our sponsor may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of its board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.

Our sponsor has the right, as the initial holder of our incentive distribution rights, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50.0%) for the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election by our sponsor, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

If our sponsor elects to reset the target distribution levels, it will be entitled to receive a number of common units. The number of common units to be issued to our sponsor will equal the number of common units that would have entitled the holder to an aggregate quarterly cash distribution in the quarter prior to the reset election equal to the distribution to our sponsor on the incentive distribution rights in the quarter prior to the reset election. We anticipate that our sponsor would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our sponsor could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that our common unitholders would have otherwise received had we not issued new common units to our sponsor in connection with resetting the target distribution levels. Please read “How We Make Distributions to Our Partners—Our Sponsor’s Right to Reset Incentive Distribution Levels.”

 

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Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. The board of directors of our general partner, including the independent directors, is chosen entirely by our sponsor, as a result of it owning our general partner, and not by our unitholders. Please read “Management—Management of Hi-Crush Partners LP” and “Certain Relationships and Related Transactions.” Unlike publicly-traded corporations, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

If our unitholders are dissatisfied with the performance of our general partner, they will have limited ability to remove our general partner. Unitholders initially will be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the closing of this offering, our sponsor will own an aggregate of     % of our common and subordinated units (or     % of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). Also, if our general partner is removed without cause during the subordination period and no units held by the holders of the subordinated units or their affiliates are voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business.

Unitholders will experience immediate and substantial dilution of $         per common unit.

The assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover page of this prospectus) exceeds our pro forma net tangible book value of $         per common unit. Based on the assumed initial public offering price of $         per common unit, unitholders will incur immediate and substantial dilution of $         per common unit. This dilution results primarily because the assets contributed to us by affiliates of our general partner are recorded at their historical cost in accordance with GAAP, and not their fair value. Please read “Dilution.”

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of the members of our general partner to transfer their respective membership interests in our general partner to a third party. The new members of our general partner would then be in a position to replace the board of directors and executive officers of our general partner with their own designees and thereby exert significant control over the decisions taken by the board of directors and executive officers of our general partner. This effectively permits a “change of control” without the vote or consent of the unitholders.

 

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The incentive distribution rights held by our sponsor may be transferred to a third party without unitholder consent.

Our sponsor may transfer the incentive distribution rights to a third party at any time without the consent of our unitholders. If our sponsor transfers the incentive distribution rights to a third party but retains its ownership interest in our general partner, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if our sponsor had retained ownership of the incentive distribution rights. For example, a transfer of incentive distribution rights by our sponsor could reduce the likelihood of our sponsor accepting offers made by us relating to assets owned by it, as it would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

Our general partner has a call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act. Upon consummation of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, our sponsor will own an aggregate of     % of our common and subordinated units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), our sponsor will own     % of our common units. For additional information about the limited call right, please read “The Partnership Agreement—Limited Call Right.”

We may issue additional units without unitholder approval, which would dilute existing unitholder ownership interests.

Our partnership agreement does not limit the number of additional limited partner interests we may issue at any time without the approval of our unitholders. The issuance of additional common units or other equity interests of equal or senior rank will have the following effects:

 

   

our existing unitholders’ proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution on each unit may decrease;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of the common units may decline.

 

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There are no limitations in our partnership agreement on our ability to issue units ranking senior to the common units.

In accordance with Delaware law and the provisions of our partnership agreement, we may issue additional partnership interests that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of units of senior rank may (i) reduce or eliminate the amount of cash available for distribution to our common unitholders; (ii) diminish the relative voting strength of the total common units outstanding as a class; or (iii) subordinate the claims of the common unitholders to our assets in the event of our liquidation.

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public or private markets, including sales by our sponsor or other large holders.

After this offering, we will have              common units and              subordinated units outstanding, which includes the              common units we and the selling unitholder are selling in this offering (or              common units if the underwriters exercise their option to purchase additional common units in full) that may be resold in the public market immediately. All of the subordinated units will convert into common units on a one-for-one basis at the end of the subordination period. All of              common units (or              common units if the underwriters exercise their option to purchase additional common units in full) that are issued to our sponsor and not sold by our sponsor as the selling unitholder in this offering will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters. Each of the lock-up agreements with the underwriters may be waived in the discretion of certain of the underwriters. Sales by our sponsor or other large holders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. In addition, we have agreed to provide registration rights to our sponsor. Under our agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. Please read “Units Eligible for Future Sale.”

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Cost reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general partner.

Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available for distribution to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

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There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and unitholders could lose all or part of their investment.

Prior to this offering, there has been no public market for the common units. After this offering, there will be only              publicly-traded common units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Unitholders may not be able to resell their common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for our common units will be determined by negotiations between us, the selling unitholder and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

   

our quarterly distributions;

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

general economic conditions;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

the other factors described in these “Risk Factors.”

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

   

we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

   

your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

Please read “The Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations of liability on a unitholder.

Unitholders may have liability to repay distributions and in certain circumstances may be personally liable for the obligations of the partnership.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we

 

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may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes Oxley Act of 2002, (2) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (4) provide certain disclosure regarding executive compensation required of larger public companies or (5) hold unitholder advisory votes on executive compensation.

Our sponsor, which is our accounting predecessor for financial reporting purposes, has a material weakness in its internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

Prior to the completion of this offering, our sponsor has been a private entity with limited accounting personnel and other supervisory resources to adequately execute its accounting processes and address its internal control over financial reporting. In connection with our sponsor’s audit for the year ended December 31, 2011, our sponsor’s independent registered public accounting firm identified and communicated a material weakness related to the failure to maintain a sufficient complement of qualified accounting personnel, which contributed to our sponsor’s inability to maintain appropriate segregation of duties within the organization and effective review and supervision over the financial reporting process. A “material weakness” is a deficiency, or combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement of our sponsor’s financial statements will not be prevented, or detected on a timely basis. This material weakness resulted in audit adjustments to our sponsor’s financial statements, which were identified by our independent registered public accounting firm.

After the closing of this offering, our management team and financial reporting oversight personnel will be those of our sponsor and thus, we may face the same material weakness described above.

We are in the early phases of evaluating the design and operation of our internal control over financial reporting and will not complete our review until after this offering is completed. We cannot predict the outcome of our review at this time. During the course of the review, we may identify additional control deficiencies, which could give rise to significant deficiencies and other material weaknesses, in addition to the material weakness described above. The material weakness described above could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected. We cannot assure you that the measures we have taken to date, or any

 

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measures we may take in the future, will be sufficient to remediate the material weakness described above or avoid potential future material weaknesses.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded partnership, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded partnership, we will need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Furthermore, while we generally must comply with Section 404 of the Sarbanes Oxley Act of 2002 for our fiscal year ending December 31, 2012, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our annual report for the fiscal year ending December 31, 2017. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.

The New York Stock Exchange does not require a publicly-traded partnership like us to comply with certain of its corporate governance requirements.

We intend to apply to list our common units on the NYSE. Because we will be a publicly-traded partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Hi-Crush Partners LP.”

We will incur increased costs as a result of being a publicly-traded partnership.

We have no history operating as a publicly-traded partnership. As a publicly-traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly-traded

 

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entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly-traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a public company.

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly-traded company, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board or as executive officers.

We estimate that we will incur approximately $2.1 million of incremental costs per year associated with being a publicly-traded partnership; however, it is possible that our actual incremental costs of being a publicly-traded partnership will be higher than we currently estimate.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, please read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for federal income tax purposes or we were to become subject to material additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to you could be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe, based upon our current operations, that we will be so treated, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal,

 

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state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

The tax treatment of publicly-traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present federal income tax treatment of publicly-traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, members of Congress have recently considered substantive changes to the existing federal income tax laws that affect publicly-traded partnerships. Any modification to the federal income tax laws may be applied retroactively and could make it more difficult or impossible to meet the exception for certain publicly-traded partnerships to be treated as partnerships for federal income tax purposes. Although the considered legislation would not appear to have affected our treatment as a partnership, we are unable to predict whether any of these changes, or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, you will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from that income.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated as a partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, our sponsor will directly and indirectly own more than 50% of the total interests in our capital and profits. Therefore, a transfer by our sponsor of all or a portion of its interests in us could result in a termination of us as a partnership for federal income tax purposes. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than the calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, after our termination we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income result in a decrease in your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be

 

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taxed as ordinary income due to potential recapture of depreciation and depletion deductions and certain other items. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.

Investments in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (or “IRAs”), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes, and non-U.S. persons will be required to file federal tax returns and pay tax on their shares of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to you.

The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest by the IRS may materially and adversely impact the market for our common units and the price at which they trade. Our costs of any contest by the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopt.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is placed in service. The use of this proration method may not be permitted under existing Treasury Regulations, and although the U.S. Treasury Department issued proposed Treasury Regulations allowing a similar monthly simplifying convention, such regulations are not final and do not specifically authorize the use of the proration method we have adopted. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to

 

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successfully challenge our proration method, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.

A unitholder whose common units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of common units) may be considered as having disposed of those common units. If so, he would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because there is no tax concept of loaning a partnership interest, a unitholder whose common units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, he may no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.

You will likely be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our common units.

In addition to federal income taxes, you will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. We will initially own assets and conduct business in the states of Wisconsin and Texas. Wisconsin currently imposes a personal income tax and also imposes income taxes on corporations and other entities. You may be required to file state and local income tax returns and pay state and local income taxes in Wisconsin. Further, you may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may own assets or conduct business in additional states or foreign jurisdictions that impose a personal income tax. It is your responsibility to file all U.S. federal, foreign, state and local tax returns. Our counsel has not rendered an opinion on the foreign, state or local tax consequences of an investment in our common units.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $         million from this offering (based on an assumed initial public offering price of $         per common unit, the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts, our portion of the structuring fee and estimated offering expenses.

In connection with the closing of this offering, we intend to assume approximately $         million of indebtedness outstanding under our sponsor’s subordinated promissory notes and to use a portion of the net proceeds we receive from this offering to repay in full such assumed debt. We intend to use approximately $         million of the net proceeds we receive from this offering to reimburse capital expenditures of, and pay a distribution to, our sponsor. The remaining net proceeds of approximately $4.1 million will be available to fund capital expenditures and for general partnership purposes. We are retaining this amount as reimbursement for our obligation to deliver sand volumes in satisfaction of a cash prepayment that our sponsor received for such sand volumes prior to the completion of this offering.

Indebtedness outstanding under our sponsor’s subordinated promissory notes matures in July 2016 and bears interest, at our sponsor’s option, at a rate of 10.0% for cash interest and 12.0% for paid-in-kind interest. Such indebtedness was used by our sponsor to fund the construction of the Wyeville plant and for general corporate purposes.

We will not receive any proceeds from the sale of common units by the selling unitholder in this offering, including proceeds from the sale of additional common units by the selling unitholder pursuant to the underwriters’ option to purchase additional common units.

A $1.00 increase or decrease in the assumed initial public offering price of $         per common unit would cause the net proceeds we receive from this offering, after deducting the estimated underwriting discounts, our portion of the structuring fee and offering expenses payable by us, to increase or decrease, respectively, by approximately $         million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed public offering price to $         per common unit, would increase net proceeds to us from this offering by approximately $         million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $         decrease in the assumed initial offering price to $         per common unit, would decrease the net proceeds to us from this offering by approximately $         million.

 

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CAPITALIZATION

The following table shows our capitalization as of March 31, 2012:

 

   

on an actual basis for our accounting predecessor, Hi-Crush Proppants LLC;

 

   

on a pro forma basis to give effect to the elimination of certain assets not contributed to us; and

 

   

on an as adjusted basis to reflect the offering of our common units and distribution to our sponsor, the other transactions described under “Summary—Formation Transactions and Partnership Structure” and the application of the net proceeds from this offering as described under “Use of Proceeds.”

This table is derived from, and should be read together with, the unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Summary—Formation Transactions and Partnership Structure,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2012  
     Actual      Pro Forma      As Adjusted  
     (in thousands)  

Cash and cash equivalents

   $ 10,527       $ 3,884       $          
  

 

 

    

 

 

    

 

 

 

Long-term debt:

        

Predecessor debt (1)

   $ 55,973       $ 55,973       $   

New revolving credit facility (2)

                       
  

 

 

    

 

 

    

 

 

 

Total long-term debt

     55,973         55,973           

Members’ equity/Partners’ capital (3)

     16,423         1,466      
  

 

 

    

 

 

    

 

 

 

Total capitalization (3)

   $ 72,396       $ 57,439       $     
  

 

 

    

 

 

    

 

 

 

 

(1) Hi-Crush Proppants LLC is party to various subordinated promissory notes and a senior secured revolving credit facility. As of May 31, 2012, there was approximately $57.1 million outstanding under the subordinated promissory notes and $25.0 million outstanding under the senior secured credit facility. In connection with the closing of this offering, we intend to assume all indebtedness outstanding under our sponsor’s subordinated promissory notes and to use a portion of the net proceeds we receive from this offering to repay in full such assumed debt. We expect Hi-Crush Proppants LLC to continue as borrower under the senior secured credit facility, and that we will have no ongoing obligations with respect to any borrowings thereunder upon completion of this offering.
(2) In connection with the closing of this offering, we intend to enter into a new credit facility in the aggregate principal amount of up to $         million. We do not expect to have any borrowings outstanding under this facility at the completion of this offering.
(3) Each $1.00 increase or decrease in the assumed public offering price of $         per common unit would increase or decrease, respectively, total members’ equity/partners’ capital and total capitalization by approximately $         million, after deducting the estimated underwriting discount, our portion of the structuring fee and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed offering price to $         per common unit, would increase total members’ equity/partners’ capital and total capitalization by approximately $         million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed offering price to $         per common unit, would decrease total members’ equity/partners’ capital and total capitalization by approximately $         million. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the net tangible book value per common unit after the offering. Assuming an initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover page of this prospectus), on a pro forma basis as of March 31, 2012, after giving effect to the offering of common units and the related transactions, our net tangible book value would have been approximately $         million, or $         per common unit. Purchasers of our common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

      $                

Pro forma net tangible book value per common unit before the offering (1)

   $                   

Increase in net tangible book value per common unit attributable to purchasers in the offering

     
  

 

 

    

Less: Pro forma net tangible book value per common unit after the offering (2)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering (3)(4)

      $     
     

 

 

 

 

(1) Determined by dividing the pro forma net tangible book value of the contributed assets and liabilities by the number of units (             common units and              subordinated units) to be issued to our general partner and its affiliates for their contribution of assets and liabilities to us.
(2) Determined by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering, by the total number of units (             common units and              subordinated units) to be outstanding after the offering.
(3) Each $1.00 increase or decrease in the assumed public offering price of $         per common unit would increase or decrease, respectively, our pro forma net tangible book value by approximately $         million, or approximately $         per common unit, and dilution per common unit to investors in this offering by approximately $         per common unit, after deducting the estimated underwriting discount, our portion of the structuring fee and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. An increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed offering price to $         per common unit, would result in a pro forma net tangible book value of approximately $         million, or $         per common unit, and dilution per common unit to investors in this offering would be $         per common unit. Similarly, a decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed public offering price to $         per common unit, would result in an pro forma net tangible book value of approximately $         million, or $         per common unit, and dilution per common unit to investors in this offering would be $         per common unit. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
(4) Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units from the selling unitholder and we will not receive any net proceeds from such exercise, there will be no change to the dilution in net tangible book value per common unit to purchasers in the offering due to any such exercise of the option.

 

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The following table sets forth the number of units that we will issue and the total consideration contributed to us by our sponsor and by the purchasers of our common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units     Total Consideration  
      Number    Percent     Amount    Percent  

Hi-Crush Proppants LLC (1)(2)(3)

                        

Purchasers in the offering (3)

                        
  

 

  

 

 

   

 

  

 

 

 

Total

        100        100
  

 

  

 

 

   

 

  

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, Hi-Crush Proppants LLC will own              common units (assuming the underwriters do not exercise their option to purchase additional common units) and              subordinated units.
(2) The assets contributed by Hi-Crush Proppants LLC will be recorded at historical cost. The pro forma book value of the consideration provided by Hi-Crush Proppants LLC as of March 31, 2012 would have been approximately $        , as adjusted for distributions to Hi-Crush Proppants LLC.
(3) Assumes the underwriters’ option to purchase additional common units from the selling unitholder is not exercised.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with “—Assumptions and Considerations” below, which includes the factors and assumptions upon which we base our cash distribution policy. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

For additional information regarding our historical and pro forma results of operations, you should refer to the audited historical financial statements as of December 31, 2010 and 2011, for the two-month period ended December 31, 2010 and for the year ended December 31, 2011, the unaudited historical financial statements as of and for the three months ended March 31, 2011 and 2012 and our unaudited pro forma financial statements as of and for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012, included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

It is our intent to distribute at least the minimum quarterly distribution of $         per unit ($         per unit on an annualized basis) on all of our units to the extent we have sufficient cash after the establishment of cash reserves and payment of our expenses, including payments to our general partner and its affiliates. Furthermore, we expect that if we are successful in executing our business strategy, we will grow our business in a steady and sustainable manner and distribute to our unitholders a portion of any increase in our cash available for distribution resulting from such growth. Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing rather than retaining our cash available for distribution.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

There is no guarantee that we will distribute quarterly cash distributions to our unitholders. We do not have a legal or contractual obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate. Our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:

 

   

Our cash distribution policy will be subject to restrictions on distributions under the revolving credit facility that we expect to enter into in connection with this offering (“our new credit facility”), which will contain financial tests and covenants that we must satisfy. These financial tests and covenants are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities—Our New Credit Facility.” Should we be unable to satisfy these restrictions or if we are otherwise in default under our new credit facility, we will be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.

 

   

Our general partner will have the authority to establish cash reserves for the prudent conduct of our business, including for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

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Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all direct and indirect expenses they incur on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of cash available for distribution to pay distributions to our unitholders.

 

   

Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner.

 

   

Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs. While our general partner may cause us to borrow funds in order to permit the payment of cash distributions on our common units, subordinated units and incentive distribution rights, it has no obligation to cause us to do so.

 

   

If we make distributions out of capital surplus, as opposed to operating surplus, any such distributions would constitute a return of capital and would result in a reduction in the minimum quarterly distribution and the target distribution levels. Please read “How We Make Distributions To Our Partners—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” We do not anticipate that we will make any distributions from capital surplus.

 

   

Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state limited liability company laws and other laws and regulations.

Our Ability to Grow may be Dependent on Our Ability to Access External Expansion Capital

We expect to generally distribute a significant percentage of our cash from operations to our unitholders on a quarterly basis, after the establishment of cash reserves and payment of our expenses. Therefore, our growth may not be as fast as businesses that reinvest most or all of their cash to expand ongoing operations. Moreover, our future growth may be slower than our historical growth. We expect that we will rely primarily upon external financing sources, including bank borrowings and issuances of debt and equity interests, to fund our expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

 

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Our Minimum Quarterly Distribution

Pursuant to our distribution policy, we intend upon completion of this offering to declare a minimum quarterly distribution of $         per unit for each complete quarter, or $         per unit on an annualized basis. Quarterly distributions, if any, will be made within 60 days after the end of each quarter. The payment of the full minimum quarterly distribution on all of the common units and subordinated units to be outstanding after completion of this offering would require us to have cash available for distribution of approximately $         million per quarter, or $         million per year. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” The table below sets forth the amount of common units and subordinated units that will be outstanding immediately after this offering, assuming the underwriters do not exercise their option to purchase additional common units from the selling unitholder, and the cash available for distribution needed to pay the aggregate minimum quarterly distribution on all of such units for a single fiscal quarter and a four quarter period:

 

          Distributions  
     Number of
Units
   One
Quarter
     Annualized  

Publicly held common units

      $                    $                

Common units held by Hi-Crush Proppants LLC

        

Subordinated units held by Hi-Crush Proppants LLC

        
  

 

  

 

 

    

 

 

 

Total

      $         $     
  

 

  

 

 

    

 

 

 

If and to the extent the underwriters exercise their option to purchase additional common units, the selling unitholder, Hi-Crush Proppants LLC, will sell the number of common units purchased by the underwriters pursuant to such exercise and the remainder, if any, will be retained by Hi-Crush Proppants LLC. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read “Underwriting.”

Our sponsor will initially hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50.0%, of the cash we distribute in excess of $         per unit per quarter.

We expect to pay our distributions on or about the last day of each of February, May, August and November to holders of record on or about the 15th day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date. We will adjust the quarterly distribution for the period after the closing of this offering through                     , 2012 based on the actual length of the period.

Subordinated Units

Our sponsor will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. When the subordination period ends, all of the subordinated units will convert into an equal number of common units.

To the extent we do not pay the minimum quarterly distribution on our common units, our common unitholders will not be entitled to receive such payments in the future except during the subordination period. To the extent we have cash available for distribution in any future quarter during the subordination period in excess of the amount necessary to pay the minimum quarterly distribution to holders of our common units, we will use this excess cash available for distribution to pay any distribution arrearages on common units related to prior quarters before any cash distribution is made to holders of subordinated units. Please read “How We Make Distributions To Our Partners—Subordination Period.”

 

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Pro Forma Cash Available for Distribution for the Twelve and Three Months Ended March 31, 2012

If we had completed the transactions contemplated in this prospectus on January 1, 2011, our pro forma cash available for distribution for the twelve and three months ended March 31, 2012 would have been approximately $18.0 million and $7.4 million, respectively. This amount would have been insufficient to pay the full minimum quarterly distribution on all of our common units for the twelve months ended March 31, 2012, by approximately $                 million, but would have been sufficient to pay the full minimum quarterly distribution on all of our common units for the three months ended March 31, 2012. In addition, these amounts would have been insufficient to pay the full minimum quarterly distribution on all of our common and subordinated units for the twelve and three months ended March 31, 2012, by approximately $         million and $         million, respectively. This shortfall is primarily attributable to the following factors:

 

   

the twelve months ended March 31, 2012 included only nine months of operations, as our Wyeville facility did not commence operations until July 2011; and

 

   

neither the twelve nor three months ended March 31, 2012 reflected the impact of our Wyeville plant expansion, which was completed in March 2012, and sales under new contracts with subsidiaries of Baker Hughes and FTS International associated with the expansion, which commenced in May 2012 and will initially be reflected in our operating results for the second quarter of 2012.

The pro forma financial statements, upon which pro forma cash available for distribution is based, do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the date indicated. Furthermore, cash available for distribution is a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution that we might have generated had we been formed in an earlier period.

Following the completion of this offering, we estimate that we will incur $3.8 million of incremental annual general and administrative expenses as a result of operating as a publicly traded partnership and our recent expansion. These incremental general and administrative expenses are not reflected in our unaudited pro forma financial statements and consist of $2.1 million of expenses that we expect to incur as a result of operating as a publicly traded partnership, such as expenses associated with annual and quarterly reporting, tax return and Schedule K-1 preparation and distribution expenses, Sarbanes-Oxley compliance expenses, expenses associated with listing on the NYSE, independent auditor fees, legal fees, investor relations expenses, registrar and transfer agent fees, director and officer insurance expenses and director and officer compensation expenses, as well as incremental administrative expenses to support our recent expansion, including management level positions in operations, human resources, legal, accounting and reporting, as well as license fees associated with upgrading accounting and reporting software. We expect the incremental expenses related to our recent expansion to gradually increase over time as we hire additional personnel, from about $0.7 million for the year ending December 31, 2012 to $1.7 million on an annualized basis by September 30, 2013, the end of the projection period provided under “—Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013.”

Our unaudited pro forma financial statements are derived from the audited and unaudited historical financial statements of our accounting predecessor, Hi-Crush Proppants LLC, included elsewhere in this prospectus and Hi-Crush Proppants LLC’s accounting records, which are unaudited. Our unaudited pro forma financial statements should be read together with “Selected Historical and Pro Forma Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited historical financial statements of Hi-Crush Proppants LLC and the notes to those statements included elsewhere in this prospectus.

The following table illustrates, on a pro forma basis for the three and the twelve months ended March 31, 2012, the amount of cash that would have been available for distribution to our unitholders, assuming that the transactions contemplated in this prospectus had been consummated on January 1, 2011. Certain of the adjustments reflected or presented below are explained in the footnotes to such adjustments.

 

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Hi-Crush Partners LP

Unaudited Pro Forma Cash Available for Distribution

 

     Pro Forma for the
Twelve Months Ended

March 31, 2012 (2)
     Pro Forma for the
Three Months Ended

March 31, 2012 (2)
 
    

(in thousands,

except per unit data)

    

(in thousands,

except per unit data)

 

Operating revenues

   $ 33,885       $ 13,532   

Operating expenses:

     

Production costs (1)

     10,595         4,597   

Depreciation and depletion

     628         179   
  

 

 

    

 

 

 

Costs of goods sold

     11,223         4,776   
  

 

 

    

 

 

 

Gross profit

     22,662         8,756   

General and administrative expenses

     2,161         646   

Accretion of asset retirement obligations

     34         6   
  

 

 

    

 

 

 

Operating income

     20,467         8,104   

Interest expense, net

     363         91   
  

 

 

    

 

 

 

Net income (2)

     20,104         8,013   

Adjustments to reconcile net income to EBITDA:

     

Add:

     

Depreciation and depletion

     628         179   

Interest expense, net (3)

     363         91   
  

 

 

    

 

 

 

EBITDA (1)

     21,095         8,283   

Less:

     

Cash interest expense (3)

     263         66   

Maintenance and replacement capital expenditures, including accrual for reserve replacement (4)

     750         301   

Incremental general and administrative expenses (5)

     2,100         525   

Plus:

     

Accretion of asset retirement obligations

     34         6   
  

 

 

    

 

 

 

Estimated cash available for distribution by Hi-Crush Partners LP

   $ 18,016       $ 7,397   
  

 

 

    

 

 

 

Minimum annual distribution per unit (based on a minimum quarterly distribution rate of $         per unit)

     

Annual distributions to:

     

Public common unitholders

     

Hi-Crush Proppants LLC:

     

Common units

     

Subordinated units

     

Total distributions to Hi-Crush Proppants LLC

     

Total distributions to our unitholders at the minimum distribution rate

     

Shortfall

     

 

(1) For more information, please read “Summary—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”
(2) Reflects our pro forma operating results for the periods indicated, derived from or prepared on a basis consistent with our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The pro forma adjustments reflected in our unaudited pro forma condensed consolidated financial statements for the three and twelve months ended March 31, 2012 have been prepared as if this offering had taken place on January 1, 2011.

 

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(3) Interest expense, net and cash interest expense both include commitment and administrative agent fees on our new credit facility. Interest expense, net also includes the amortization of debt issuance costs incurred in connection with our new credit facility.
(4) Maintenance and replacement capital expenditures, including accrual for reserve replacement, was determined based on $1.35 per ton of sand sold during the periods presented. This reflects an estimate of reserve replacement cost, but it is not a reserve or requirement to spend the capital. Please read “—Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013—Maintenance and Replacement Capital Expenditures.”
(5) Reflects an adjustment to our EBITDA for approximately $2.1 million of incremental general and administrative expenses that we expect to incur as a result of operating as a publicly traded partnership that are not reflected in our unaudited pro forma financial statements.

Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013

Set forth below is a statement of Estimated Cash Available for Distribution that reflects a forecast of our ability to generate sufficient cash flows to make the minimum quarterly distribution on all of our outstanding limited partner units for the twelve months ending September 30, 2013, based on assumptions we believe to be reasonable. These assumptions include adjustments giving effect to this offering.

Our estimated cash available for distribution reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2013. The assumptions disclosed under “—Assumptions and Considerations” below are those that we believe are significant to our ability to generate such estimated cash available for distribution. We believe our actual results of operations and cash flows for the twelve months ending September 30, 2013 will be sufficient to generate our estimated cash available for distribution for such period; however, we can give you no assurance that such estimated cash available for distribution will be achieved. There will likely be differences between our estimated cash available for distribution for the twelve months ending September 30, 2013 and our actual results for such period and those differences could be material. If we fail to generate the estimated cash available for distribution for the twelve months ending September 30, 2013, we may not be able to pay cash distributions on our common units at the minimum quarterly distribution rate or at any rate.

We do not as a matter of course make public projections as to future operations, earnings or other results. However, management has prepared the estimated cash available for distribution and assumptions set forth below to substantiate our belief that we will have sufficient cash available to make the minimum quarterly distribution to our unitholders for the twelve months ending September 30, 2013. This prospective financial information was not prepared with a view toward compliance with published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate the estimated cash available for distribution necessary for us to have sufficient cash available for distribution to pay the full minimum quarterly distribution to all of our unitholders for the twelve months ending September 30, 2013. However, this information is not historical fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information. The prospective financial information included in this offering document has been prepared by, and is the responsibility of, the Company’s management. PricewaterhouseCoopers LLP has neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this offering document relates to the Company’s historical financial information. It does not extend to the prospective financial information and should not be read to do so.

 

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When considering the estimated cash available for distribution set forth below you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus could cause our actual results of operations to vary significantly from those supporting such estimated available cash. Accordingly, there can be no assurance that the forecast is indicative of our future performance. Inclusion of the forecast in this prospectus is not a representation by any person, including us or the underwriters, that the results in the forecast will be achieved.

We are providing the estimated cash available for distribution and related assumptions for the twelve months ending September 30, 2013 to supplement our pro forma and historical financial statements in support of our belief that we will have sufficient available cash to allow us to pay cash distributions on all of our outstanding common and subordinated units for each quarter in the twelve-month period ending September 30, 2013 at our stated minimum quarterly distribution rate. Please read below under “—Assumptions and Considerations” for further information as to the assumptions we have made for the preparation of the estimated cash available for distribution set forth below. The narrative descriptions of our assumptions in “—Assumptions and Considerations” generally compare our estimated cash available for distribution for the twelve months ending September 30, 2013 with the unaudited pro forma cash available for distribution for the twelve months ended March 31, 2012 presented under “—Pro Forma Cash Available for Distribution for the Twelve and Three Months Ended March 31, 2012.” We have not provided any narrative comparison to our unaudited pro forma cash available for distribution for the three months ended March 31, 2012, as we do not believe comparing a three-month period to a twelve-month period is useful to investors.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the assumptions used in generating our estimated cash available for distribution for the twelve months ending September 30, 2013 or to update those assumptions to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this information.

 

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Hi-Crush Partners LP

Estimated Cash Available for Distribution

(Unaudited)

 

     Three Months Ending      Twelve
Months
Ending
September 30,
2013
 
     December 31,
2012
     March 31,
2013
     June 30,
2013
     September 30,
2013
    
     (in millions, except per unit data)  

Operating revenues

   $ 24.1       $ 24.1       $ 24.1       $ 24.1       $ 96.4   

Operating expenses:

              

Production costs (1)

     7.6         8.5         7.4         7.4         30.9   

Depreciation and depletion

     0.5         0.4         0.4         0.4         1.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of goods sold

     8.1         8.9         7.8         7.8         32.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     16.0         15.2         16.3         16.3         63.8   

General and administrative expenses (2)

     1.6         1.5         1.5         1.6         6.2   

Accretion of asset retirement obligations

                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     14.4         13.7         14.8         14.7         57.6   

Interest expense, net (3)

     0.1         0.1         0.1         0.1         0.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 14.3       $ 13.6       $ 14.7       $ 14.6       $ 57.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjustments to reconcile net income to estimated EBITDA:

              

Add:

              

Depreciation and depletion

     0.5         0.4         0.4         0.4         1.7   

Interest expense, net (3)

     0.1         0.1         0.1         0.1         0.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA (1)

   $ 14.9       $ 14.1       $ 15.2       $ 15.1       $ 59.3   

Adjustments to reconcile estimated EBITDA to estimated cash available for distribution:

              

Less:

              

Cash interest expense

     0.1         0.1         0.1                 0.3   

Estimated maintenance and replacement capital expenditures, including accrual for reserve replacement (4)

     0.5         0.5         0.5         0.5         2.0   

Costs associated with inventory buildup (5)

                     1.2         1.2         2.4   

Plus:

              

Accretion of asset retirement obligations

                                       

Costs allocated to inventory drawdown (5)

             2.4                         2.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Estimated cash available for distribution

   $ 14.3       $ 15.9       $ 13.4       $ 13.4       $ 57.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Minimum distributions per unit (based on minimum quarterly distribution rate of $             per unit)

              

Distributions to public common unitholders

              

Distributions to Hi-Crush Proppants LLC—common units

              

Distributions to Hi-Crush Proppants LLC—subordinated units

              

Total Distributions

              

Excess of cash available for distributions over aggregate minimum quarterly cash distributions

              

 

(1) For more information, please read “Summary—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”
(2) Includes general and administrative expenses of $2.4 million allocated from Hi-Crush Proppants LLC and its affiliates, an incremental $1.7 million of administrative expenses to support our recent expansion and $2.1 million of incremental general and administrative expenses that we expect to incur as a result of operating as a publicly-traded partnership.

 

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(3) Reflects the pro forma amortization during the forecast period of the $0.5 million in credit facility arrangement fees, which will be amortized over a five-year period, an annual $0.1 million administrative agent fee and commitment fees of $0.2 million. We expect to have no indebtedness outstanding during the twelve months ending September 30, 2013. Please read “—Our Financing” below for additional detail on the calculation of interest expense.
(4) Maintenance and replacement capital expenditures, including accrual for reserve replacement, was determined based on $1.35 per ton of sand sold during the projected period. This reflects an estimate of reserve replacement cost, but it is not a reserve or requirement to spend the capital. Because Northern White sand is a limited resource, costs of acquiring Northern White sand reserves may increase in the future, which could cause our future reserve replacement costs to exceed the $1.35 per ton estimated reserve replacement cost we have assumed for purposes of estimating our cash available for distribution over the forecast period. Please read “Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2013—Maintenance and Replacement Capital Expenditures.”
(5) Reflects adjustments to reconcile the cash flows associated with excavation costs when calculating our estimated cash available for distribution. Please see “—Assumptions and Considerations—Our Expenses” below for additional information regarding these adjustments.

Assumptions and Considerations

We believe that our cash available for distribution for the twelve months ending September 30, 2013 will not be less than $57.0 million. This amount of estimated cash available for distribution is approximately $39.0 million more than the $18.0 million pro forma cash available for distribution we generated for the twelve months ended March 31, 2012, due in part to only nine months of operating revenue from the Wyeville facility, which commenced operations in July 2011. As we discuss in further detail below, we believe that increased income from a full year’s operation of the Wyeville facility, the completion of our plant expansion in March 2012, and commencement of deliveries under our contracts with subsidiaries of Baker Hughes and FTS International in May 2012 will result in our generating higher cash available for distribution for the twelve months ending September 30, 2013. The assumptions and estimates we have made to support our ability to generate the estimated cash available for distribution are set forth below.

Our Operating Revenue

We estimate that we will generate approximately $96.4 million in total revenues for the twelve months ending September 30, 2013. Prior to the acquisition of our Wyeville sand reserves and construction of the Wyeville facility, our mines were nonoperational and accordingly generated no revenue. From the Wyeville in-service date through March 31, 2012, our Wyeville assets produced revenue of approximately $33.9 million.

All of the revenues estimated for the forecast period are expected to be generated from long-term sales contracts that require our customers to pay a specified price for a specified volume each month. Accordingly, our estimate of total revenue for the twelve months ending September 30, 2013 is based on our current operating capacity and the pricing terms and volume commitments specified in our long-term sales contracts rather than on our historical revenues. Our estimate assumes that we will make sales of our total contracted volume of 1,460,000 tons of frac sand at contract prices over the forecast period. We generated $33.9 million in revenues for the twelve months ended March 31, 2012. The expected $62.5 million increase in our revenues from the twelve months ending September 30, 2013, compared to the twelve months ended March 31, 2012, is primarily due to:

 

   

increased revenues of $51.9 million resulting from 730,000 tons of incremental frac sand sales that were contracted as part of the March 2012 plant expansion; and

 

   

$10.6 million in incremental revenue associated with operating for the full twelve-month period.

 

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Our Expenses

We estimate that our production costs will be approximately $30.9 million for the twelve months ending September 30, 2013, as compared to pro forma production costs of approximately $10.7 million for the twelve months ended March 31, 2012. The increase results from:

 

   

increased excavation costs and royalties of $10.1 million related to higher frac sand volumes excavated and sold;

 

   

increased personnel and plant operating expenses of $7.0 million related to our recent expansion; and

 

   

additional personnel and plant operating expenses of $3.2 million associated with operating for the full twelve-month period.

Because our excavation costs and royalties are fixed on a per ton basis, our estimate of those expenses for the twelve months ending September 30, 2013 is based on our expectation that we will produce and sell 1,460,000 tons of frac sand over the contract period. Our estimate of personnel and plant operating expenses is based on our historical costs, adjusted to account for the additional expenses we will incur as a result of our recent plant expansion and a full twelve months of operations.

We estimate that our general and administrative expenses will be approximately $6.2 million for the twelve months ending September 30, 2013, as compared to pro forma general and administrative expenses of approximately $2.2 million for the twelve months ended March 31, 2012. The change is primarily due to:

 

   

approximately $2.1 million of incremental general and administrative expenses resulting from our being a publicly traded limited partnership; and

 

   

an incremental $1.7 million of general and administrative expenses to support our recent expansion, including management level positions in operations, human resources, legal, accounting and reporting, as well as license fees associated with upgrading accounting and reporting software.

We estimate our depreciation and depletion expense for the twelve months ending September 30, 2013 for the Wyeville facility will be approximately $1.7 million, as compared to pro forma depreciation and depletion expense of approximately $0.6 million for the twelve months ended March 31, 2012. The increase in estimated depreciation and depletion expense is primarily due to completion of the plant expansion in March 2012 and as a result of operating for the full twelve-month period.

Because our excavation and wet plant related production activities halt during the winter months consistent with industry practice, we excavate excess sand to build a stockpile that will feed the dry plant, which continues to operate during the winter months. We are excavating excess sand in the six month period, which began on March 31, 2012 and ends on September 30, 2012, for use in the winter months. We also expect to excavate excess volumes for a portion of the three month period ending December 31, 2012; however, we estimate that excess volumes excavated during the first part of this period will also be consumed during the portion of this time period in which we are not excavating volumes. In the three months ending March 31, 2013, no excavation is expected to occur, and all sand is expected to be sold from our work-in-process inventory, which was created during the six month period ending September 30, 2012.

In the period in which sand is stockpiled, the associated cash excavation costs are included in the value of our work-in-process inventory and not reflected in cost of goods sold on our income statement. These excavation costs are recognized as cost of goods sold on our income statement in a later period when the stockpiled sand is processed by the dry plant and sold. We have made adjustments to reconcile the cash flows associated with excavation costs when calculating our estimated cash available for distribution. In the three months ending March 31, 2013, we add the costs allocated to inventory drawdown to reflect prior period excavation costs that are included in cost of goods sold. We subtract the costs associated with inventory buildup in the six months ending September 30, 2013 to reflect extraction costs that are paid in these periods but will be included in the

 

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value of our work-in-process inventory. Over the twelve months ending September 30, 2013, costs allocated to inventory drawdown are expected to equal the costs associated with inventory buildup.

Our Capital Expenditures

We estimate that maintenance and replacement capital expenditures relating to the Wyeville facility will be approximately $2.0 million for the twelve months ending September 30, 2013. This amount is calculated based on $1.35 per ton of sand sold and the 1,460,000 tons of sand contracted to be sold during the period. The increase from $0.7 million for the twelve months ended March 31, 2012 is attributable to the increase in tons of sand sold as a result of the plant expansion that was completed in March 2012 and a full twelve-month period of operations. Please read “—Maintenance and Replacement Capital Expenditures.”

Our Financing

Our interest and debt expense for the twelve months ending September 30, 2013 is based on the following assumptions:

 

   

At the closing of this offering we will not have any borrowings under our new $                     million credit facility.

 

   

Because the cash we have on hand at the closing of this offering together with cash we expect to generate in excess of distributions for the forecast period should provide us with sufficient working capital during the twelve months ending September 30, 2013, we do not expect to incur borrowings during such period.

 

   

Our new credit facility will have a commitment fee of     %.

 

   

We will remain in compliance with the financial and other covenants in our new credit facility.

Our Regulatory, Industry and Economic Factors

Our forecast of our results of operations for the twelve months ending September 30, 2013 is based on the following assumptions related to regulatory, industry and economic factors:

 

   

There will not be any new federal, state or local regulations affecting our operations or those of our customers, or any new interpretations of existing regulations, that will be materially adverse to our business during the twelve months ending September 30, 2013.

 

   

There will not be any major adverse changes affecting our operations or those of our customers during the twelve months ending September 30, 2013.

 

   

There will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our facilities or those of third parties on which we depend.

 

   

Industry, insurance and overall economic conditions will not change substantially during the twelve months ending September 30, 2013.

 

   

There will not be any material non-performance by our customers.

Maintenance and Replacement Capital Expenditures

For our purposes, maintenance and replacement capital expenditures are those capital expenditures required to maintain, over the long term, the operating capacity of our capital assets, and expansion capital expenditures are those capital expenditures that increase, over the long term, the operating capacity of our capital assets. Examples of maintenance and replacement capital expenditures include expenditures associated with the

 

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replacement of equipment and sand reserves, to the extent such expenditures are made to maintain our long-term operating capacity.

Because our maintenance and replacement capital expenditures can be irregular, the amount of our actual maintenance and replacement capital expenditures may differ substantially from period to period, which could cause similar fluctuations in the amounts of cash available for distribution. We do not expect to spend capital to replace our reserves ratably quarter-over-quarter or year-over-year but expect, over the long term, to invest capital to maintain our operating capacity. We currently expense costs associated with maintaining our wet and dry plants as they are incurred. However, for purposes of calculating our pro forma estimated cash available for distribution for the three and twelve months ended March 31, 2012 and our estimated cash available for distribution for the twelve months ending September 30, 2013, maintenance and replacement capital expenditures were determined based on an estimated reserve replacement cost of $1.35 per ton of sand sold. This estimate was developed by considering the actual and projected capital expenditures required to acquire the Wyeville and Augusta reserves as well as the capital required to develop and construct the plant and infrastructure at each location, divided by the estimated, sellable reserves product at each site as determined by John T. Boyd. We believe this methodology is an appropriate proxy for the long-term future costs to maintain our existing reserve base. We believe reserves can also be replaced at our existing Wyeville facility through acquisitions of additional acreage without incurring the cost of building an additional processing facility. While this reflects a reserve replacement cost, it is not a reserve or requirement to spend capital.

 

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HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

General

Intent to Distribute the Minimum Quarterly Distribution

Within 60 days after the end of each quarter, beginning with the quarter ending                     , 2012, we intend to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $         per unit, or $         on an annualized basis, to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We will adjust the minimum quarterly distribution for the period after the closing of the offering through                     , 2012.

Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner. Our partnership agreement does not contain a requirement for us to pay distributions to our unitholders, and there is no guarantee that we will pay the minimum quarterly distribution, or any distribution, on the units in any quarter. However, it does contain provisions intended to motivate our general partner to make steady, increasing and sustainable distributions over time.

General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us and will be entitled to receive distributions on any such interests.

Incentive Distribution Rights

Our sponsor currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The maximum distribution of 50.0% does not include any distributions that our sponsor may receive on any limited partner units that it owns.

Operating Surplus and Capital Surplus

General

Any distributions we make will be characterized as made from “operating surplus” or “capital surplus.” Distributions from operating surplus are made differently than cash distributions that we would make from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all unitholders, but the holder of the incentive distribution rights would generally not participate in any capital surplus distributions with respect to those rights.

Operating Surplus

We define operating surplus as:

 

   

$         million (as described below); plus

 

   

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below); plus

 

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working capital borrowings made after the end of a period but on or before the date of determination of operating surplus for the period; plus

 

   

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued on the closing date of this offering, to finance all or a portion of expansion capital expenditures or expenditures for a replacement capital asset in respect of the period from such financing until the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; plus

 

   

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights) to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures or expenditures for a replacement capital asset referred to above, in each case, in respect of the period from such financing until the earlier to occur of the date the capital asset is placed in service and the date that it is abandoned or disposed of; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

   

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

   

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings; less

 

   

any loss realized on disposition of an investment capital expenditure.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a basket of $             million that will enable us, if we choose, to distribute as operating surplus cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deemed repayment.

We define operating expenditures in our partnership agreement, which generally means all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made under interest rate hedge agreements or commodity hedge agreements (provided that (1) with respect to amounts paid in connection with the initial purchase of an interest rate hedge contract or a commodity hedge contract, such amounts will be amortized over the life of the applicable interest rate hedge contract or commodity hedge contract and (2) payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract), officer compensation, repayment of working capital borrowings, debt service payments and estimated maintenance and replacement capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:

 

   

repayment of working capital borrowings deducted from operating surplus pursuant to the penultimate bullet point of the definition of operating surplus above when such repayment actually occurs;

 

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payments (including prepayments and prepayment penalties and the purchase price of indebtedness that is repurchased and cancelled) of principal of and premium on indebtedness, other than working capital borrowings;

 

   

expansion capital expenditures;

 

   

actual maintenance and replacement capital expenditures (as discussed in further detail below);

 

   

investment capital expenditures;

 

   

payment of transaction expenses relating to interim capital transactions;

 

   

distributions to our partners (including distributions in respect of our incentive distribution rights); or

 

   

repurchases of equity interests except to fund obligations under employee benefit plans.

Capital Surplus

Capital surplus is defined in our partnership agreement as any cash and cash equivalents distributed in excess of our operating surplus. Accordingly, capital surplus would generally be generated only by the following (which we refer to as “interim capital transactions”):

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities; and

 

   

sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirement or replacement of assets.

Characterization of Cash Distributions

Our partnership agreement requires that we treat all cash distributed as coming from operating surplus until the sum of all cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as distributions of capital surplus. As described above, operating surplus includes up to $         million, which does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, it is a provision that will enable us, if we choose, to distribute as operating surplus up to this amount that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Estimated maintenance and replacement capital expenditures reduce operating surplus, but expansion capital expenditures, actual maintenance and replacement capital expenditures and investment capital expenditures do not. Maintenance and replacement capital expenditures are those capital expenditures required to maintain our long-term operating capacity. Examples of maintenance and replacement capital expenditures include expenditures associated with the replacement of equipment and sand reserves, to the extent such expenditures are made to maintain our long-term operating capacity. Maintenance and replacement capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of the construction or development of a replacement asset that is paid in respect of the period that begins when we enter into a binding obligation to commence constructing or developing a replacement asset and ending on the earlier to occur of the date that any such replacement asset commences commercial service and the date that such asset is abandoned or disposed. Capital expenditures made solely for investment purposes will not be considered maintenance and replacement capital expenditures.

Because our maintenance and replacement capital expenditures can be irregular, the amount of our actual maintenance and replacement capital expenditures may differ substantially from period to period, which could

 

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cause similar fluctuations in the amounts of operating surplus and adjusted operating surplus if we subtracted actual maintenance and replacement capital expenditures from operating surplus.

Our partnership agreement will require that an estimate of the average quarterly maintenance and replacement capital expenditures necessary to maintain our operating capacity over the long-term be subtracted from operating surplus each quarter as opposed to the actual amounts spent. The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus for those periods will be subject to review and change by our general partner at least once a year, provided that any change is approved by our conflicts committee. The estimate will be made at least annually and whenever an event occurs that is likely to result in a material adjustment to the amount of our maintenance and replacement capital expenditures, such as a major acquisition or the introduction of new governmental regulations that will impact our business. Our partnership agreement does not set a limit on the amount of maintenance and replacement capital expenditures that our general partner may estimate. For purposes of calculating operating surplus, any adjustment to this estimate will be prospective only. For a discussion of the amounts we have allocated toward estimated maintenance and replacement capital expenditures, please read “Cash Distribution Policy and Restrictions on Distributions.”

The use of estimated maintenance and replacement capital expenditures in calculating operating surplus will have the following effects:

 

   

the amount of actual maintenance and replacement capital expenditures in any quarter will not directly reduce operating surplus but will instead be factored into the estimate of the average quarterly maintenance and replacement capital expenditures. This may result in the subordinated units converting into common units when the use of actual maintenance and replacement capital expenditures would result in lower operating surplus during the subordination period and potentially result in the tests for conversion of the subordinated units not being satisfied;

 

   

it may increase our ability to distribute as operating surplus cash we receive from non-operating sources; and

 

   

it may be more difficult for us to raise our distribution above the minimum quarterly distribution and pay incentive distributions on the incentive distribution rights held by our sponsor.

Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of new reserves or equipment, development of a new surface mine or the expansion of an existing surface mine, to the extent such capital expenditures are expected to expand our long-term operating capacity. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of the construction of such capital improvement in respect of the period that commences when we enter into a binding obligation to commence construction of a capital improvement and ending on the earlier to occur of the date any such capital improvement commences commercial service and the date that it is disposed of or abandoned. Capital expenditures made solely for investment purposes will not be considered expansion capital expenditures.

Investment capital expenditures are those capital expenditures that are neither maintenance and replacement capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity, but which are not expected to expand, for more than the short term, our operating capacity.

 

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As described below, neither investment capital expenditures nor expansion capital expenditures are included in operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction, replacement or improvement of a capital asset in respect of a period that begins when we enter into a binding obligation to commence construction of a capital improvement and ending on the earlier to occur of the date any such capital asset commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

Capital expenditures that are made in part for maintenance and replacement capital purposes, investment capital purposes and/or expansion capital purposes will be allocated as maintenance and replacement capital expenditures, investment capital expenditures or expansion capital expenditures by our general partner.

Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we describe below), the common units will have the right to receive distributions from operating surplus each quarter in an amount equal to $         per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient cash from operating surplus to pay the minimum quarterly distribution on the common units.

Determination of Subordination Period

Our sponsor will initially own all of our subordinated units. Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending                     , 2015, if each of the following has occurred:

 

   

distributions from operating surplus on each of the outstanding common and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

   

the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distribution on all of the outstanding common and subordinated units during those periods on a fully diluted weighted average basis; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate, and all of the subordinated units will convert into common units on a one-for-one basis, on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending                     , 2013, if each of the following has occurred:

 

   

distributions from operating surplus exceeded $         (150.0% of the annualized minimum quarterly distribution) on all outstanding common units and subordinated units, plus the related distributions on the incentive distribution rights for a four-quarter period immediately preceding that date;

 

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the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of $         (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units during that period on a fully diluted weighted average basis, plus the related distribution on the incentive distribution rights; and

 

   

there are no arrearages in payment of the minimum quarterly distributions on the common units.

Expiration Upon Removal of the General Partner

In addition, if the unitholders remove our general partner other than for cause:

 

   

the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (1) neither such person nor any of its affiliates voted any of its units in favor of the removal and (2) such person is not an affiliate of the successor general partner; and

 

   

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end.

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will then participate pro-rata with the other common units in distributions.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods. Adjusted operating surplus consists of:

 

   

operating surplus generated with respect to that period (excluding any amounts attributable to the items described in the first bullet point under “—Operating Surplus and Capital Surplus—Operating Surplus” above); less

 

   

any net increase in working capital borrowings with respect to that period; less

 

   

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

   

any net decrease in working capital borrowings with respect to that period; plus

 

   

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium; plus

 

   

any net decrease made in subsequent periods in cash reserves for operating expenditures initially established with respect to such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.

Distributions From Operating Surplus During the Subordination Period

If we make a distribution from operating surplus for any quarter during the subordination period, our partnership agreement requires that we make the distribution in the following manner:

 

   

first, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter and any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;

 

   

second, to the subordinated unitholders, pro rata, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—Incentive Distribution Rights” below.

 

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Distributions From Operating Surplus After the Subordination Period

If we make distributions of cash from operating surplus for any quarter after the subordination period, our partnership agreement requires that we make the distribution in the following manner:

 

   

first, to all common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “—Incentive Distribution Rights” below.

General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us and will be entitled to receive distributions on any such interests.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our sponsor currently holds the incentive distribution rights, but may transfer these rights at any time.

If for any quarter:

 

   

we have distributed cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we have distributed cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then we will make additional distributions from operating surplus for that quarter among the unitholders and the sponsor (as the holder of our incentive distribution rights) in the following manner:

 

   

first, to all unitholders, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all common unitholders and subordinated unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all common unitholders and subordinated unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all common unitholders and subordinated unitholders, pro rata, and 50.0% to the holders of our incentive distribution rights.

Percentage Allocations of Distributions From Operating Surplus

The following table illustrates the percentage allocations of distributions from operating surplus between the unitholders and our sponsor (as the holder of our incentive distribution rights) based on the specified target distribution levels. The amounts set forth under the column heading “Marginal Percentage Interest in Distributions” are the percentage interests of our sponsor (as the holder of our incentive distribution rights) and the unitholders in any distributions from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit.” The percentage interests shown for our unitholders and our sponsor (as the holder of our incentive distribution rights) for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly

 

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distribution. The percentage interests set forth below assume our sponsor has not transferred its incentive distribution rights and there are no arrearages on common units.

 

     Total Quarterly Distribution
Per Common Unit and
Subordinated Unit
     Marginal Percentage
Interest in Distributions
 
        Unitholders     Sponsor
(as Holder of
Our Incentive
Distribution Rights)
 

Minimum Quarterly Distribution

   $                      100.0     0

First Target Distribution

   above $          up to $                 100.0     0

Second Target Distribution

   above $          up to $                 85.0     15.0

Third Target Distribution

   above $          up to $                 75.0     25.0

Thereafter

   above $                  50.0     50.0

Our Sponsor’s Right to Reset Incentive Distribution Levels

Our sponsor, as the initial holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the target distribution levels upon which the incentive distribution payments to our sponsor would be set. If our sponsor transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our sponsor holds all of the incentive distribution rights at the time that a reset election is made. The right to reset the target distribution levels upon which the incentive distributions are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for the prior four consecutive fiscal quarters. The reset target distribution levels will be higher than the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit following the reset event increase as described below. We anticipate that our sponsor would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our sponsor.

In connection with the resetting of the target distribution levels and the corresponding relinquishment by our sponsor of incentive distribution payments based on the target cash distributions prior to the reset, our sponsor will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the cash distributions related to the incentive distribution rights received by our sponsor for the quarter prior to the reset event as compared to the cash distribution per common unit in such quarter.

The number of common units that our sponsor would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the amount of cash distributions received by our sponsor in respect of its incentive distribution rights for the fiscal quarter ended immediately prior to the date of such reset election by (y) the amount of cash distributed per common unit with respect to such quarter. Our sponsor would be entitled to receive distributions in respect of these common units pro rata in subsequent periods.

Following a reset election, a baseline minimum quarterly distribution amount will be calculated as an amount equal to the cash distribution amount per unit for the fiscal quarter immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would make distributions from operating surplus for each quarter thereafter as follows:

 

   

first, to all common unitholders, pro rata, until each unitholder receives an amount per unit equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

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second, 85.0% to all common unitholders, pro rata, and 15.0% to our sponsor, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75.0% to all common unitholders, pro rata, and 25.0% to our sponsor, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50.0% to all common unitholders, pro rata, and 50.0% to our sponsor.

Because a reset election can only occur after the subordination period expires, the reset minimum quarterly distribution will have no significance except as a baseline for the target distribution levels.

The following table illustrates the percentage allocation of distributions from operating surplus between the unitholders and our sponsor (as the holder of our incentive distribution rights) at various distribution levels (1) pursuant to the distribution provisions of our partnership agreement in effect at the closing of this offering, as well as (2) following a hypothetical reset of the target distribution levels based on the assumption that the quarterly distribution amount per common unit during the fiscal quarter immediately preceding the reset election was $        .

 

    Quarterly
Distribution Per Unit
               Prior to Reset              
  Unitholders     Sponsor
(as Holder
of Our
Incentive
Distribution
Rights)
    Quarterly Distribution Per
Unit Following
              Hypothetical Reset              

First Target Distribution

  up to $             100.0     0.0   above $         up to $          (1)

Second Target Distribution

  above $        up to $             85.0     15.0   above $         up to $          (2)

Third Target Distribution

  above $        up to $             75.0     25.0   above $         up to $          (3)

Thereafter

  above $             50.0     50.0   above $        

 

(1) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
(2) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
(3) This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders and our sponsor (as the holder of our incentive distribution rights), in respect of its incentive distribution rights, based on the amount distributed for the quarter immediately prior to the reset. The table assumes that immediately prior to the reset there would be              common units outstanding and the distribution to each common unit would be $         per quarter for the quarter prior to the reset.

 

    

Quarterly Distribution
Per Unit Prior to Reset

   Cash
Distributions to
Common
Unitholders
Prior to Reset
     Cash Distributions to
Sponsor (as Holder of
Our Incentive
Distribution Rights)
Prior to Reset
        
           Incentive
Distribution
Rights
     Total      Total
Distributions
 

First Target Distribution

   up to $            $                  $  —       $                $            

Second Target Distribution

   above $        up to $                    

Third Target Distribution

   above $        up to $                    

Thereafter

   above $                    
     

 

 

    

 

 

    

 

 

    

 

 

 
      $              $         $              $          
     

 

 

    

 

 

    

 

 

    

 

 

 

The following table illustrates the total amount of distributions from operating surplus that would be distributed to the unitholders and our sponsor (as the holder of our incentive distribution rights) in respect of its incentive distribution rights, with respect to the quarter in which the reset occurs. The table reflects that as a

 

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result of the reset there would be              common units outstanding and the distribution to each common unit would be $        . The number of common units to be issued to our sponsor upon the reset was calculated by dividing (1) the amount received by our sponsor in respect of its incentive distribution rights for the quarter prior to the reset as shown in the table above, or $        , by (2) the cash distributed on each common unit for the quarter prior to the reset as shown in the table above, or $        .

 

   

Quarterly Distribution
Per Unit After Reset

  Cash
Distributions to
Common
Unitholders
After Reset
    Cash Distributions to

Sponsor (as Holder of Our
Incentive Distribution Rights)
After Reset
       
        Common
Units(1)
    Incentive
Distribution
Rights
    Total     Total
Distributions
 

First Target Distribution

          up to $           $               $               $     —      $               $            

Second Target Distribution

  above $         up to $                                           

Third Target Distribution

  above $         up to $                                           

Thereafter

  above $                                           
    $             $             $      $             $          
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents distributions in respect of the common units issued to our sponsor upon the reset.

Our sponsor (as the holder of our incentive distribution rights) will be entitled to cause the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

Distributions From Capital Surplus

How Distributions From Capital Surplus Will Be Made

Our partnership agreement requires that we make distributions from capital surplus, if any, in the following manner:

 

   

first, to all common unitholders and subordinated unitholders, pro rata, until the minimum quarterly distribution is reduced to zero, as described below;

 

   

second, to the common unitholders, pro rata, until we distribute for each common unit an amount from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

 

   

thereafter, we will make all distributions from capital surplus as if they were from operating surplus.

Effect of a Distribution From Capital Surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in relation to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for our sponsor to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we reduce the minimum quarterly distribution and target distribution levels to zero, all future distributions will be made such that 50.0% is paid to all unitholders, pro rata, and 50.0% is paid to the holder or holders of incentive distribution rights, pro rata.

 

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Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our common units into fewer common units or subdivide our common units into a greater number of common units, our partnership agreement specifies that the following items will be proportionately adjusted:

 

   

the minimum quarterly distribution;

 

   

the target distribution levels;

 

   

the initial unit price, as described below under “—Distributions of Cash Upon Liquidation”;

 

   

the per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units; and

 

   

the number of subordinated units.

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. Our partnership agreement provides that we do not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if as a result of a change in law or interpretation thereof, we or any of our subsidiaries is treated as an association taxable as a corporation or is otherwise subject to additional taxation as an entity for U.S. federal, state, local or non-U.S. income or withholding tax purposes, our general partner may, in its sole discretion, reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is cash for that quarter (after deducting our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholdings taxes payable by reason of such change in law or interpretation) and the denominator of which is the sum of (1) cash for that quarter, plus (2) our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation thereof. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in distributions with respect to subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and the holders of the incentive distribution rights, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of units to a repayment of the initial value contributed by unitholders for their units in this offering, which we refer to as the “initial unit price” for each unit. The allocations of gain and loss upon liquidation are also intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the common unitholders to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our sponsor.

 

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Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in the partnership agreement. If our liquidation occurs before the end of the subordination period, we will generally allocate any gain to the partners in the following manner:

 

   

first, to our general partner to the extent of certain prior losses specially allocated to our general partner;

 

   

second, to the common unitholders, pro rata, until the capital account for each common unit is equal to the sum of: (1) the initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (3) any unpaid arrearages in payment of the minimum quarterly distribution;

 

   

third, to the subordinated unitholders, pro rata, until the capital account for each subordinated unit is equal to the sum of: (1) the initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

   

fourth, to all unitholders, pro rata, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions from operating surplus in excess of the minimum quarterly distribution per unit that we distributed to the unitholders, pro rata, for each quarter of our existence;

 

   

fifth, 85.0% to all unitholders, pro rata, and 15.0% to our sponsor (as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, and 15.0% to our general partner for each quarter of our existence;

 

   

sixth, 75.0% to all unitholders, pro rata, and 25.0% to our sponsor (as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, and 25.0% to our sponsor (as the holder of our incentive distribution rights) for each quarter of our existence; and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our sponsor (as the holder of our incentive distribution rights).

The percentage interests set forth above for our sponsor assume our sponsor has not transferred the incentive distribution rights.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the third bullet point above will no longer be applicable.

We may make special allocations of gain among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to our general partner and the unitholders in the following manner:

 

   

first, to holders of subordinated units in proportion to the positive balances in their capital accounts until the capital accounts of the subordinated unitholders have been reduced to zero;

 

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second, to the holders of common units in proportion to the positive balances in their capital accounts, until the capital accounts of the common unitholders have been reduced to zero; and

 

   

thereafter, 100.0% to our general partner.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

We may make special allocations of loss among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

Adjustments to Capital Accounts

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for federal income tax purposes, unrecognized gain resulting from the adjustments to the unitholders and sponsor (as the holder of our incentive distribution rights) in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner which results, to the extent possible, in the partners’ capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had been made. By contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and our general partner based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. In the event we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

Hi-Crush Partners LP was formed in May 2012 and does not have historical financial statements. Therefore, in this prospectus we present the historical financial statements of our sponsor, Hi-Crush Proppants LLC, which is our accounting predecessor for financial reporting purposes. In connection with the closing of this offering, our sponsor will contribute all of the outstanding equity interests in certain of its operating subsidiaries, which account for substantially all of our sponsor’s historical business, to us. The following table presents summary historical financial and operating data of our sponsor and summary pro forma financial and operating data of Hi-Crush Partners LP as of the dates and for the periods indicated.

Our sponsor was formed in October 2010 to develop excavation, processing and logistics facilities for raw frac sand used in hydraulic fracturing operations in oil and natural gas wells. Since its formation, our sponsor acquired our assets in a number of separate acquisitions. As a result of our sponsor’s recent formation, we have limited operating history upon which you can base an evaluation of our current business and our future earnings prospects. This prospectus includes audited financial statements only as of December 31, 2011 and for the period from inception (October 28, 2010) to December 31, 2010 and unaudited financial information as of and for the three-month periods ended March 31, 2012 and 2011. In this prospectus, we refer to the period from inception to December 31, 2010 as the two-month period ended December 31, 2010. We have not completed or provided in this prospectus any stand-alone pre-acquisition financial statements for the assets we acquired in the transactions described above. As a result, and given our recent date of formation, we have not provided in this prospectus three years of audited financial statements that normally would be included in a prospectus forming part of an SEC registration statement or two years of audited financial statements as would normally be included in a prospectus forming part of an SEC registration statement filed by an emerging growth company.

The summary historical financial data presented as of December 31, 2010 and 2011, for the two-month period ended December 31, 2010 and for the year ended December 31, 2011 is derived from the audited historical financial statements of Hi-Crush Proppants LLC that are included elsewhere in this prospectus. The summary historical financial data presented as of and for the three months ended March 31, 2011 and 2012 are derived from the unaudited historical financial statements of Hi-Crush Proppants LLC included elsewhere in this prospectus.

The summary pro forma financial data presented as of and for the year ended December 31, 2011 and as of and for the three months ended March 31, 2012 is derived from our unaudited pro forma financial statements included elsewhere in this prospectus. Our unaudited pro forma financial statements give pro forma effect to the following:

 

   

the contribution of Hi-Crush Chambers LLC, Hi-Crush Railroad LLC, Hi-Crush Wyeville LLC and Hi-Crush Operating LLC to us by our sponsor;

 

   

the assumption by us from our sponsor of debt outstanding under its subordinated promissory notes;

 

   

a reduction in general and administrative expenses as a result of allocations between our Wyeville facility and our sponsor’s other assets and activities that will not be contributed to us in connection with this offering;

 

   

the removal of other operating expenses of our sponsor related to assets and operations that will be retained by our sponsor following the completion of this offering;

 

   

the issuance of              common units and              subordinated units to our sponsor;

 

   

the issuance and sale by us and the sale by Hi-Crush Proppants LLC of              and              common units, respectively, to the public; and

 

   

the application of the net proceeds from the issuance and sale of              common units by us as described in “Use of Proceeds.”

 

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Index to Financial Statements

Each of the adjustments described above are either directly related to this offering or are required by or are a consequence of the contribution to us by our sponsor of the Wyeville facility and related assets, the closing of which is a condition precedent to the closing of this offering.

The unaudited pro forma balance sheet as of March 31, 2012 assumes the events listed above occurred as of March 31, 2012. The unaudited pro forma statements of income data for the year ended December 31, 2011 and the three months ended March 31, 2012 assume the events listed above occurred as of January 1, 2011.

We have not given pro forma effect to incremental general and administrative expenses of approximately $2.1 million that we expect to incur annually as a result of operating as a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1 preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer insurance expenses; and director and officer compensation expenses. We also have not given pro forma effect to additional general and administrative expenses that we expect to incur to support our recent expansion, including management level positions in operations, human resources, legal, accounting and reporting, as well as license fees associated with upgrading accounting and reporting software. We expect these incremental growth associated expenses to gradually increase over time as we hire additional personnel, from about $0.7 million for the year ending December 31, 2012 to $1.7 million on an annualized basis by September 30, 2013.

For a detailed discussion of the summary historical financial information contained in the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table should also be read in conjunction with “Use of Proceeds,” “Business—Our History and Relationship with Our Sponsor” and the audited and unaudited historical financial statements of Hi-Crush Proppants LLC and our unaudited pro forma financial statements included elsewhere in this prospectus. Among other things, the historical and unaudited pro forma financial statements include more detailed information regarding the basis of presentation for the information in the following table.

 

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The following table presents non-GAAP financial measures, EBITDA and production costs, which we use in our business as important supplemental measures of our performance. EBITDA represents net income before interest expense, income taxes and depreciation and depletion. Production costs represents costs of goods sold, excluding depreciation and depletion. EBITDA and production costs are not calculated or presented in accordance with GAAP. We explain these measures under “—Non-GAAP Financial Measures” below and reconcile them to their most directly comparable financial measures calculated and presented in accordance with GAAP. Please also read “Summary—Summary Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”

 

    Predecessor Historical     Hi-Crush Partners LP
Pro Forma
 
    Inception
to
December 31,
2010
    Year Ended
December 31,
2011
    Three Months Ended
March 31,
    Year Ended
December 31,
2011
    Three Months
Ended
March 31,
2012
 
      2011     2012      
    (in thousands, except per unit and operating information)  

Statement of Operations Data:

           

Revenues

  $      $ 20,353      $      $ 13,532      $ 20,353      $ 13,532   

Production costs (1)

           5,998               4,597        5,998        4,597