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

 

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

 

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.

 

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

 

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:

 

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

 

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

 

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increases in the length of the typical horizontal wellbore;

 

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

 

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

 

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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,

 

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:

 

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

 

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

 

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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;

 

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

 

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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

 

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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:

 

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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.

 

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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

 

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.

 

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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.

 

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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.

 

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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:

 

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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.

 

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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.

 

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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.

 

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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

 

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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.

 

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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.

 

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

 

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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.

 

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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.

 

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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.

 

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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

 

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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.

 

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

 

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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.

 

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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.

 

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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.

 

Risks Inherent in an Investment in Us

 

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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.

 

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

 

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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.

 

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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.

 

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

 

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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.

 

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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

 

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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.

 

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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.

 

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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.”

 

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.

 

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.

 

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:

 

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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;

 

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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;

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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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.

 

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:

 

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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;

 

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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;

 

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

 

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we will issue              common units to the public;

 

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

 

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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;

 

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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;

 

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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;

 

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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;

 

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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

 

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

 

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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;

 

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

 

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

 

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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.

 

Organizational Structure

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

 

 

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.”