WASHINGTON, D. C. 20549
For the transition period from ___ to ___.
ADAMS RESOURCES & ENERGY, INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
Adams Resources & Energy, Inc. (“AE”), is a publicly traded Delaware corporation organized in 1973, the common shares of which are listed on the NYSE American LLC under the ticker symbol “AE”. We and itsour subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation.transportation primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.
On April 21, 2017, one of our wholly owned subsidiaries, Adams Resources Exploration Corporation (“AREC”), filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”), Case No. 17-10866 (KG). AREC operated its business and managed its properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. AE was the primary creditor in the Chapter 11 process.
On May 3, 2017, AREC filed a motion with the Bankruptcy Court for approval of an auction process to sell its assets pursuant to Section 363 of the Bankruptcy Code and for approval to engage Oil & Gas Asset Clearinghouse to conduct the auction. The auction commenced on July 19, 2017 to determine the highest or otherwise best bid to acquire all or substantially all of AREC’s assets. During the third quarter of 2017, Bankruptcy Court approval was obtained on three asset purchase and sales agreements with three unaffiliated parties, and AREC closed on the sales of substantially all of its assets (see Note 3 for further information).
As a result of AREC’s voluntary bankruptcy filing in April 2017, we no longer controlled the operations of AREC; therefore, we deconsolidated AREC effective with the bankruptcy filing and recorded our investment in AREC under the cost method (see Note 3 for further information). We anticipate completing the bankruptcy process with a confirmed plan during the fourth quarter of 2017. Over the past few years, we have de-emphasized our upstream operations and do not expect this Chapter 11 filing by AREC to have a material adverse impact on any of our core businesses.
Historically, we have operated and reported in three business segments: (i) crude oil marketing, transportation and storage, (ii) tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation, and (iii) upstream crude oil and natural gas exploration and production. We exited the upstream crude oil and natural gas exploration and production business during the third quarter of 2017 with the sale of our upstream crude oil and natural gas exploration and production assets.assets as a result of a voluntary bankruptcy filing for this subsidiary. The bankruptcy case involving the wholly owned subsidiary through which this business was conducted was dismissed in October 2018, and we expect final settlement to occur during the fourth quarter of 2018.
Basis of Presentation
Our results of operations for the three and nine months ended September 30, 20172018 are not necessarily indicative of results expected for the full year of 2017.2018. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring accruals necessary for fair presentation. The condensed consolidated financial statements and the accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and the rules of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted and, therefore, these interim financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 20162017 (the “2016“2017 Form 10-K”) filed with the SEC on March 31, 2017.12, 2018. All significant intercompany transactions and balances have been eliminated in consolidation.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain reclassifications have been made in the prior year’s financial statements to conform to classifications used in the current year. Losses from equity investment has been classified as a component of other income (expense), net, with its tax effect included in the income tax benefit (provision) line item on our condensed consolidated statements of operations.
Use of Estimates
The preparation of our financial statements in conformity with GAAP requires management to use estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and on various other assumptions and information we believe to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. While we believe the estimates and assumptions used in the preparation of these condensed consolidated financial statements are appropriate, actual results could differ from those estimates.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. GeneralSummary of Significant Accounting Policies
Earnings Per Share
Basic earnings (losses) per share is computed by dividing our net earnings (losses) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (losses) per share is computed by giving effect to all potential shares of common stock outstanding, including our stock related to unvested restricted stock unit awards. Unvested restricted stock unit awards granted under the Adams Resources & Energy, Inc. 2018 Long-Term Incentive Plan (“2018 LTIP”) are not considered to be participating securities as the holders of these shares do not have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares (see Note 10 for further discussion).
A reconciliation of the denominator used in the calculation of basic and Disclosure Mattersdiluted earnings (losses) per share is as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | | | | | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Basic earnings (losses) per share: | | | | | | | |
Net earnings (losses) | $ | 2,035 | | $ | (3,033) | | $ | 6,793 | | $ | (4,175) |
| | | | | | | |
Weighted average number of shares outstanding — Basic | 4,218 | | 4,218 | | 4,218 | | 4,218 |
| | | | | | | |
Basic earnings (losses) per share | $ | 0.48 | | $ | (0.72) | | $ | 1.61 | | $ | (0.99) |
| | | | | | | |
Diluted earnings (losses) per share: | | | | | | | |
Net earnings (losses) | $ | 2,035 | | $ | (3,033) | | $ | 6,793 | | $ | (4,175) |
| | | | | | | |
Diluted weighted average number of shares outstanding: | | | | | | | |
Common shares | 4,218 | | 4,218 | | 4,218 | | 4,218 |
Restricted stock unit awards (1) | 1 | | — | | — | | — |
Performance share unit awards (2) | — | | — | | — | | — |
Total | 4,219 | | 4,218 | | 4,218 | | 4,218 |
| | | | | | | |
Diluted earnings (losses) per share | $ | 0.48 | | $ | (0.72) | | $ | 1.61 | | $ | (0.99) |
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(1) The dilutive effect of restricted stock unit awards for the three and nine months ended September 30, 2018 is de minimis.
(2) The dilutive effect of performance share awards will be included in the calculation of diluted earnings per share when the performance share award performance conditions have been achieved.
Fair Value Measurements
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments. Marketable securities are recorded at fair value based on market quotations from actively traded liquid markets.
A three-tier hierarchy has been established that classifies fair value amounts recognized in the financial statements based on the observability of inputs used to estimate such fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair value contracts consist of derivative financial instruments and are recorded as either an asset or liability measured at its fair value. Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and we elect, cash flow hedge accounting. We had no contracts designated for hedge accounting during any current reporting periods (see Note 89 for further information).
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of these items and their respective tax basis. On December 22, 2017, the Tax Cut and Jobs Act was enacted into law resulting in a reduction in the federal corporate income tax rate from 35 percent to 21 percent for years beginning in 2018, which impacts our income tax provision or benefit.
Investments in Unconsolidated Affiliates
At September 30,AREC. In April 2017, one of our wholly owned subsidiaries, Adams Resources Exploration Corporation (“AREC”), filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of Title 11 of the United States Code. As a result of the voluntary bankruptcy filing, we had no remaining balanceslonger controlled the operations of AREC; therefore, we deconsolidated AREC in our medical-related investments. We currently do not have any plans to pursue additional medical-related investments.
Bencap. Through FebruaryApril 2017, and we owned a 30% member interest in Bencap LLC (“Bencap”). Bencap provides medical insurance brokerage and medical claims auditing services to employers utilizing ERISA governed employee benefit plans. We accounted forrecorded our investment in Bencapthis subsidiary under the equitycost method of accounting. UnderlyingDuring the termssecond quarter of 2017, we recorded a non-cash charge of approximately $1.6 million associated with the investment agreement, Bencap had the option to request borrowings from usdeconsolidation of up to $1.5 million (on or after December 5, 2016 but before October 31, 2018) that we were required to provide or forfeit our 30% member interest. During 2016, we determined that we were unlikely to provide additional funding to Bencap due to Bencap’s lower than projected revenue growth and operating losses since investment inception.AREC. During the third quarter of 2016,2017, as a result of the sale of substantially all of AREC’s assets, we recognized an after-tax netadditional loss of $1.4$1.9 million, which represents the difference between the net proceeds we expected to write-off our investment in Bencap, which consisted of a pre-tax impairment charge of approximately $1.7 million, pre-tax losses from the equity method investment of $0.5 million
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and an income tax benefit of $0.8 million. In February 2017, in accordance with the termsbe paid upon settlement of the investment agreement, Bencap requested additional fundingbankruptcy, net of approximately $0.5 million from us. We declinedanticipated remaining closing costs identified as part of the additional funding requestliquidation plan, and as a result, forfeitedthe book value of our 30% member interest in Bencap.cost method investment. At September 30, 2017,2018, our remaining investment in AREC was $0.4 million. The bankruptcy case was dismissed during October 2018, and we had no further ownership interest in Bencap.expect final settlement to occur during the fourth quarter of 2018.
VestaCare. We own an approximate 15% equity interest (less than 3% voting interest) in VestaCare, Inc., a California corporation (“VestaCare”). VestaCare provides an array of software as a service (“SaaS”) electronic payment technologies to medical providers, payers and patients including VestaCare’s most recent product offering, VestaPay™. VestaPay™ allows medical care providers to structure fully automated and dynamically updating electronic payment plans for their patients. We account for this investment under the cost method of accounting. During the third quarter of 2017, we reviewed our investment in VestaCare, Inc. (“VestaCare”), in which we own an approximate 15 percent equity interest (less than 3 percent voting interest), and determined that the current projected operating results did not support the carrying value of the investment. As such, we recognized a pre-tax impairment charge of $2.5 million during the third quarter of 2017 and wrote-off our investment in VestaCare. At September 30, 2017, we continue to own an approximate 15% equity interest in VestaCare.
AREC. As a result of AREC’s voluntary bankruptcy filing in April 2017 and our loss of control of AREC, we deconsolidated AREC in April 2017, and we recorded our investment in this subsidiary under the cost method of accounting. We recorded a non-cash charge during the second quarter of 2017 of approximately $1.6 million associated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on the expected sales transaction price, net of estimated transaction costs. As a result of the sale of substantially all of AREC’s assets during the third quarter of 2017, we recognized an additional loss of $1.9 million, which represents the difference between the net proceeds we expect to be paid upon settlement of the bankruptcy, net of anticipated remaining closing costs identified as part of the liquidation plan, and the book value of our cost method investment. At September 30, 2017, our remaining investment in AREC was $3.2 million (see Note 3 for further information).
Letter of Credit Facility
We maintain a Credit and Security Agreement with Wells Fargo Bank, National Association to provide up to a $60$60.0 million stand-by letter of credit facility used to support crude oil purchases within our crude oil marketing segment.segment and for other purposes. We are currently using the letter of credit facility for a letter of credit related to our insurance program. This facility is collateralized by the eligible accounts receivable within our crude oil marketing segment.segment and expires on August 30, 2019.
The issued stand-by letters of credit are canceled as the underlying purchase obligations are satisfied by cash payment when due. The letter of credit facility places certain restrictions on GulfmarkGulfMark Energy, Inc., one of our wholly owned subsidiaries. These restrictions include the maintenance of a combined 1.1 to 1.0 current ratio and the maintenance of positive net earnings excluding inventory valuation changes, as defined, among other restrictions. We are currently in compliance with all such financial covenants. NoSubsequent to September 30, 2018, per the terms of our letter of credit amountsagreement, we were outstanding atin default of certain nonfinancial covenants and obtained a waiver whereby the creditor will not exercise any of their rights or remedies. At September 30, 20172018 and December 31, 2016. The letter of credit facility was amended during the third quarter of 2017, to extend the expiration date to August 27, 2019.we had $0.4 million and $2.2 million, respectively, outstanding under this facility.
Prepayments and Other Current Assets
The components of prepayments and other current assets were as follows at the dates indicated (in thousands):
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
| | | |
Insurance premiums | $ | 201 |
| | $ | 1,403 |
|
Rents, licenses and other | 967 |
| | 694 |
|
Total | $ | 1,168 |
| | $ | 2,097 |
|
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
We capitalize expendituresProperty and equipment is recorded at cost. Expenditures for major renewalsadditions, improvements and betterments,other enhancements to property and we expense expenditures forequipment are capitalized, and minor replacements, maintenance and repairs that do not extend asset life or add value are charged to expense as incurred. We capitalize interest costs incurred in connection with major capital expendituresWhen property and amortize these costs over the lives of the related assets. When propertiesequipment assets are retired or sold,otherwise disposed of, the related cost and accumulated depreciation depletion and amortization is removed from the accounts and any resulting gain or loss is reflectedincluded in earnings, and is includedresults of operations in operating costs and expenses.
We accounted for oil and gas exploration and development expenditures in accordance with the successful efforts method of accounting. We capitalized direct costs of acquiring developed or undeveloped leasehold acreage, including lease bonus, brokerage and other fees. We initially capitalized exploratory drilling costs until the properties were evaluated and determined to be either productive or nonproductive. Such evaluations were made on a quarterly basis. If an exploratory well was determined to be nonproductive, the costs of drilling the well were charged to expense. Costs incurred to drill and complete development wells, including dry holes, were capitalized. At September 30, 2017, we had no unevaluated or suspended exploratory drilling costs. Effective in April 2017, our oil and natural gas subsidiary was deconsolidated and was accounted for as a cost method investment, as a result of its bankruptcy filing (see Note 3 for further information).
We calculated depreciation, depletion and amortization of the cost of proved oil and gas properties using the units-of-production method. The reserve base or denominator used to calculate depreciation, depletion and amortization for leasehold acquisition costs and the cost to acquire proved properties was the sum of proved developed reserves and proved undeveloped reserves. For lease and well equipment, development costs and successful exploration drilling costs, the reserve base included only proved developed reserves. The numerator for these calculations was actual production volumesexpenses for the respective period. All other propertyProperty and equipment, except for land, is depreciated using the straight-line method over the estimated average useful lives of threeranging from two to twentythirty-nine years.
We review our long-lived assets for impairment whenever there is evidence that the carrying value of suchthese assets may not be recoverable. Any impairment recognized is permanent and may not be restored. Property and equipment is reviewed at the lowest level of identifiable cash flows. Producing oil and gas properties were reviewed on a field-by-field basis. Fields with carrying values in excess of their estimated undiscounted future net cash flows were deemed impaired. For properties requiring impairment, the fair value is estimated based on an internal discounted cash flow model. Cash flows are developed based on estimatedmodel of future production,cash flows.
See Note 5 for additional information regarding our property and prices are then discounted using a market based rate of return consistent with that used by us in evaluating cash flows for other assets of a similar nature.equipment.
On a quarterly basis, we evaluated the carrying value of non-producing oil and gas leasehold properties and may have deemed them impaired based on remaining lease term, area drilling activity and our plans for the property. This fair value measure depended highly on our assessment of the likelihood of continued exploration efforts in a given area. Therefore, such data inputs are categorized as “unobservable” or “Level 3” inputs (see Note 8 for further information). Impairment provisions included in our oil and natural gas segment operating losses were not material during the three and nine months ended September 30, 2016 or for the period from January 1, 2017 through April 30, 2017.
Revenue Recognition
Certain commodity purchase and sale contracts utilized by our crude oil marketing business qualify as derivative instruments with certain specifically identified contracts also designated as trading activity. From the time of contract origination, such trading activity contracts are marked-to-market and recorded on a net revenue basis in the accompanying consolidated financial statements.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Most crude oil purchase and sale contracts qualify and are designated as non-trading activities, and we consider such contracts as normal purchases and sales activity. For normal purchases and sales, our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer. Such sales are recorded on a gross basis in the financial statements because we take title, have risk of loss for the products, are the primary obligor for the purchase, establish the sale price independently with a third party and maintain credit risk associated with the sale of the product.
Certain crude oil contracts may be with a single counterparty to provide for similar quantities of crude oil to be bought and sold at different locations. These contracts are entered into for a variety of reasons, including effecting the transportation of the commodity, to minimize credit exposure, and/or to meet the competitive demands of the customer. Such buy/sell arrangements are reflected on a net revenue basis in the accompanying unaudited condensed consolidated financial statements.
Reporting these crude oil contracts on a gross revenue basis would increase our reported revenues as follows for the periods indicated (in thousands):
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Revenue gross-up | $ | 46,306 |
| | $ | 70,236 |
| | $ | 148,779 |
| | $ | 245,245 |
|
Transportation segment customers are invoiced based upon contractually agreed upon terms, and the related revenue is recognized as the service is provided.
Recent Accounting Developments
Revenue Recognition. In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification 606, Revenue from Contracts with Customers(“ASC 606”ASC”). The new accounting standard, along with its related amendments, replaces the current rules-based U.S. GAAP governing revenue recognition with a principles-based approach. We plan to adopt the new standard on January 1, 2018 using the modified retrospective approach, which requires us to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018 through a cumulative adjustment to equity. In accordance with this approach, our consolidated revenues for periods prior to January 1, 2018 will not be revised.
The core principle in the new guidance is that a company should recognize revenue in a manner that fairly depicts the transfer of goods or services to customers in amounts that reflect the consideration the company expects to receive for those goods or services. In order to apply this core principle, companies will apply the following five steps in determining the amount of revenues to recognize: (i) identify the contract; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the performance obligation is satisfied. Each of these steps involves management’s judgment and an analysis of the material terms and conditions of the contract.
Our implementation activities related to ASC 606 are ongoing. We do not anticipate that there will be material differences in the amount or timing of revenues recognized following the new standard’s adoption date. Although total consolidated revenues may not be materially impacted by the new guidance, we do anticipate significant changes to our disclosures based on the additional requirements prescribed by ASC 606. These new disclosures include information regarding the significant judgments used in evaluating when and how revenue is (or will be) recognized and data related to contract assets and liabilities. Additionally, we are currently evaluating our business processes, systems and controls to ensure the accuracy and timeliness of the recognition and disclosure requirements under the new revenue guidance.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Leases. In February 2016, the FASB issued ASC 842, Leases (“ASC 842”), which requires substantially all leases (with the exception of leases with a term of one year or less) to be recorded on the balance sheet using a method referred to as the right-of-use (“ROU”) asset approach. We plan to adopt the new standard on January 1, 2019 using the modified retrospective method described within ASC 842.approach and apply it to (i) all new leases entered into after January 1, 2019 and (ii) all existing lease contracts as of January 1, 2019 through a cumulative adjustment to equity. In accordance with this approach, our consolidated operating expenses for periods prior to January 1, 2019 will not be revised.
The new standard introduces two lease accounting models, which result in a lease being classified as either a “finance” or “operating” lease on the basis of whether the lessee effectively obtains control of the underlying asset during the lease term. A lease would be classified as a finance lease if it meets one of five classification criteria, four of which are generally consistent with current lease accounting guidance. By default, a lease that does not meet the criteria to be classified as a finance lease will be deemed an operating lease. Regardless of classification, the initial measurement of both lease types will result in the balance sheet recognition of a ROU asset representing a company’s right to use the underlying asset for a specified period of time and a corresponding lease liability. The lease liability will be recognized at the present value of the future lease payments, and the ROU asset will equal the lease liability adjusted for any prepaid rent, lease incentives provided by the lessor, and any indirect costs.
The subsequent measurement of each type of lease varies. Leases classified as a finance lease will be accounted for using the effective interest method. Under this approach, a lessee will amortize the ROU asset (generally on a straight-line basis in a manner similar to depreciation) and the discount on the lease liability (as a component of interest expense). Leases classified as an operating lease will result in the recognition of a single lease expense amount that is recorded on a straight-line basis (or another systematic basis, if more appropriate).
We are in the process of reviewing our lease agreements in light of the new guidance. Although we are in the early stages of our ASC 842 implementation project, weWe anticipate that this new lease guidance will cause significantresult in changes to the way our operating leases are recorded, presented and disclosed in our consolidated financial statements.
Note 3. Subsidiary Bankruptcy, Deconsolidation and Sale
Bankruptcy Filing, Deconsolidation and Sale
On April 21, 2017, AREC filed a voluntary petition in the Bankruptcy Court seeking relief under the Bankruptcy Code. AREC operated its business and managed its properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. As a result of AREC’s bankruptcy filing, AE ceded its authority to the Bankruptcy Court, and AE management could not carry on AREC activities in the ordinary course of business without Bankruptcy Court approval. AE managed the day-to-day operations of AREC, but did not have discretion to make significant capital or operating budgetary changes or decisions and purchase or sell significant assets, as AREC’s material decisions were subject to review by the Bankruptcy Court. For these reasons, we concluded that AE lost control of AREC, and no longer has significant influence over AREC during the pendency of the bankruptcy. Therefore, we deconsolidated AREC effective with the filing of the Chapter 11 bankruptcy in April 2017.
In order to deconsolidate AREC, the carrying values of the assets and liabilities of AREC were removed from our consolidated balance sheet as of April 30, 2017, and we recorded our investment in AREC at its estimated fair value of approximately $5.0 million. We determined the fair value of our investment based upon bids we received in the auction process. We also determined that the estimated fair value of our investment in AREC was expected to be lower than its net book value immediately prior to the deconsolidation. As a result, during the second quarter of 2017, we recorded a non-cash charge of approximately $1.6 million associated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on the expected sales transaction price of approximately $5.0 million, net of estimated transaction costs. Subsequent to the deconsolidation of AREC, we accounted for our investment in AREC using the cost method of accounting because AE did not exercise significant influence over the operations of AREC due to the Chapter 11 filing.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
We measure all share-based payments, including the issuance of restricted stock units and performance share units to employees and board members, using a fair-value based method. The cost of services received from employees and non-employee board members in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period. The fair value of restricted stock unit awards and performance share unit awards is based on the closing price of our common stock on the grant date. We account for forfeitures as they occur. See Note 10 for additional information regarding our 2018 LTIP.
Note 3. Revenue Recognition
Adoption of ASC 606
On AugustJanuary 1, 2017,2018, we adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) and all related Accounting Standards Updates by applying the modified retrospective method to all contracts that were not completed on January 1, 2018. The modified retrospective approach required us to recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings on January 1, 2018. Comparative information has not been restated and continues to be reported under the historical accounting standards in effect for those periods. The adoption of the new revenue standard did not result in a hearingcumulative effect adjustment to our retained earnings since there was held beforeno significant impact upon adoption of the Bankruptcy Court seeking approvalnew standard. There was also no material impact to revenues, or any other financial statement line items, for the three and nine months ended September 30, 2018 as a result of assetapplying ASC 606. We expect the impact of the adoption of ASC 606 to remain immaterial to our net earnings on an ongoing basis.
Revenue Recognition
The new revenue standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new revenue standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.
Our revenues are primarily generated from the marketing, transportation and storage of crude oil and other related products and the tank truck transportation of liquid chemicals and dry bulk. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. To identify the performance obligations, we considered all of the products or services promised in the contracts with customers, whether explicitly stated or implied based on customary business practices. Revenue is recognized when, or as, each performance obligation is satisfied under terms of the contract. Payment is typically due in full within 30 days of the invoice date.
For our crude oil marketing segment, most of our crude oil purchase and sale contracts qualify and are designated as non-trading activities, and we consider these contracts as normal purchases and sales agreements under Section 363activity. For normal purchases and sales, our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the Bankruptcy Code with three unaffiliated partiesproduct to purchase AREC’s oil and natural gas assets for aggregate cash proceeds of approximately $5.2 million. The Bankruptcy Court approved the asset purchase and sales agreements, and we closedcustomer. Revenue is recognized based on the transaction price and the quantity delivered.
The majority of our crude oil sales contracts have multiple distinct performance obligations as the promise to transfer the individual goods (e.g., barrels of these assets duringcrude oil) is separately identifiable from the third quarterother goods promised within the contracts. Our performance obligations are satisfied at a point in time. For normal sales arrangements, revenue is recognized in the month in which control of 2017.
In October 2017, AREC submitted its liquidation planthe physical product is transferred to the Bankruptcy Court for approval. In connection with the sales of these assets and submissioncustomer, generally upon delivery of the liquidation plan, we recognized an additional lossproduct to the customer.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For our transportation segment, each sales order associated with our master transportation agreements is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the third quarter of 2017, which represents the difference between the proceeds we expect to be paid upon settlement of the bankruptcy, net of anticipated remaining closing costs identified as part of the liquidation plan,goods and the book value of our cost method investment. We anticipate completing the bankruptcy process with a confirmed plan during the fourth quarter of 2017.services are delivered.
DIP Financing – Related Party RelationshipPractical Expedients
In connection with our adoption of ASC 606, we reviewed our revenue contracts for impact upon adoption. For example, our revenue contracts often include promises to transfer various goods and services to a customer. Determining whether goods and services are considered distinct performance obligations that should be accounted for separately versus together will continue to require continual assessment. We also used practical expedients permitted by ASC 606 when applicable. These practical expedients included:
• Applying the bankruptcy filing, ARECnew guidance only to contracts that were not completed as of January 1, 2018; and
• Not accounting for the effects of significant financing components if the company expects that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and customer advances and deposits (contract liabilities) on our consolidated balance sheet. Currently, we do not record any contract assets in our financial statements due to the timing of revenue recognized and when our customers are billed. Our crude oil marketing customers are generally billed monthly based on contractually agreed upon terms. However, we sometimes receive advances or deposits from customers before revenue is recognized, resulting in contract liabilities. These contract assets and liabilities, if any, are reported on our consolidated balance sheets at the end of each reporting period.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Disaggregation
The following table disaggregates our revenue by segment and by major source for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Reporting Segments | | | | |
| Marketing | | Transportation | | Total |
| | | | | |
Three Months Ended September 30, 2018 | | | | | |
Revenues from contracts with customers | $ | 424,061 | | $ | 14,265 | | $ | 438,326 |
Other (1) | 29,565 | | — | | 29,565 |
Total revenues | $ | 453,626 | | $ | 14,265 | | $ | 467,891 |
| | | | | |
Timing of revenue recognition: | | | | | |
Goods transferred at a point in time | $ | 424,061 | | $ | — | | $ | 424,061 |
Services transferred over time | — | | 14,265 | | 14,265 |
Total revenues from contracts with customers | $ | 424,061 | | $ | 14,265 | | $ | 438,326 |
| | | | | |
Nine Months Ended September 30, 2018 | | | | | |
Revenues from contracts with customers | $ | 1,203,511 | | $ | 41,509 | | $ | 1,245,020 |
Other (1) | 62,544 | | — | | 62,544 |
Total revenues | $ | 1,266,055 | | $ | 41,509 | | $ | 1,307,564 |
| | | | | |
Timing of revenue recognition: | | | | | |
Goods transferred at a point in time | $ | 1,203,511 | | $ | — | | $ | 1,203,511 |
Services transferred over time | — | | 41,509 | | 41,509 |
Total revenues from contracts with customers | $ | 1,203,511 | | $ | 41,509 | | $ | 1,245,020 |
_______________
(1) Other marketing revenues are recognized under ASC 815, Derivatives and Hedging, and ASC 845, Nonmonetary Transactions – Purchases and Sales of Inventory with the Same Counterparty.
Other Marketing Revenue
Certain of the commodity purchase and sale contracts utilized by our crude oil marketing business qualify as derivative instruments with certain specifically identified contracts also designated as trading activity. From the time of contract origination, these contracts are marked-to-market and recorded on a net revenue basis in the accompanying consolidated financial statements.
Certain of our crude oil contracts may be with a single counterparty to provide for similar quantities of crude oil to be bought and sold at different locations. These contracts are entered into for a Debtor in Possession Credit and Security Agreement with AE (“DIP Credit Agreement”) dated asvariety of April 25, 2017, in an aggregate amount of up to $1.25 million, of whichreasons, including effecting the funds were to be used by AREC solely to fund operations through August 11, 2017. Loans under the DIP Credit Agreement accrued interest at a rate of LIBOR plus 2.0% per annum and were due and payable upon the earlier of (a) twelve months after the petition date, (b) the closingtransportation of the salecommodity, to minimize credit exposure, and/or to meet the competitive demands of substantially all of AREC’s assets, (c) the effective date ofcustomer. These buy/sell arrangements are reflected on a Chapter 11 plan of reorganization of AREC, and (d) the date that the DIP loan was accelerated upon the occurrence of an event of default, as definednet revenue basis in the DIP Credit Agreement. AREC borrowed approximately $0.4 million underaccompanying consolidated financial statements.
Reporting these crude oil contracts on a gross revenue basis would increase our reported revenues as follows for the DIP Credit Agreement,periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Revenue gross-up | $ | 76,373 | | $ | 46,306 | | $ | 178,399 | | $ | 148,779 |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Prepayments and Other Current Assets
The components of prepayments and other current assets were as follows at the amount was repaid during the third quarter of 2017 with proceeds from the sales of the assets.dates indicated (in thousands):
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
| | | |
Insurance premiums | $ | 274 | | $ | 425 |
Rents, licenses and other | 997 | | 839 |
Total | $ | 1,271 | | $ | 1,264 |
Note 4.5. Property and Equipment
ComponentsThe historical costs of our property and equipment and related accumulated depreciation balances were as follows at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Estimated | | | | |
| Useful Life | | September 30, | | December 31, |
| in Years | | 2018 | | 2017 |
| | | | | |
Tractors and trailers (1) | 5 – 6 | | $ | 84,578 | | $ | 88,065 |
Field equipment | 2 – 5 | | 19,987 | | 18,490 |
Buildings | 5 – 39 | | 15,746 | | 15,727 |
Office equipment | 2 – 5 | | 1,808 | | 1,929 |
Land | | | 1,790 | | 1,790 |
Construction in progress | | | 1,664 | | 275 |
Total | | | 125,573 | | 126,276 |
Less accumulated depreciation | | | (94,655) | | (96,914) |
Property and equipment, net | | | $ | 30,918 | | $ | 29,362 |
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
| | | |
Marketing | $ | 56,913 |
| | $ | 56,907 |
|
Transportation | 70,790 |
| | 70,849 |
|
Oil and natural gas (successful efforts) | — |
| | 62,784 |
|
Other | 108 |
| | 108 |
|
Total | 127,811 |
| | 190,648 |
|
Less accumulated depreciation, depletion and amortization | (95,853 | ) | | (144,323 | ) |
Property and equipment, net | $ | 31,958 |
| | $ | 46,325 |
|
_______________
During the third quarter of 2017, we entered into(1) Amounts include assets held under capital leases for certain truckstractors in our marketing segment. Gross property and equipment recordedassociated with assets held under capital leases were $3.0 million and $1.8 million at September 30, 2017.2018 and December 31, 2017, respectively. Accumulated amortization associated with assets held under capital leases was less thanwere $0.4 million and $0.1 million at September 30, 2018 and December 31, 2017, respectively (see Note 1012 for further information).
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Components of depreciation, depletion and amortization expense were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Depreciation, depletion and amortization, | | | | | | | |
excluding amounts under capital leases | $ | 2,210 | | $ | 3,210 | | $ | 6,703 | | $ | 10,742 |
Amortization of property and equipment | | | | | | | |
under capital leases | 130 | | 30 | | 311 | | 30 |
Total depreciation, depletion and amortization | $ | 2,340 | | $ | 3,240 | | $ | 7,014 | | $ | 10,772 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Depreciation, depletion and amortization, | | | | | | | |
excluding amounts under capital leases | $ | 3,210 |
| | $ | 4,514 |
| | $ | 10,742 |
| | $ | 14,385 |
|
Amortization of property and equipment | | | | | | | |
under capital leases | 30 |
| | — |
| | 30 |
| | — |
|
Total depreciation, depletion and amortization | $ | 3,240 |
| | $ | 4,514 |
| | $ | 10,772 |
| | $ | 14,385 |
|
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 5.6. Cash Deposits and Other Assets
Components of cash deposits and other assets were as follows at the dates indicated (in thousands):
| | | September 30, | | December 31, | | September 30, | | December 31, |
| 2017 | | 2016 | | 2018 | | 2017 |
| | | | | | | |
Amounts associated with liability insurance program: | | | | Amounts associated with liability insurance program: | |
Insurance collateral deposits | $ | 2,252 |
| | $ | 2,599 |
| Insurance collateral deposits | $ | 3,517 | | $ | 3,767 |
Excess loss fund | 1,495 |
| | 1,450 |
| Excess loss fund | 1,662 | | 2,284 |
Accumulated interest income | 777 |
| | 812 |
| Accumulated interest income | 736 | | 814 |
Other amounts: | | | | Other amounts: | |
State collateral deposits | 51 |
| | 143 |
| State collateral deposits | 61 | | 57 |
Materials and supplies | 320 |
| | 354 |
| Materials and supplies | 227 | | 273 |
Other | 37 |
| | 171 |
| Other | 36 | | 37 |
Total | $ | 4,932 |
| | $ | 5,529 |
| Total | $ | 6,239 | | $ | 7,232 |
We have established certain deposits to support participation in our liability insurance program and remittance of state crude oil severance taxes and other state collateral deposits. Insurance collateral deposits are held by the insurance company to cover past or potential open claims based upon a percentage of the maximum assessment under our insurance policies. Insurance collateral deposits are invested at the discretion of our insurance carrier. Excess amounts in our loss fund represent premium payments in excess of claims incurred to date that we may be entitled to recover through settlement or commutation as claim periods are closed. Interest income is earned on allthe majority of amounts held by the insurance companycompanies and will be paid to us upon settlement of policy years.
Insurance collateral deposits are invested at the discretion of our insurance carrier. This fair value measure relies on inputs from quoted prices for similar assets and is thus categorized as a “Level 3” valuation in the fair value hierarchy (see Note 8 for further information).
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6.7. Segment Reporting
Historically, our three reporting segments have been: (i) crude oil marketing, transportation and storage, (ii) tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation and (iii) upstream crude oil and natural gas exploration and production. Our upstream crude oil and natural gas exploration and production wholly owned subsidiary filed for bankruptcy in April 2017, (see Note 3 for further information), and as a result of our loss of control of the wholly owned subsidiary, AREC was deconsolidated and is accounted for under the cost method of accounting. AREC remained a reportable segment until its deconsolidation, effective April 30, 2017.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Information concerning our various business activities was as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Reporting Segments | | | | | | |
| Marketing | | Transportation | | Oil and Gas and Other | | Total |
| | | | | | | |
Three Months Ended September 30, 2018 | | | | | | | |
Revenues | $ | 453,626 | | $ | 14,265 | | $ | — | | $ | 467,891 |
Segment operating (losses) earnings (1) | 2,982 | | 790 | | — | | 3,772 |
Depreciation, depletion and amortization | 1,277 | | 1,063 | | — | | 2,340 |
Property and equipment additions (2) | 612 | | 4,416 | | — | | 5,028 |
| | | | | | | |
Three Months Ended September 30, 2017 | | | | | | | |
Revenues | $ | 282,229 | | $ | 13,082 | | $ | — | | $ | 295,311 |
Segment operating (losses) earnings (1) (4) | 2,412 | | (915) | | — | | 1,497 |
Depreciation, depletion and amortization | 1,911 | | 1,329 | | — | | 3,240 |
Property and equipment additions (2) | 178 | | 179 | | — | | 357 |
| | | | | | | |
Nine Months Ended September 30, 2018 | | | | | | | |
Revenues | $ | 1,266,055 | | $ | 41,509 | | $ | — | | $ | 1,307,564 |
Segment operating (losses) earnings (1) | 11,712 | | 2,002 | | — | | 13,714 |
Depreciation, depletion and amortization | 4,110 | | 2,904 | | — | | 7,014 |
Property and equipment additions (2) (3) | 1,682 | | 6,061 | | 13 | | 7,756 |
| | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | |
Revenues | $ | 872,020 | | $ | 40,153 | | $ | 1,427 | | $ | 913,600 |
Segment operating (losses) earnings (1) (4) | 5,496 | | (920) | | 53 | | 4,629 |
Depreciation, depletion and amortization | 5,957 | | 4,392 | | 423 | | 10,772 |
Property and equipment additions (2) | 451 | | 189 | | 1,825 | | 2,465 |
|
| | | | | | | | | | | | | | | |
| Reporting Segments | | |
| Marketing | | Transportation | | Oil and Gas | | Total |
| | | | | | | |
Three Months Ended September 30, 2017 | | | | | | | |
Revenues | $ | 282,229 |
| | $ | 13,082 |
| | $ | — |
| | $ | 295,311 |
|
Segment operating (losses) earnings | 2,412 |
| | (915 | ) | | — |
| | 1,497 |
|
Depreciation, depletion and amortization | 1,911 |
| | 1,329 |
| | — |
| | 3,240 |
|
Property and equipment additions | 178 |
| | 179 |
| | — |
| | 357 |
|
| | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | |
Revenues | $ | 243,704 |
| | $ | 12,310 |
| | $ | 863 |
| | $ | 256,877 |
|
Segment operating (losses) earnings | 1,265 |
| | (430 | ) | | (543 | ) | | 292 |
|
Depreciation, depletion and amortization | 2,418 |
| | 1,701 |
| | 395 |
| | 4,514 |
|
Property and equipment additions | — |
| | 2,329 |
| | 85 |
| | 2,414 |
|
| | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | |
Revenues | $ | 872,020 |
| | $ | 40,153 |
| | $ | 1,427 |
| | $ | 913,600 |
|
Segment operating (losses) earnings | 5,496 |
| | (920 | ) | | 53 |
| | 4,629 |
|
Depreciation, depletion and amortization | 5,957 |
| | 4,392 |
| | 423 |
| | 10,772 |
|
Property and equipment additions | 451 |
| | 189 |
| | 1,825 |
| | 2,465 |
|
| | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | |
Revenues | $ | 758,627 |
| | $ | 39,517 |
| | $ | 2,427 |
| | $ | 800,571 |
|
Segment operating (losses) earnings | 13,148 |
| | 444 |
| | (1,222 | ) | | 12,370 |
|
Depreciation, depletion and amortization | 7,621 |
| | 5,536 |
| | 1,228 |
| | 14,385 |
|
Property and equipment additions | 514 |
| | 6,480 |
| | 192 |
| | 7,186 |
|
_______________
(1) Our marketing segment’s operating earnings included inventory liquidation gains of $0.1 million and $2.5 million for the three and nine months ended September 30, 2018, respectively, inventory valuation gains of $2.0 million for the three months ended September 30, 2017 and inventory valuation losses of $0.1 million for the nine months ended September 30, 2017.
(2) Our marketing segment’s property and equipment additions do not include approximately $1.2 million and $1.8 million of tractors acquired during the nine months ended September 30, 2018 and 2017, respectively, under capital leases. See Note 12 for further information.
(3) During the nine months ended September 30, 2018, we had $13 thousand of property and equipment additions for leasehold improvements at our corporate headquarters level, which is not attributed or allocated to any of our reporting segments.
(4) Segment operating (losses) earnings for the three and nine months ended September 30, 2017 included approximately $0.4 million of costs related to a voluntary early retirement program that was implemented in August 2017.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Segment operating earnings reflect revenues net of operating costs and depreciation, depletion and amortization expense and are reconciled to earnings (losses) before income taxes, as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | | | | | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Segment operating earnings | $ | 3,772 | | $ | 1,497 | | $ | 13,714 | | $ | 4,629 |
General and administrative (1) | (1,533) | | (2,787) | | (6,100) | | (6,884) |
Operating earnings (losses) | 2,239 | | (1,290) | | 7,614 | | (2,255) |
Loss on deconsolidation of subsidiary | — | | (1,870) | | — | | (3,505) |
Impairment of investment in unconsolidated | | | | | | | |
affiliate | — | | (2,500) | | — | | (2,500) |
| | | | | | | |
Interest income | 601 | | 370 | | 1,486 | | 789 |
Interest expense | (26) | | (8) | | (60) | | (10) |
(Losses) earnings before income taxes | $ | 2,814 | | $ | (5,298) | | $ | 9,040 | | $ | (7,481) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Segment operating earnings | $ | 1,497 |
| | $ | 292 |
| | $ | 4,629 |
| | $ | 12,370 |
|
General and administrative | (2,787 | ) | | (2,114 | ) | | (6,884 | ) | | (6,252 | ) |
Operating earnings (losses) | (1,290 | ) | | (1,822 | ) | | (2,255 | ) | | 6,118 |
|
Loss on deconsolidation of subsidiary | (1,870 | ) | | — |
| | (3,505 | ) | | — |
|
Impairment of investments in unconsolidated affiliates | (2,500 | ) | | (1,732 | ) | | (2,500 | ) | | (1,732 | ) |
Losses from equity investment | — |
| | (68 | ) | | — |
| | (468 | ) |
Interest income | 370 |
| | 245 |
| | 789 |
| | 444 |
|
Interest expense | (8 | ) | | — |
| | (10 | ) | | — |
|
(Losses) earnings before income taxes | $ | (5,298 | ) | | $ | (3,377 | ) | | $ | (7,481 | ) | | $ | 4,362 |
|
_______________
(1) General and administrative expenses for the three and nine months ended September 30, 2017 included approximately $1.0 million of costs related to a voluntary early retirement program we implemented in August 2017.
Identifiable assets by industry segment were as follows at the dates indicated (in thousands):
| | | September 30, | | December 31, | | September 30, | | December 31, |
| 2017 | | 2016 | | 2018 | | 2017 |
| | | | | | | |
Reporting segment: | | | | Reporting segment: | |
Marketing | $ | 107,388 |
| | $ | 107,257 |
| Marketing | $ | 143,427 | | $ | 134,745 |
Transportation | 29,492 |
| | 32,120 |
| Transportation | 32,049 | | 29,069 |
Oil and Gas (1) | 3,200 |
| | 7,279 |
| Oil and Gas (1) | 425 | | 425 |
Cash and other assets | 108,449 |
| | 100,216 |
| Cash and other assets | 137,411 | | 118,465 |
Total assets | $ | 248,529 |
| | $ | 246,872 |
| Total assets | $ | 313,312 | | $ | 282,704 |
___________________________________
| |
(1) | At September 30, 2017, amount represents our cost method investment in this segment. |
(1) Amounts represent our cost method investment in this segment.
Intersegment sales are insignificant and all sales occurred in the United States.insignificant. Other identifiable assets are primarily corporate cash, corporate accounts receivable investments and properties not identified with any specific segment of our business. Accounting policies for transactions between reportable segments are consistent with applicable accounting policies as disclosed herein.
Note 7.8. Transactions with Affiliates
We enter into certain transactions in the normal course of business with affiliated entities including direct cost reimbursement for shared phone and administrative services. In addition, we lease our corporate office space from an affiliated entity.
We utilize our former affiliate, Bencap LLC (“Bencap”), to administer certain of our employee medical benefit programs including a detail audit of individual medical claims. Bencap earns a fee from us for providing suchthese services at a discounted amount from its standard charge to non-affiliates. We had an equity method investment in Bencap, which was forfeited during the first quarter of 2017. As discussed further in Note 2, at September 30, 2017,a result, we have no further ownership interest in Bencap.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Activities with affiliates were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | Three Months Ended | | | Nine Months Ended | |
| Three Months Ended | | Nine Months Ended | | September 30, | | | September 30, | |
| September 30, | | September 30, | | 2018 | | 2017 | | 2018 | | 2017 |
| 2017 | | 2016 | | 2017 | | 2016 | | | | | | | | |
| | | | | | | | |
Overhead recoveries | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 30 |
| |
Affiliate billings to us | 16 |
| | 13 |
| | 52 |
| | 51 |
| Affiliate billings to us | $ | 18 | | $ | 16 | | $ | 58 | | $ | 52 |
Billings to affiliates | 1 |
| | 1 |
| | 3 |
| | 3 |
| Billings to affiliates | 1 | | 1 | | 4 | | 3 |
Rentals paid to affiliate | 137 |
| | 155 |
| | 462 |
| | 473 |
| Rentals paid to affiliate | 121 | | 137 | | 365 | | 462 |
Fees paid to Bencap (1) | — |
| | 309 |
| | 108 |
| | 439 |
| Fees paid to Bencap (1) | — | | — | | — | | 108 |
__________________________________
| |
(1) | Amounts represent(1) Amount represents fees paid to Bencap through the date of the forfeiture of our investment during the first quarter of 2017. As a result of the investment forfeiture, Bencap is no longer an affiliate. |
DIP Financing
In connection with its voluntary bankruptcy filing, AREC entered into a DIP Credit Agreement with AE, of which the amounts outstanding were repaid during the thirdfirst quarter of 2017 with proceeds from2017. As a result of the sales of AREC’s assets. We earned interest income of approximately $0.1 million under the DIP Credit Agreement through September 30, 2017 (see Note 3 for further information).investment forfeiture, Bencap is no longer an affiliate.
Note 8.9. Derivative Instruments and Fair Value Measurements
Derivative Instruments
OurIn the normal course of our operations, our crude oil marketing segment is involved in the purchasepurchases and sale ofsells crude oil. We seek to profit by procuring the commodity as it is produced and then delivering the material to the end users or the intermediate use marketplace. As typical for the industry, suchthese transactions are made pursuant to the terms of forward month commodity purchase and/or sale contracts. Some of these contracts meet the definition of a derivative instrument, and therefore, we account for suchthese contracts at fair value, unless the normal purchase and sale exception is applicable. SuchThese types of underlying contracts are standard for the industry and are the governing document for our crude oil marketing segment. None of our derivative instruments have been designated as hedging instruments.
At September 30, 2017, our2018, we had in place 12 commodity purchase and sale contracts, of which four of these contracts had ano fair value associated with them as the contractual prices of zero. Atcrude oil were within the range of prices specified in the agreements. These commodity purchase and sale contracts encompassed approximately:
• 258 barrels per day of crude oil during October 2018 through December 31, 2016, the2018;
• 322 barrels per day of crude oil during January 2019 through April 2019;
• 258 barrels per day of crude oil during May 2019; and
• 322 barrels per day of crude oil during June 2019 through August 2019.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of forward month commodity contracts (derivatives) reflected in the accompanying unaudited condensed consolidated balance sheet were as follows at the date indicated (in thousands):
| | | December 31, 2016 | | September 30, 2018 | |
| Balance Sheet Location and Amount | | Balance Sheet Location and Amount | |
| Current | | Other | | Current | | Other | | Current | | Other | | Current | | Other |
| Assets | | Assets | | Liabilities | | Liabilities | | Assets | | Assets | | Liabilities | | Liabilities |
Asset derivatives: | | | | | | | | Asset derivatives: | | | | | | | |
Fair value forward hydrocarbon commodity | | | | | | | | Fair value forward hydrocarbon commodity | |
contracts at gross valuation | $ | 378 |
| | $ | — |
| | $ | — |
| | $ | — |
| contracts at gross valuation | $ | 263 | | $ | — | | $ | — | | $ | — |
Liability derivatives: | | | | | | | | Liability derivatives: | |
Fair value forward hydrocarbon commodity | | | | | | | | Fair value forward hydrocarbon commodity | |
contracts at gross valuation | — |
| | — |
| | 330 |
| | — |
| contracts at gross valuation | — | | — | | 247 | | — |
Less counterparty offsets | (266 | ) | | — |
| | (266 | ) | | — |
| Less counterparty offsets | — | | — | | — | | — |
As reported fair value contracts | $ | 112 |
| | $ | — |
| | $ | 64 |
| | $ | — |
| As reported fair value contracts | $ | 263 | | $ | — | | $ | 247 | | $ | — |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2016, our derivative valuations were comprised of two commodity purchase and sale contracts. These contracts encompassed approximately 65 barrels per day of diesel fuel during January through March 2017 and 145,000 barrels of crude oil during January 2017 through April 2017.
We only enter into commodity contracts with creditworthy counterparties and we evaluate our exposure to significant counterparties on an ongoing basis. At September 30, 20172018 and December 31, 2016,2017, we were not holding nor have we posted any collateral to support our forward month fair value derivative activity. We are not subject to any credit-risk related trigger events. We have no other financial investment arrangements that would serve to offset our derivative contracts.
Forward month commodity contracts (derivatives) reflected in the accompanying unaudited condensed consolidated statements of operations were as follows for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | |
| Earnings (losses) |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Revenues – Marketing | $ | (748 | ) | | $ | 180 |
| | $ | (48 | ) | | $ | 304 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gains (losses) | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Revenues – marketing | $ | (7) | | $ | (748) | | $ | (5) | | $ | (48) |
Fair Value Measurements
At September 30, 2017, we had no Level 1, 2 or 3 financial assets and liabilities with value. The following tables set forth, by level with the Level 1, 2 and 3 fair value hierarchy, the carrying values of our financial assets and liabilities at December 31, 2016the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | | | | | | | |
| Fair Value Measurements Using | | | | | | | | |
| Quoted Prices | | | | | | | | |
| in Active | | Significant | | | | | | |
| Markets for | | Other | | Significant | | | | |
| Identical Assets | | Observable | | Unobservable | | | | |
| and Liabilities | | Inputs | | Inputs | | Counterparty | | |
| (Level 1) | | (Level 2) | | (Level 3) | | Offsets | | Total |
| | | | | | | | | |
Derivatives: | | | | | | | | | |
Current assets | $ | — | | $ | 263 | | $ | — | | $ | — | | $ | 263 |
Current liabilities | — | | (247) | | — | | — | | (247) |
Net value | $ | — | | $ | 16 | | $ | — | | $ | — | | $ | 16 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | |
| Fair Value Measurements Using | | | | | | | | |
| Quoted Prices | | | | | | | | |
| in Active | | Significant | | | | | | |
| Markets for | | Other | | Significant | | | | |
| Identical Assets | | Observable | | Unobservable | | | | |
| and Liabilities | | Inputs | | Inputs | | Counterparty | | |
| (Level 1) | | (Level 2) | | (Level 3) | | Offsets | | Total |
Derivatives: | | | | | | | | | |
Current assets | $ | — | | $ | 166 | | $ | — | | $ | — | | $ | 166 |
Current liabilities | — | | (145) | | — | | — | | (145) |
Net value | $ | — | | $ | 21 | | $ | — | | $ | — | | $ | 21 |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Fair Value Measurements Using | | | | |
| Quoted Prices | | | | | | | | |
| in Active | | Significant | | | | | | |
| Markets for | | Other | | Significant | | | | |
| Identical Assets | | Observable | | Unobservable | | | | |
| and Liabilities | | Inputs | | Inputs | | Counterparty | | |
| (Level 1) | | (Level 2) | | (Level 3) | | Offsets | | Total |
Derivatives: | | | | | | | | | |
Current assets | $ | — |
| | $ | 378 |
| | $ | — |
| | $ | (266 | ) | | $ | 112 |
|
Current liabilities | — |
| | (330 | ) | | — |
| | 266 |
| | (64 | ) |
Net value | $ | — |
| | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | 48 |
|
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
These assets and liabilities are measured on a recurring basis and are classified based on the lowest level of input used to estimate their fair value. Our assessment of the relative significance of suchthese inputs requires judgments.
When determining fair value measurements, we make credit valuation adjustments to reflect both our own nonperformance risk and our counterparty’s nonperformance risk. When adjusting the fair value of derivative contracts for the effect of nonperformance risk, we consider the impact of netting and any applicable credit enhancements. Credit valuation adjustments utilize Level 3 inputs, such as credit scores to evaluate the likelihood of default by us or our counterparties. At September 30, 20172018 and December 31, 2016,2017, credit valuation adjustments were not significant to the overall valuation of our fair value contracts. As a result, applicable fair value assets and liabilities are included in their entirety in the fair value hierarchy.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nonrecurring Fair Value Measurements
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. We had no items requiring nonrecurring fair value measurements during the nine months ended September 30, 2018. The following table presents categories of long-lived assets that were subject to non-recurringnonrecurring fair value measurements during the nine months ended September 30, 2017 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at the End of the Reporting Period Using | | | | | | |
| | | Quoted Prices | | | | | | |
| | | in Active | | Significant | | | | |
| Carrying | | Markets for | | Other | | Significant | | Total |
| Value at | | Identical Assets | | Observable | | Unobservable | | Non-Cash |
| September 30, | | and Liabilities | | Inputs | | Inputs | | Impairment |
| 2017 | | (Level 1) | | (Level 2) | | (Level 3) | | Loss |
| | | | | | | | | |
Oil and gas properties — | | | | | | | | | |
Investment in AREC | $ | 3,200 | | $ | — | | $ | 3,200 | | $ | — | | $ | 3,505 |
Investment in VestaCare | — | | — | | — | | — | | 2,500 |
| | | | | | | | | $ | 6,005 |
Note 10. Share-Based Compensation Plan
In May 2018, our shareholders approved the 2018 LTIP, a long-term incentive plan under which any employee or non-employee director who provides services to us is eligible to participate in the plan. The 2018 LTIP, which is overseen by the Compensation Committee of our Board of Directors, provides for the grant of various types of equity awards, of which restricted stock unit awards and performance-based compensation awards were granted during the second quarter of 2018. The maximum number of shares authorized for issuance under the 2018 LTIP is 150,000 shares, and the 2018 LTIP is effective until May 8, 2028. We began awarding share-based compensation to eligible employees and directors in June 2018. After giving effect to awards granted under the 2018 LTIP and assuming the potential achievement of the maximum amounts of the performance factors through September 30, 2018, a total of 120,403 shares were available for issuance. During the three and nine months ended September 30, 2018, we recognized $0.1 million and $0.1 million, respectively, of compensation expense in connection with equity-based awards as the grant date for all awards under the 2018 LTIP was June 29, 2018.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at the End of the Reporting Period Using | | |
| | | Quoted Prices | | | | | | |
| | | in Active | | Significant | | | | |
| Carrying | | Markets for | | Other | | Significant | | Total |
| Value at | | Identical Assets | | Observable | | Unobservable | | Non-Cash |
| September 30, | | and Liabilities | | Inputs | | Inputs | | Impairment |
| 2017 | | (Level 1) | | (Level 2) | | (Level 3) | | Loss |
| | | | | | | | | |
Investment in AREC | $ | 3,200 |
| | $ | — |
| | $ | 3,200 |
| | $ | — |
| | $ | 3,505 |
|
Investment in VestaCare | — |
| | — |
| | — |
| | — |
| | 2,500 |
|
| | | | | | | | | $ | 6,005 |
|
If dividends are paid with respect to our common shares during the vesting period, an equivalent amount will accrue and be held by us without interest until the restricted stock unit awards and performance share unit awards vest, at which time the amount will be paid to the recipient. If the award is forfeited prior to vesting, the accrued dividends will also be forfeited. At September 30, 2018, we had $5 thousand of accrued dividend amounts for awards granted under the 2018 LTIP.
Restricted Stock Unit Awards
A restricted stock unit award is a grant of a right to receive our common shares in the future at no cost to the recipient apart from fulfilling service and other conditions once a defined vesting period expires, subject to customary forfeiture provisions. A restricted stock unit award will either be settled by the delivery of common shares or by the payment of cash based upon the fair market value of a specified number of shares, at the discretion of the Compensation Committee, subject to the terms of the applicable award agreement. The Compensation Committee intends for these awards to vest with the settlement of common shares. Restricted stock unit awards generally vest at a rate of approximately 33 percent per year beginning one year after the grant date and are non-vested until the required service periods expire.
The fair value of a restricted stock unit award is based on the market price per share of our common shares on the date of grant. Compensation expense is recognized based on the grant date fair value over the requisite service or vesting period.
The following table presents restricted stock unit award activity for the periods indicated:
| | | | | | | | | | | |
| | | Weighted- |
| | | Average Grant |
| Number of | | Date Fair Value |
| Shares | | per Share (1) |
| | | |
Restricted stock unit awards at January 1, 2018 | — | | $ | — |
Granted (2) | 13,733 | | $ | 43.00 |
Vested | — | | $ | — |
Forfeited | — | | $ | — |
Restricted stock unit awards at September 30, 2018 | 13,733 | | $ | — |
_______________
(1) Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.
(2) The aggregate grant date fair value of restricted stock unit awards issued during 2018 was $0.6 million based on a grant date market price of our common shares of $43.00 per share.
Unrecognized compensation cost associated with restricted stock unit awards was approximately $0.5 million at September 30, 2018. Due to the graded vesting provisions of these awards, we expect to recognize the remaining compensation cost for these awards over a weighted-average period of 1.6 years.
Performance Share Unit Awards
An award granted as performance-based compensation is awarded to a participant contingent upon attainment of our future performance goals during a performance cycle. The performance goals were pre-established by the Compensation Committee. Following the end of the performance period, the holder of a performance-based compensation award is entitled to receive payment of an amount not exceeding the number of shares of common stock subject to, or the maximum value of, the performance-based compensation award, based on the achievement of the performance measures for the performance period. The performance share unit awards generally vest in full approximately three years after grant date, and are non-vested until the required service period expires.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of a performance share unit award is based on the market price per share of our common shares on the date of grant. Compensation expense is recognized based on the grant date fair value over the requisite service or vesting period. Compensation expense will be adjusted for the performance goals on a quarterly basis.
The following table presents performance share unit award activity for the periods indicated:
| | | | | | | | | | | | | | |
| | | | Weighted- |
| | | | Average Grant |
| | Number of | | Date Fair Value |
| | Shares | | per Share (1) |
| | | | |
Performance share unit awards at January 1, 2018 | | — | | $ | — |
Granted (2) | | 7,932 | | $ | 43.00 |
Vested | | — | | $ | — |
Forfeited | | — | | $ | — |
Performance share unit awards at September 30, 2018 | | 7,932 | | $ | — |
_______________
(1) Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.
(2) The aggregate grant date fair value of performance share unit awards issued during 2018 was $0.4 million based on a grant date market price of our common share of $43.00 per share and assuming a performance factor of 100 percent.
Unrecognized compensation cost associated with performance share unit awards was approximately $0.3 million at September 30, 2018. We expect to recognize the remaining compensation cost for these awards over a weighted-average period of 2.9 years.
Note 9.11. Supplemental Cash Flow Information
Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):
| | | | | | | | | | | |
| Nine Months Ended | | |
| September 30, | | |
| 2018 | | 2017 |
| | | |
Cash paid for interest | $ | 60 | | $ | 10 |
Cash paid for federal and state income taxes | 811 | | 381 |
| | | |
Non-cash transactions: | | | |
Change in accounts payable related to property and equipment additions | (84) | | — |
Property and equipment acquired under capital leases | 1,208 | | 1,808 |
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 |
| | | |
Cash paid for federal and state taxes | $ | 381 |
| | $ | 2,582 |
|
| | | |
Non-cash transactions: | | | |
Change in accounts payable related to property and equipment additions | — |
| | 382 |
|
Property and equipment acquired under capital leases | 1,808 |
| | — |
|
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10.12. Commitments and Contingencies
Capital Lease Obligations
During the third quarter of 2017 and 2018, we entered into capital leases for certain of our truckstractors in our crude oil marketing segment. The following table summarizes our principal contractual commitments outstanding under our capital leases at September 30, 20172018 for the next five years, and in total thereafter (in thousands):
| | | | | |
Remainder of 2018 | $ | 168 |
2019 | 671 |
2020 | 671 |
2021 | 670 |
2022 | 527 |
Thereafter | 158 |
Total minimum lease payments | 2,865 |
Less: Amount representing interest | (256) |
Present value of capital lease obligations | 2,609 |
Less current portion of capital lease obligations | (568) |
Total long-term capital lease obligations | $ | 2,041 |
Operating Lease Obligations
We lease certain property and equipment under noncancelable and cancelable operating leases. Our significant lease agreements consist of (i) arrangements with independent truck owner-operators for use of their equipment and driver services; (ii) leased office space; and (iii) certain lease and terminal access contracts in order to provide tank storage and dock access for our crude oil marketing business. Currently, our significant lease agreements have terms that range from one to eight years.
Lease expense is charged to operating costs and expenses on a straight-line basis over the period of expected economic benefit. Contingent rental payments are expensed as incurred. We are generally required to perform routine maintenance on the underlying leased assets. Maintenance and repairs of leased assets resulting from our operations are charged to expense as incurred. Rental expense was as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Rental expense | $ | 2,869 | | $ | 2,874 | | $ | 8,291 | | $ | 9,332 |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
Remainder of 2017 | $ | 100 |
|
2018 | 398 |
|
2019 | 398 |
|
2020 | 398 |
|
2021 | 398 |
|
Thereafter | 255 |
|
Total minimum lease payments | 1,947 |
|
Less: Amount representing interest | (176 | ) |
Present value of capital lease obligations | 1,771 |
|
Less current portion of capital lease obligations | (306 | ) |
Total long-term capital lease obligations | $ | 1,465 |
|
At September 30, 2018, rental obligations under non-cancelable operating leases and terminal arrangements with terms in excess of one year for the next five years and thereafter are payable as follows (in thousands):
| | | | | |
Remainder of 2018 | $ | 1,536 |
2019 | 3,551 |
2020 | 1,780 |
2021 | 1,651 |
2022 | 1,570 |
Thereafter | 2,966 |
Total operating lease payments | $ | 13,054 |
Insurance Policies
Under our automobile and workers’ compensation insurance policies that were in place through September 30, 2017, we canpre-funded our estimated losses, and therefore, we could either receive a return of premium paid or be assessed for additional premiums up to pre-established limits. Additionally, in certain instances, the risk of insured losses iswas shared with a group of similarly situated entities.entities through an insurance captive. We have appropriately recognized estimated expenses and liabilities related to these policies for losses incurred but not reported to us or our insurance carriercarrier. The amount of pre-funded insurance premiums left to cover potential future losses are presented in the table below. If the potential insurance claims do not further develop, the pre-funded premiums will be returned to us as a premium refund.
Effective October 1, 2017, we changed the structure of our automobile and workers’ compensation insurance policies. We exited the group captive and now establish a liability for expected claims incurred but not reported on a monthly basis as we move forward. As claims are paid, the liability is relieved. The amount of pre-funded insurance premiums left to cover potential future losses and our accruals for automobile and workers’ compensation claims were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
| | | |
Pre-funded premiums for losses incurred but not reported | $ | 497 | | $ | 988 |
Accrued automobile and workers’ compensation claims | 1,721 | | 450 |
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Estimated expenses and liabilities | $ | 1,573 |
| | $ | 2,657 |
|
We maintain a self-insurance program for managing employee medical claims. A liability for expected claims incurred but not reported is established on a monthly basis. As claims are paid, the liability is relieved. We also maintain third party insurance stop-loss coverage for annual aggregate medical claims exceeding $4.5$6.0 million. Medical accrual amounts were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
| | | |
Accrued medical claims | $ | 1,100 | | $ | 1,329 |
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
Accrued medical claims | $ | 1,424 |
| | $ | 1,411 |
|
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Litigation
AREC was named as a defendant in a number of Louisiana lawsuits involving alleged environmental contamination from prior drilling operations. Such suits typically allege improper disposal of oilfield wastes in earthen pits, with one matter involving allegations that drilling operations in 1986 contributed to the formation of a sinkhole in 2012 (the “Sinkhole Cases”). The Sinkhole Cases, while arising from a singular event, include a number of different lawsuits brought in Louisiana State Court and one consolidated action in the United States District Court for the Eastern District of Louisiana. In addition to the Sinkhole Cases, AREC is also currently involved in two other suits. These suits are styled LePetit Chateau Deluxe v. Adams Resources Exploration Corporation dated March 2004 and Henning Management, LLC v. Adams Resources Exploration Corporation dated November 2013. Each suit involves multiple industry defendants with substantially larger proportional interest in the properties. In the LePetit Chateau Deluxe matter, all the larger defendants have settled the case.
The plaintiffs in each of these matters are seeking unspecified compensatory and punitive damages. While we do not believe that these claims will result in a material adverse effect on us, significant attorney fees may be incurred to address claims related to these suits. At December 31, 2016, we had $0.5 million accrued for future legal costs for these matters. During May 2017, AREC was dismissed without prejudice as a party to the suit with Henning Management. We also determined that the likelihood of future claims from other remaining litigation was remote. As such, we released the $0.5 million accrual for future legal settlements related to these matters. At September 30, 2017, we had no remaining accruals for legal costs for these matters.
From time to time as incidental to our operations, we may become involved in various lawsuits and/or disputes. Primarily as an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, worker compensation claims and other items of general liability as would be typical for the industry. We are presently unaware of any claims against us that are either outside the scope of insurance coverage or that may exceed the level of insurance coverage and could potentially represent a material adverse effect on our financial position or results of operations.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Subsequent Event
On October 1, 2018, we completed the purchase of a trucking company for $10.0 million that owned approximately 113 tractor trailer trucks and 125 trailers operating in the Red River area in North Texas and South Central Oklahoma. This acquisition will be included in our crude oil marketing segment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and accompanying Notes included in this quarterly report on Form 10-Q and the Audited Consolidated Financial Statements and related Notes, together with our discussion and analysis of financial position and results of operations, included in our annual report on Form 10-K for the year ended December 31, 20162017 (the “2016“2017 Form 10-K”), as filed on March 31, 201712, 2018 with the U.S. Securities and Exchange Commission (“SEC”). Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
Cautionary Statement Regarding Forward-Looking Information
This quarterly report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and information that are based on our beliefs, as well as assumptions made by us and information currently available to us. When used in this document, words such as “anticipate,” “project,” “expect,” “plan,” “seek,” “goal,” “estimate,” “forecast,” “intend,” “could,” “should,” “would,” “will,” “believe,” “may,” “potential” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we believe that our expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions as described in more detail under Part I, Item 1A of our 20162017 Form 10-K and within Part II, Item 1A of this quarterly report. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements. The forward-looking statements in this quarterly report speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.
Overview of Business
Adams Resources & Energy, Inc. (“AE”), a Delaware corporation organized in 1973, and its subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation.transportation primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.
Historically, we have operated and reported in three business segments: (i) crude oil marketing, transportation and storage, (ii) tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation and (iii) upstream crude oil and natural gas exploration and production. We exited the upstream crude oil and natural gas exploration and production business during the third quarter of 2017 with the sale of our upstream crude oil and natural gas exploration and production assets.
Recent Developments
Subsidiary Bankruptcy, Deconsolidation and Sale
On April 21, 2017, oneassets as a result of oura voluntary bankruptcy filing for this subsidiary. The bankruptcy case involving the wholly owned subsidiaries, Adams Resources Exploration Corporation (“AREC”), filed a voluntary petitionsubsidiary through which this business was conducted was dismissed in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”), Case No. 17-10866 (KG). AREC operated its businessOctober 2018, and managed its properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. AE was the primary creditor in the Chapter 11 process.
During the second quarter of 2017, we recorded a non-cash charge of approximately $1.6 million associated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on an expected sales transaction price of approximately $5.0 million, net of estimated transaction costs. During the third quarter of 2017, Bankruptcy Court approval was obtained on three asset purchase and sales agreements with three unaffiliated parties, and AREC closed on the sales of substantially all of its assets.
In October 2017, AREC submitted its liquidation plan to the Bankruptcy Court for approval. In connection with the sales of these assets and submission of the liquidation plan, we recognized an additional loss of $1.9 million during the third quarter of 2017, which represents the difference between the proceeds we expect final settlement to be paid upon settlement of the bankruptcy, net of anticipated remaining closing costs identified as part of the liquidation plan, and the book value of our cost method investment. We anticipate completing the bankruptcy process with a confirmed planoccur during the fourth quarter of 2017.2018.
In connection with
Recent Developments
On October 1, 2018, we completed the bankruptcy filing, AREC entered intopurchase of a DIP Credit Agreement with AE, which was repaid with proceeds from the sale of the assets. See Note 3trucking company for $10.0 million that owned approximately 113 tractor trailer trucks and 125 trailers operating in the Notes to Unaudited Condensed Consolidated Financial Statements for further information.
Voluntary Early Retirement Program
In August 2017, we implemented a voluntary early retirement program for certain employees, which resultedRed River area in an increase in personnel expenses of approximately $1.4 million, of which approximately $1.0 million wasNorth Texas and South Central Oklahoma. This acquisition will be included in general and administrative expenses and $0.4 million was included in operating expenses.our crude oil marketing segment.
Results of Operations
Marketing
Our crude oil marketing segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Nine Months Ended | | | | |
| September 30, | | | | | | September 30, | | | | |
| 2018 | | 2017 | | Change (1) | | 2018 | | 2017 | | Change (1) |
| | | | | | | | | | | |
Revenues | $ | 453,626 | | $ | 282,229 | | 61 | % | | $ | 1,266,055 | | $ | 872,020 | | 45 | % |
Operating earnings | 2,982 | | 2,412 | | 24 | % | | 11,712 | | 5,496 | | 113 | % |
Depreciation and amortization | 1,277 | | 1,911 | | (33) | % | | 4,110 | | 5,957 | | (31) | % |
Driver commissions | 3,099 | | 2,962 | | 5 | % | | 9,155 | | 9,153 | | — | % |
Insurance | 1,435 | | 1,358 | | 6 | % | | 3,849 | | 3,855 | | — | % |
Fuel | 1,479 | | 1,249 | | 18 | % | | 4,647 | | 3,887 | | 20 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2017 | | 2016 | | Change (1) | | 2017 | | 2016 | | Change (1) |
| | | | | | | | | | | |
Revenues | $ | 282,229 |
| | $ | 243,704 |
| | 16 | % | | $ | 872,020 |
| | $ | 758,627 |
| | 15 | % |
Operating earnings | 2,412 |
| | 1,265 |
| | 91 | % | | 5,496 |
| | 13,148 |
| | (58 | %) |
Depreciation | 1,911 |
| | 2,418 |
| | (21 | %) | | 5,957 |
| | 7,621 |
| | (22 | %) |
Driver commissions | 2,962 |
| | 3,361 |
| | (12 | %) | | 9,153 |
| | 11,702 |
| | (22 | %) |
Insurance | 1,358 |
| | 1,816 |
| | (25 | %) | | 3,855 |
| | 5,934 |
| | (35 | %) |
Fuel | 1,249 |
| | 1,185 |
| | 5 | % | | 3,887 |
| | 4,162 |
| | (7 | %) |
| |
(1) | Represents the percentage increase (decrease) from the prior year periods. |
_______________
(1) Represents the percentage increase (decrease) from the prior year period.
Supplemental volumeVolume and price information were as follows for the periods indicated:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Field level purchase volumes – per day (1) | | | | | | | |
Crude oil – barrels | 64,104 |
| | 61,200 |
| | 65,760 |
| | 75,083 |
|
| | | | | | | |
Average purchase price | | | | | | | |
Crude oil – per barrel | $ | 46.78 |
| | $ | 42.33 |
| | $ | 47.38 |
| | $ | 37.26 |
|
| |
(1) | Reflects the volume purchased from third parties at the field level of operations. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Field level purchase volumes – per day (1) | | | | | | | |
Crude oil – barrels | 70,635 | | 64,104 | | 68,767 | | 65,760 |
| | | | | | | |
Average purchase price | | | | | | | |
Crude oil – per barrel | $ | 71.69 | | $ | 46.78 | | $ | 68.11 | | $ | 47.38 |
_______________
(1) Reflects the volume purchased from third parties at the field level of operations.
Revenues and Operating Earnings. Crude oil marketing revenues increased by $171.4 million during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily as a result of an increase in the market price of crude oil, which increased revenues by approximately $129.5 million, and an increase inhigher overall crude oil volumes. Crudevolumes, which increased revenues by approximately $41.9 million. The average crude oil price received was $46.78 for the three months ended September 30, 2017, which increased to $71.69 for the three months ended September 30, 2018.
Our crude oil marketing operating earnings for the three months ended September 30, 2018 increased by $0.6 million as compared to the same period in 2017, due to increased crude oil volumes increased during the 2017 period, primarily as a result of increased wellhead purchases, partially offset by volume declines as a result of the effects of Hurricane Harvey, which affected the Gulf Coast area in late August and early September of 2017. During the third quarter of 2017, volumes began increasing as activity in our marketing areas has increased in recent months, which resulted in increased operatingimproved market conditions. Operating earnings partially offsetwere also impacted by inventory valuation changes (as shown in the table below). Operating earnings were also impacted by the implementation in August 2017
Crude oil marketing revenues increased by $394.0 million during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily as a result of an increase in the market price of crude oil. The increase inoil, which increased revenues by approximately $338.7 million, and higher overall crude oil prices during the 2017 period has offset the decline involumes, which increased revenues by approximately $55.3 million. The average crude oil marketing volumes duringprice received was $47.38 for the nine months ended September 30, 2017, as comparedwhich increased to $68.11 for the same period in 2016. nine months ended September 30, 2018.
Our crude oil marketing operating earnings for the nine months ended September 30, 2018 increased by $6.2 million as compared to the same period in 2017, were adversely affected bydue to increased crude oil volume declines, including declines as a result of the effects of Hurricane Harvey as discussed above, as well as a narrowing of margins during the 2017 period.volumes and improved market conditions. Operating earnings were also impacted by inventory valuation changes (as shown in the table below) and the voluntary early retirement program discussed above.changes.
Expenses. Driver commissions decreased during the three and nine months ended September 30, 2017 as compared to the same periods in 2016 as a result of the decrease in crude oil marketing volumes for the nine month period in 2017. Insurance costs decreased during the three and nine months ended September 30, 2017 as compared to the same periods in 2016 as a result of favorable driver safety performance and reduced mileage during 2017 as compared to the same periods in 2016. Fuel costs increased by $0.1 million during the three months ended September 30, 20172018 as compared to the same period in 20162017, primarily due to increased driver pay and an increase in crude oil marketing volumes, partially offset by a decrease in the number of drivers in the 2018 period as compared to the 2017 period. Insurance costs were mostly consistent with the same period in 2017, primarily as a result of higher insurance claims in the 2018 period, offset by decreased mileage during the 2018 period as compared to the 2017 period, and favorable driver safety performance during the 2018 period. Fuel costs increased marketing volumesby $0.2 million during the three months ended September 30, 2018 as compared to the same period in 2017, consistent with higher crude oil prices during the 2018 period and an increase in the price of diesel fuel during the 2018 period as compared to the 2017 periodperiod. Depreciation and amortization expense decreased by $0.6 million during the three months ended September 30, 2018 as compared to the same period in 2016. Fuel costs decreased2017, primarily as a result of certain tractors, trailers and field equipment being fully depreciated during 2017.
Driver commissions during the nine months ended September 30, 2018 were consistent with the same period in 2017, with increased driver pay and an increase in crude oil marketing volumes, offset by a decrease in the number of drivers in the 2018 period as compared to the 2017 period. Insurance costs were consistent with the same period in 2017, primarily as a result of decreased mileage during the 2018 period as compared to the 2017 period, and favorable driver safety performance during the 2018 period, offset by higher insurance claims. Fuel costs increased by $0.8 million during the nine months ended September 30, 2018 as compared to the same period in 20162017 consistent with decreased marketing volumeshigher crude oil prices during the 2018 period and an increase in the price of diesel fuel during the 2018 period as compared to the 2017 periodperiod. Depreciation and amortization expense decreased by $1.8 million during the nine months ended September 30, 2018 as compared to the same period in 2016.2017, primarily as a result of certain tractors, trailers and field equipment being fully depreciated during 2017.
Field Level Operating Earnings (Non-GAAP Financial Measure). Inventory valuations and forward commodity contract (derivatives or mark-to-market) valuations are two significant factors affecting comparative crude oil marketing segment operating earnings. As a purchaser and shipper of crude oil, we hold inventory in storage tanks and third-party pipelines. Inventory sales turnover occurs approximately every three days, but the quantity held in stock at the end of a given period can be reasonably consistent. During periods of increasing crude oil prices, we recognize inventory liquidation gains while during periods of falling prices, we recognize inventory liquidation and valuation losses.
Crude oil marketing operating earnings are alsocan be affected by the valuations of our forward month commodity contracts (derivative instruments). These non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. We generally enter into these derivative contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level). The valuation of derivative instruments at period end requires the recognition of non-cash “mark-to-market” gains and losses.
The impact of inventory liquidations and derivative valuations on our crude oil marketing segment operating earnings is summarized in the following reconciliation of our non-GAAP financial measure for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
As reported segment operating earnings (1) | $ | 2,982 | | $ | 2,412 | | $ | 11,712 | | $ | 5,496 |
Add (subtract): | | | | | | | |
Inventory liquidation gains | (60) | | (1,954) | | (2,535) | | — |
Inventory valuation losses | — | | — | | — | | 109 |
Derivative valuation losses | 7 | | 748 | | 5 | | 48 |
Field level operating earnings (2) | $ | 2,929 | | $ | 1,206 | | $ | 9,182 | | $ | 5,653 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
As reported segment operating earnings | $ | 2,412 |
| | $ | 1,265 |
| | $ | 5,496 |
| | $ | 13,148 |
|
Add (subtract): | | | | | | | |
Inventory liquidation gains | (1,954 | ) | | — |
| | — |
| | (5,779 | ) |
Inventory valuation losses | — |
| | 432 |
| | 109 |
| | — |
|
Derivative valuation (gains) losses | 748 |
| | (181 | ) | | 48 |
| | (305 | ) |
Field level operating earnings (1) | $ | 1,206 |
| | $ | 1,516 |
| | $ | 5,653 |
| | $ | 7,064 |
|
_______________ | |
(1) | The use of field level operating earnings is (a) unique to us, (b) not a substitute for a GAAP measure and (c) not comparable to any similar measures developed by industry participants. We utilize such data to evaluate the profitability of our operations. |
(1) Segment operating earnings included inventory liquidation gains of $0.1 million and $2.5 million for the three and nine months ended September 30, 2018, respectively, inventory liquidation gains of $2.0 million for the three months ended September 30, 2017 and inventory valuation losses of $0.1 million for the nine months ended September 30, 2017.
(2) The use of field level operating earnings is unique to us, not a substitute for a GAAP measure and may not be comparable to any similar measures developed by industry participants. We utilize this data to evaluate the profitability of our operations.
Field level operating earnings and field level purchase volumes (see above table) depict our day-to-day operation of acquiring crude oil at the wellhead, transporting the product and delivering the product to market sales point. Field level operating earnings decreasedincreased during the three and nine months ended September 30, 20172018 as compared to the same periods in 20162017 due to an increase in the market price of crude oil, which increased personnel costs related to the voluntary early retirement program, partially offset by increased volumes andrevenues, the effects of a newly negotiatedlower barge contract, whichcosts, reduced operating expenses, during the third quarter of 2017.increased crude oil volumes and improved market conditions.
We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2018 | | | | December 31, 2017 | | |
| | | Average | | | | Average |
| Barrels | | Price | | Barrels | | Price |
| | | | | | | |
Crude oil inventory | 476,703 | | $ | 72.92 | | 198,011 | | $ | 61.57 |
|
| | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| | | Average | | | | Average |
| Barrels | | Price | | Barrels | | Price |
| | | | | | | |
Crude oil inventory | 434,746 |
| | $ | 51.52 |
| | 255,146 |
| | $ | 51.22 |
|
During the third quarter of 2017, the number of barrels in our inventory increased by approximately 70% from December 31, 2016 and by approximately 25% from June 30, 2017 primarily as a result of the effects of Hurricane Harvey. As a result of the hurricane, certain sections of the Intercoastal Waterway were shut down, which delayed crude oil shipments to and from barge terminals, resulting in an increase in barrels in our inventory. By the end of October 2017, the level of inventory has decreased to more normalized levels. This increase in inventory at September 30, 2017 also resulted in a decrease in our overall cash balance due to the timing of inventory purchases and sales.
Historically, prices received for crude oil have been volatile and unpredictable with price volatility expected to continue. See “Part I, Item 1A. Risk Factors” in our 20162017 Form 10-K.
Transportation
Our transportation segment revenues, operating earnings (losses) and selected costs were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Nine Months Ended | | | | |
| September 30, | | | | | | September 30, | | | | |
| 2018 | | 2017 | | Change (1) | | 2018 | | 2017 | | Change (1) |
| | | | | | | | | | | |
Revenues | $ | 14,265 | | $ | 13,082 | | 9 | % | | $ | 41,509 | | $ | 40,153 | | 3 | % |
Operating earnings (losses) | $ | 790 | | $ | (915) | | 186 | % | | $ | 2,002 | | $ | (920) | | 318 | % |
Depreciation and amortization | $ | 1,063 | | $ | 1,329 | | (20) | % | | $ | 2,904 | | $ | 4,392 | | (34) | % |
Driver commissions | $ | 3,163 | | $ | 2,912 | | 9 | % | | $ | 8,769 | | $ | 8,640 | | 1 | % |
Insurance | $ | 1,317 | | $ | 1,598 | | (18) | % | | $ | 3,921 | | $ | 4,051 | | (3) | % |
Fuel | $ | 1,770 | | $ | 1,582 | | 12 | % | | $ | 5,368 | | $ | 4,691 | | 14 | % |
Maintenance expense | $ | 1,221 | | $ | 1,532 | | (20) | % | | $ | 4,296 | | $ | 4,641 | | (7) | % |
Mileage (000s) | 4,860 | | 5,404 | | (10) | % | | 14,629 | | 16,647 | | (12) | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2017 | | 2016 | | Change (1) | | 2017 | | 2016 | | Change (1) |
| | | | | | | | | | | |
Revenues | $ | 13,082 |
| | $ | 12,310 |
| | 6 | % | | $ | 40,153 |
| | $ | 39,517 |
| | 2 | % |
Operating earnings (losses) | $ | (915 | ) | | $ | (430 | ) | | 113 | % | | $ | (920 | ) | | $ | 444 |
| | (307 | %) |
Depreciation | $ | 1,329 |
| | $ | 1,701 |
| | (22 | %) | | $ | 4,392 |
| | $ | 5,536 |
| | (21 | %) |
Driver commissions | $ | 2,912 |
| | $ | 2,672 |
| | 9 | % | | $ | 8,640 |
| | $ | 8,477 |
| | 2 | % |
Insurance | $ | 1,598 |
| | $ | 1,285 |
| | 24 | % | | $ | 4,051 |
| | $ | 3,880 |
| | 4 | % |
Fuel | $ | 1,582 |
| | $ | 1,365 |
| | 16 | % | | $ | 4,691 |
| | $ | 4,124 |
| | 14 | % |
Maintenance expense | $ | 1,532 |
| | $ | 1,350 |
| | 13 | % | | $ | 4,641 |
| | $ | 3,991 |
| | 16 | % |
Mileage (000s) | 5,404 |
| | 5,315 |
| | 2 | % | | 16,647 |
| | 16,800 |
| | (1 | %) |
_______________ | |
(1) | Represents the percentage increase (decrease) from the prior year periods. |
(1) Represents the percentage increase (decrease) from the prior year period.
Our revenue rate structure includes a component for fuel costs in which fuel cost fluctuations are largely passed through to the customer over time. Revenues, net of fuel costscost, were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Total transportation revenue | $ | 14,265 | | $ | 13,082 | | $ | 41,509 | | $ | 40,153 |
Diesel fuel cost | (1,770) | | (1,582) | | (5,368) | | (4,691) |
Revenues, net of fuel cost (1) | $ | 12,495 | | $ | 11,500 | | $ | 36,141 | | $ | 35,462 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Total transportation revenue | $ | 13,082 |
| | $ | 12,310 |
| | $ | 40,153 |
| | $ | 39,517 |
|
Diesel fuel cost | (1,582 | ) | | (1,365 | ) | | (4,691 | ) | | (4,124 | ) |
Revenues, net of fuel costs (1) | $ | 11,500 |
| | $ | 10,945 |
| | $ | 35,462 |
| | $ | 35,393 |
|
| |
(1) | Revenues, net of fuel costs is a non-GAAP financial measure and is utilized for internal analysis of the results of our transportation segment. |
_______________
(1) Revenues, net of fuel costscost, is a non-GAAP financial measure and is utilized for internal analysis of the results of our transportation segment.
Transportation revenues increased by $1.2 million during the three and ninemonths ended September 30, 2018 as compared to the three months ended September 30, 2017, primarily as a result of a new transportation agreement entered into in January 2018 and higher transportation rates in the 2018 period, partially offset by a decrease in revenue as a result of less miles traveled in the current period. Revenues, net of fuel cost, increased activity in our transportation segment. During the third quarter of 2017, demand for our services increased slightly as indicated by the increased mileage$1.0 million during the 2017three months ended September 30, 2018, primarily as a result of higher revenues in the 2018 period, as compared to the same period in 2016. We began to seepartially offset by an increase in transportationthe price of diesel and lower miles traveled during the 2018 period. Transportation activity by the end of September 2017, andhas continued to increase as we continue to work onpursue our strategy of streamlining operations and diversifying offerings in our transportation segment. We have continued to work with customers to increase our transportation rates as well as streamlining operations in low margin areas. This increase in services has resulted in an increase in revenues, an increase in variable expenses related to transportation activities and a decrease in mileage as we reduce low margin operations.
Fuel costs increased by $0.2 million as a result of an increase in the price of diesel during the 2018 period as compared to the 2017 period, partially offset by a decrease in miles traveled. Depreciation and amortization expense decreased by $0.3 million during the three months ended September 30, 2018 as compared to the same period in 2017, primarily as a result of certain tractors, trailers and field equipment being fully depreciated during 2017, partially offset by the purchase of new tractors in the the second and third quarters of 2018, which will result in increased depreciation expense in future periods.
Transportation revenues increased by $1.4 million during the nine months ended September 30, 2018, primarily as a result of the new transportation agreement entered into in January 2018 and higher transportation rates in the 2018 period. Revenues, net of fuel cost, increased by $0.7 million during the nine months ended September 30, 2018, primarily as a result of higher revenues in the 2018 period, partially offset by an increase in the price of diesel fuel and lower miles traveled during the 2018 period. This increase in services resulted in an increase in variable expenses related to transportation activities.
Fuel costs increased by $0.7 million as a result of increased mileage and an increase in the price of diesel during the 2018 period as compared to the 2017 periodsperiod, partially offset by a decrease in miles traveled. Depreciation and amortization expense decreased by $1.5 million during the nine months ended September 30, 2018 as compared to the same periodsperiod in 2016. Our operating results2017, primarily as a result of certain tractors, trailers and field equipment being fully depreciated during 2017, partially offset by the purchase of new tractors in the second and third quarters of 2018, which will result in increased depreciation expense in future periods. During the remainder of 2018, we expect to purchase additional tractors, which will reduce the age of our fleet and increase depreciation expense. See “Other Items” below for the three and nine months ended September 30, 2017, were also adversely impacted by Hurricane Harvey, which affected the Gulf Coast area in late August and early September of 2017, resulting in decreased revenues and lower mileage during the period.further information regarding our purchase commitments.
Oil and Gas
OilOur upstream crude oil and natural gas exploration and production segment revenues and operating earnings (losses) arewere primarily a function of crude oil and natural gas prices and volumes. We accounted for our upstream operations under the successful efforts method of accounting. As a result of AREC’s bankruptcy filing in April 2017 and our loss of control of this subsidiary, we deconsolidated AREC effective with theits bankruptcy filing in 2017 and recorded our investment in AREC under the cost method of accounting. Our results for the nine months ended September 30, 2017 periodswere for the period in which AREC was consolidated (January 1, 2017 through April 30, 2017).
Our upstream crude oil and natural gas exploration and production segment revenues, operating earnings and depreciation and depletion expense were as follows for the nine months ended September 30, 2017 (in thousands):
| | | | | | | | |
| | |
Revenues (1) | | $ | 1,427 |
Operating earnings (1) | | 53 |
Depreciation and depletion (1) | | 423 |
_______________
(1) Results for the nine months ended September 30, 2017 are only through April 30, 2017, during the period in which AREC was consolidated.
Revenues, operating earnings (losses) and depreciation and depletion expense for our oil and gas segment were as follows for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2017 | | 2016 | | Change (1) | | 2017 | | 2016 | | Change (1) |
| | | | | | | | | | | |
Revenues (2) | $ | — |
| | $ | 863 |
| | (100 | %) | | $ | 1,427 |
| | $ | 2,427 |
| | (41 | %) |
Operating earnings (losses) (2) | — |
| | (543 | ) | | 100 | % | | 53 |
| | (1,222 | ) | | 104 | % |
Depreciation/depletion (2) | — |
| | 395 |
| | (100 | %) | | 423 |
| | 1,228 |
| | (66 | %) |
| |
(1) | Represents the percentage increase (decrease) from the prior year periods.
|
| |
(2) | Results for the 2017 periods represent amounts from January 1, 2017 through April 30, 2017. |
Revenues, operating earnings (losses) and depreciation and depletion expense from our oil and gas segment decreased during the three and nine months ended September 30, 2017 primarily as a result of the deconsolidation of AREC effective withthis subsidiary due to its bankruptcy filing in April 2017 (four monthsfiling.
Supplemental volumeVolume and price information were as follows for the periods indicated (volumes in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Crude oil | | | | | | | |
Volume – barrels (1) | — |
| | 6,859 |
| | 11,643 |
| | 25,112 |
|
Average price per barrel | $ | — |
| | $ | 39.70 |
| | $ | 49.44 |
| | $ | 36.20 |
|
| | | | | | | |
Natural gas | | | | | | | |
Volume – mcf (1) | — |
| | 153,048 |
| | 189,488 |
| | 513,827 |
|
Average price per mcf | $ | — |
| | $ | 2.76 |
| | $ | 2.86 |
| | $ | 2.14 |
|
| | | | | | | |
Natural gas liquids | | | | | | | |
Volume – barrels (1) | — |
| | 11,167 |
| | 11,204 |
| | 32.156 |
|
Average price per barrel | $ | — |
| | $ | 15.15 |
| | $ | 26.77 |
| | $ | 12.97 |
|
| |
(1) | Volumes for the 2017 periods are only through April 30, 2017 as a result of the deconsolidation of AREC due to its bankruptcy filing.
|
General and Administrative
General and administrative expenses increased by $0.7 million and $0.6 million during the three and nine months ended September 30, 2017 respectively,(volumes in thousands):
| | | | | | | | |
Crude oil | | |
Volume – barrels (1) | | 11,643 |
Average price per barrel | | $ | 49.44 |
| | |
Natural gas | | |
Volume – Mcf (1) | | 189,488 |
Average price per Mcf | | $ | 2.86 |
| | |
Natural gas liquids | | |
Volume – barrels (1) | | 11,204 |
Average price per barrel | | $ | 26.77 |
_______________
(1) Volumes for the nine months ended September 30, 2017 are only through April 30, 2017, as a result of the deconsolidation of this subsidiary due to its bankruptcy filing.
General and Administrative Expense
General and administrative expense decreased by $1.3 million during the three months ended September 30, 2018 as compared to the same periodsperiod in 20162017 primarily due to higher salaries as a resultthe receipt in the 2018 period of approximately $0.6 million in insurance proceeds related to Hurricane Harvey insurance claims, which reduced expenses, and lower personnel costs in the 2018 period. The 2017 period also included approximately $1.0 million of additional personnel expenses related to a voluntary early retirement program for certain employees,employees. These decreases in expenses were partially offset by an increase in expenses related to the amortization of equity awards (see Note 10 in the Notes to Condensed Consolidated Financial Statements) and an increase in outside service fees.
General and administrative expense decreased by $0.8 million during the nine months ended September 30, 2018 as compared to the same period in 2017 primarily due to the receipt in the 2018 period of approximately $0.6 million in insurance proceeds related to Hurricane Harvey insurance claims, which resultedreduced expenses, lower personnel costs in increased personnel expensesthe 2018 period, and the reversal in the 2017 period of certain legal accruals of approximately $0.7 million related to legal matters. The 2017 period also included approximately $1.0 million of additional personnel expenses related to a voluntary early retirement program for certain employees. These decreases in expenses were partially offset by loweran increase in expenses related to the amortization of equity awards and an increase in legal fees.and outside service fees in the 2018 period.
Investments in Unconsolidated Affiliates
During the second quarter ofAREC. In April 2017, we deconsolidated AREC effective with its bankruptcy filing on April 21, 2017 and recorded our investment in AREC under the cost method of accounting. Based upon bids received in the auction process (see Note 3 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information), we determined that the fair value of our investment in AREC was expected to be lower than its net book value immediately prior to the deconsolidation. As a result, duringDuring the second quarter of 2017, we recorded a non-cash charge of approximately $1.6 million related toassociated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on the expected sales transaction price, net of estimated transaction costs.AREC. During the third quarter of 2017, as a result of the sale of substantially all of AREC’s assets, we recognized an additional loss of $1.9 million, as a result ofwhich represents the sale of these assets anddifference between the net proceeds expectedwe expect to be paid to us upon settlement of the bankruptcy, proceedings, net of anticipated remaining closing costs identified as part of the liquidation plan.plan, and the book value of our cost method investment.
VestaCare. During the third quarter of 2017, we reviewed our investment in VestaCare, Inc. (“VestaCare”), in which we own an approximate 15 percent equity interest (less than 3 percent voting interest), and determined that the current projected operating results did not support the carrying value of the investment. As such, we recognized a pre-tax impairment charge of $2.5 million during the third quarter of 2017 related toand wrote-off our investment in VestaCare.
Income Taxes
Provision for (benefit from) income taxes is based upon federal and state tax rates, and variations in amounts are consistent with taxable income (loss) in the respective accounting periods.
On December 22, 2017, the Tax Cut and Jobs Act was enacted into law resulting in a reduction in the federal corporate income tax rate from 35 percent to 21 percent for years beginning in 2018. As a result of the lower tax rate, our provision for income taxes reflects the effects of the new tax rate during the three and nine months ended September 30, 2018 as compared to the same periods in 2017.
Outlook
We plan to operate our remaining business segments with internally generated cash flows during 2017,2018, but intend to remain flexible as the focus will be on increasing efficiencies and on business development opportunities. During 2017,the remainder of 2018, we plan to leverage our investment in theour transportation segment’s Houston terminal with the continued efforts to diversify service offerings, and we plan to grow in new or existing areas with our crude oil marketing segment. We completedsegment, including integrating the exit ofacquisition that occurred on October 1, 2018 with our existing business (see Note 13 in the upstream oil and gas business during 2017.Notes to Unaudited Condensed Consolidated Financial Statements).
Liquidity and Capital Resources
Liquidity
Our liquidity is from our cash balance and net cash provided by operating activities and is therefore dependent on the success of future operations. If our cash inflow subsides or turns negative, we will evaluate our investment plan accordingly and remain flexible.
One of our wholly owned subsidiaries, AREC, filed for bankruptcy in April 2017. Over the past few years, we have de-emphasized our upstream operations and do not expect this Chapter 11 filing by AREC to have a material adverse impact on any of our core businesses. In connection with its bankruptcy filing, AREC entered into a DIP Credit Agreement with AE. AREC borrowed approximately $0.4 million under the DIP Credit Agreement, and the amount was repaid during the third quarter of 2017 with proceeds from the sales of the assets. We were the primary creditor in AREC’s Chapter 11 process. As a result of thean auction process, AREC sold its assets for approximately $5.2 million during 2017. After settlement of certain claims in late 2017, AE received approximately $2.8 million from AREC in December 2017. AE anticipates receiving an additional $0.8 million cash payment from AREC in the thirdfourth quarter of 2017.2018 when the bankruptcy is settled.
At September 30, 20172018 and December 31, 2016,2017, we had no bank debt or other forms of debenture obligations. CashWe maintain cash balances are maintained in order to meet the timing of day-to-day cash needs. Cash and working capital, the excess of current assets over current liabilities, were as follows at the dates indicated (in thousands):
| | | | | | | | September 30, | | December 31, |
| September 30, | | December 31, | | 2018 | | 2017 |
| 2017 | | 2016 | | | | |
| | | | |
Cash | $ | 99,449 |
| | $ | 87,342 |
| |
Cash and cash equivalents | | Cash and cash equivalents | $ | 130,774 | | $ | 109,393 |
Working capital | 112,934 |
| | 106,444 |
| Working capital | 119,795 | | 116,087 |
We maintain a stand-by letter of credit facility with Wells Fargo Bank, National Association to provide for the issuance of up to $60$60.0 million in stand-by letters of credit for the benefit of suppliers of crude oil.oil within our crude oil marketing segment and for other purposes. Stand-by letters of credit are issued as needed and are canceled as the underlying purchase obligations are satisfied by cash payment when due. The issuance of stand-by letters of credit enables us to avoid posting cash collateral when procuring crude oil supply. We may useare currently using the letter of credit facility for other reasons such as replacementa letter of credit related to our insurance related cash collateral.program. At September 30, 2018 and December 31, 2017, we had $0.4 million and $2.2 million, respectively, outstanding under this facility.
Management believes
We believe current cash balances, together with expected cash generated from future operations, and the ease of financing truck and trailer additions through leasing arrangements (should the need arise) will be sufficient to meet our short-term and long-term liquidity needs. We expect to fund the $10.0 million purchase price of our Red River acquisition (see Note 13 in the Notes to Unaudited Condensed Consolidated Financial Statements) from our current cash balances.
We utilize cash from operations to make discretionary investments in our marketing and transportation businesses. With the exception of operating and capital lease commitments totaling approximately $5.0 millionprimarily associated with storage tank terminal arrangements, and leased office space and tractors, our future commitments and planned investments can be readily curtailed if operating cash flows decrease. See “Contractual Obligations”“Other Items” below for information regarding our operating and capital lease obligations.
The most significant item affecting future increases or decreases in liquidity is earnings from operations, and suchthese earnings are dependent on the success of future operations. See “Part I, Item 1A. Risk Factors” in our 20162017 Form 10-K.
Cash Flows from Operating, Investing and Financing Activities
Our consolidated cash flows from operating, investing and financing activities were as follows for the periods indicated (in thousands):
| | | | | | | | | | | |
| Nine Months Ended | | |
| September 30, | | |
| 2018 | | 2017 |
| | | |
Cash provided by (used in): | | | |
Operating activities | $ | 29,825 | | $ | 16,487 |
Investing activities | (5,372) | | (1,596) |
Financing activities | (3,072) | | (2,784) |
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 |
| | | |
Cash provided by (used in): | | | |
Operating activities | $ | 16,487 |
| | $ | (3,339 | ) |
Investing activities | (1,596 | ) | | (7,269 | ) |
Financing activities | (2,784 | ) | | (2,784 | ) |
Operating activities. Net cash flows provided by operating activities for the nine months ended September 30, 20172018 increased by $19.8$13.3 million when compared to the same period in 2016.2017. This increase was primarily due to an increase in revenues and the timing of collections of accounts receivable and payments of accounts payable, partially offset by increaseda decrease in operating and general and administrative expenses.
At various times each month, we may make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within our crude oil marketing operations. Crude oil supply prepayments are recouped and advanced from month to month as the suppliers deliver product to us. In addition, in order to secure crude oil supply, we may also “early pay” our suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. SuchThese “early payments” reduce cash and accounts payable as of the balance sheet date. We also require certain customers to make similar early payments or to post cash collateral with us in order to support their purchases from us. Early payments and cash collateral received from customers increases cash and reduces accounts receivable as of the balance sheet date.
Early payments were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2018 | | 2017 |
| | | |
Early payments received | $ | 38,459 | | $ | 20,078 |
Early payments to suppliers | 1,100 | | 6,100 |
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
| | | |
Early payments received | $ | 8,715 |
| | $ | 15,032 |
|
Early payments to suppliers | 2,608 |
| | 14,382 |
|
We rely heavily on our ability to obtain open-line trade credit from our suppliers especially with respect to our crude oil marketing operations. During the fourth quarter of 2016,2017 and during the third quarter of 2018, we elected to make several early payments in our crude oil marketing operations. Our cash balance increased by approximately $12.1$21.4 million as of September 30, 20172018 relative to the year ended December 31, 2016 as the year end 2016 balance was slightly lower than normal2017 primarily as a result of thesethe timing of the early payments and prepayments made and received during the fourth quarter of 2016.each period.
Investing activities. Net cash flows used in investing activities for the nine months ended September 30, 2017 decreased2018 increased by $5.7$3.8 million when compared to the same period in 2016. The decrease2017. This increase was primarily due to a $4.7an increase of $5.3 million decrease in capital spending for property and equipment (see table below) and a $4.7 million decrease in investments in unconsolidated affiliates,following table), partially offset by a $3.1an increase of $0.9 million decrease in cash proceeds from the sales of assets. During 2016, we invested a totalassets and an increase of $4.7$0.6 million in two medical-related investments, VestaCareinsurance and Bencap LLC.state collateral refunds.
Capital spending was as follows for the periods indicated (in thousands):
| | | | | | | | | | | |
| Nine Months Ended | | |
| September 30, | | |
| 2018 | | 2017 |
Crude oil marketing (1) (2) | $ | 1,682 | | $ | 451 |
Truck transportation (3) | 6,061 | | 189 |
Oil and natural gas exploration | — | | 1,825 |
Other | 13 | | — |
| | | |
Capital spending | $ | 7,756 | | $ | 2,465 |
|
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2017 | | 2016 |
| | | |
Crude oil marketing | $ | 451 |
| | $ | 514 |
|
Truck transportation | 189 |
| | 6,480 |
|
Oil and gas exploration | 1,825 |
| | 192 |
|
Investments in unconsolidated affiliates | — |
| | 4,700 |
|
Total | $ | 2,465 |
| | $ | 11,886 |
|
_______________(1) 2018 amount primarily relates to construction of a pipeline connection.
(2) Our marketing segment amounts do not include approximately $1.2 million and $1.8 million, respectively, of tractors acquired under capital leases.
(3) 2018 amount primarily relates to the purchase of 40 tractors, 31 of which were placed into service in June 2018 through September 2018. The remaining nine will be placed into service during the fourth quarter of 2018.
Financing activities. Cash used in financing activities was $2.8for the nine months ended September 30, 2018 increased by $0.3 million forwhen compared to the same period in 2017. During each of the nine month periodsmonths ended September 30, 20172018 and 2016 as2017, we paid a quarterly cash dividend of $0.22 per common share, or $0.9a total of $2.8 million during each of the first, second and third quarters of 2017 and 2016.
Other Items
Contractual Obligations
nine month period. During the third quarter2018 period, we paid $0.3 million of 2017,principal repayments on capital lease obligations that we entered into capital leasesin September 2017 and August 2018 for certain of our truckstractors in our crude oil marketing segment. segment, with principal contractual commitments to be paid over a period of five years. See “Other Items” below for further information regarding our capital leases.
Other Items
Contractual Obligations
The following table summarizes our significant contractual obligations at September 30, 2018 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments due by period | | | | | | |
Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Capital lease obligations (1) | | $ | 2,865 | | $ | 671 | | $ | 1,341 | | $ | 853 | | $ | — |
Operating lease obligations (2) | | 13,054 | | 4,634 | | 3,471 | | 3,090 | | 1,859 |
Purchase obligations (3) | | 10,575 | | 10,575 | | — | | — | | — |
Total contractual obligations | | $ | 26,494 | | $ | 15,880 | | $ | 4,812 | | $ | 3,943 | | $ | 1,859 |
_______________
(1) Amounts represent our principal contractual commitments, including interest, outstanding under these capital leases at September 30, 2017for certain tractors in our crude oil marketing segment.
(2) Amounts represent rental obligations under non-cancelable operating leases and terminal arrangements with terms in excess of one year.
(3) Amount represents commitments to purchase 61 new tractors and 20 new trailers in connection with our transportation business.
We maintain certain lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis. In addition, we enter into office space and certain lease and terminal access contracts in order to provide tank storage and dock access for our crude oil marketing business. These storage and access contracts require certain minimum monthly payments for the term of the contracts. Rental expense was as follows for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | | Payments due by period |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | | | | | | | | |
Capital lease obligations | $ | 1,947 |
| | $ | 398 |
| | $ | 796 |
| | $ | 753 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
| | | | | | | |
Rental expense | $ | 2,869 | | $ | 2,874 | | $ | 8,291 | | $ | 9,332 |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably expected to have a material current or future effect on our financial position, results of operations or cash flows.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements.
Related Party Transactions
For more information regarding related party transactions, see Note 78 in the Notes to Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Use of Estimates
A discussion of our critical accounting policies and estimates is included in our 20162017 Form 10-K. Certain of these accounting policies require the use of estimates. There have been no material changes to our accounting policies since the disclosures provided in our 20162017 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to our “Quantitative and Qualitative Disclosures about Market Risk” that have occurred since the disclosures provided in our 20162017 Form 10-K.
Item 4. Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our Executive Chairman and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s disclosure control objectives. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those determined to be effective can provide only a reasonable assurance with respect to financial statement preparation and presentation.
As of the end of the period covered by this quarterly report, our management carried out an evaluation, with the participation of our Executive Chairman and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15(e) of the Exchange Act. Based on this evaluation, as of the end of the period covered by this quarterly report, our Executive Chairman and our Chief Financial Officer concluded:
| |
(i) | (i) that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow for timely decisions regarding required disclosures; and |
| |
(ii) | that our disclosure controls and procedures are effective. |
Remediation of Previously Identified Material Weakness in Internal Control over Financial Reporting
We have taken actions to improve our internal controls over financial reporting, including advancing previously identified initiatives to address our material weakness. These remediation actions include:
Performing a review to ensure that no personnel signs off as the reviewer and subsequently posts the journal entryinformation required to the general ledger.
Considering repositioning the personnelbe disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial close groupofficers, as appropriate to allow for more segregation of duties within the group.timely decisions regarding required disclosures; and
Addressing the control gap relating to the segregation of duties by requiring review of the manual journal entry to occur after the journal entry is independently posted. Review after posting restricts the ability to edit the journal entry.
(ii) that our disclosure controls and procedures are effective.
We have tested the internal controls related to the remediation of this deficiency and have found them to be effective and have concluded that the previously identified and disclosed material weakness has been remediated as of September 30, 2017.
Changes in Internal Control over Financial Reporting
Other than what is stated above, thereThere were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(e) under the Exchange Act) during the fiscal quarter ended September 30, 2017,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
From time to time as incidental to our operations, we may become involved in various lawsuits and/or disputes. Primarily as an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, worker compensation claims and other items of general liability as would be typical for the industry. We are presently unaware of any claims against us that are either outside the scope of insurance coverage or that may exceed the level of insurance coverage and could potentially represent a material adverse effect on our financial position or results of operations.
For additional information regarding our litigation matters, see “Litigation” under Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements included under Part I, Item 1
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our 20162017 Form 10-K and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factorsRisk Factors from those disclosed in Item 1A of our 20162017 Annual Report on Form 10-K or our other SEC filings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
| | | | |
Exhibit | |
Number | Exhibit |
| |
3.1 | Certificate of Incorporation of Adams Resources & Energy, Inc., as amended (incorporated by reference to Exhibit 3(a) to Form 10-K for the fiscal year ended December 31, 1987). |
3.2 | |
10.1* | |
31.1* | |
31.2* | |
32.1* | |
32.2* | |
101.CAL* | XBRL Calculation Linkbase Document |
101.DEF* | XBRL Definition Linkbase Document |
101.INS* | XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.LAB* | XBRL Labels Linkbase Document |
101.PRE* | XBRL Presentation Linkbase Document |
101.SCH* | XBRL Schema Document |
____________
+ Management contract or compensation plan or arrangement.
*Filed or furnished (in the case of Exhibit 32.1 and 32.2) with this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | ADAMS RESOURCES & ENERGY, INC. |
| | (Registrant) |
| | |
| | |
| | ADAMS RESOURCES & ENERGY, INC. |
| | (Registrant) |
| | |
| | |
| | |
Date: November 9, 20177, 2018 | By: | /s/ Townes G. Pressler |
| | Townes G. Pressler |
| | Executive Chairman |
| | (Principal Executive Officer) |
| | |
| By: | /s/ Josh C. AndersTracy E. Ohmart |
| | Josh C. AndersTracy E. Ohmart |
| | Chief Financial Officer |
| | (Principal Financial Officer and Principal |
| | Accounting Officer) |