Annual Statements Open main menu

ADAMS RESOURCES & ENERGY, INC. - Quarter Report: 2017 September (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10‑Q

(Mark one)

þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___  to  ___.

Commission file number: 1-07908
ADAMS RESOURCES & ENERGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
74-1753147
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
17 South Briar Hollow Lane, Suite 100
Houston, Texas 77027
(Address of Principal Executive Offices, including Zip Code)

(713) 881-3600
(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No ¨

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.
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer   o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company   o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

A total of 4,217,596 shares of Common Stock were outstanding at November 1, 2017. Our Common Stock trades on the NYSE MKT under the ticker symbol “AE.”





ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 




1


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Marketing
$
282,229

 
$
243,704

 
$
872,020

 
$
758,627

Transportation
13,082

 
12,310

 
40,153

 
39,517

Oil and natural gas

 
863

 
1,427

 
2,427

Total revenues
295,311

 
256,877

 
913,600

 
800,571

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Marketing
277,906

 
240,021

 
860,567

 
737,858

Transportation
12,668

 
11,039

 
36,681

 
33,537

Oil and natural gas

 
1,011

 
951

 
2,421

General and administrative
2,787

 
2,114

 
6,884

 
6,252

Depreciation, depletion and amortization
3,240

 
4,514

 
10,772

 
14,385

Total costs and expenses
296,601

 
258,699

 
915,855

 
794,453

 
 
 
 
 
 
 
 
Operating earnings (losses)
(1,290
)
 
(1,822
)
 
(2,255
)
 
6,118

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Loss on deconsolidation of subsidiary (Note 3)
(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
)
 

Total other income (expense), net
(4,008
)
 
(1,555
)
 
(5,226
)
 
(1,756
)
 
 
 
 
 
 
 
 
(Losses) earnings before income taxes
(5,298
)
 
(3,377
)
 
(7,481
)
 
4,362

Income tax benefit (provision)
2,265

 
1,224

 
3,306

 
(1,681
)
 
 
 
 
 
 
 
 
Net (losses) earnings
$
(3,033
)
 
$
(2,153
)
 
$
(4,175
)
 
$
2,681

 
 
 
 
 
 
 
 
Earnings (losses) per share:
 
 
 
 
 
 
 
Basic and diluted net (losses) earnings
 
 
 
 
 
 
 
per common share
$
(0.72
)
 
$
(0.51
)
 
$
(0.99
)
 
$
0.64

 
 
 
 
 
 
 
 
Weighted average number of common
 
 
 
 
 
 
 
shares outstanding
4,218

 
4,218

 
4,218

 
4,218

 
 
 
 
 
 
 
 
Dividends per common share
$
0.22

 
$
0.22

 
$
0.66

 
$
0.66

 
 
 
 
 
 
 
 


See notes to unaudited condensed consolidated financial statements.

2


Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
September 30,
 
December 31,
 
2017
 
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
99,449

 
$
87,342

Accounts receivable, net of allowance for doubtful
 
 
 
accounts of $216 and $225, respectively
81,277

 
87,162

Inventory
22,398

 
13,070

Derivative assets

 
112

Income tax receivable
4,147

 
2,735

Prepayments and other current assets
1,168

 
2,097

Total current assets
208,439

 
192,518

Property and equipment, net
31,958

 
46,325

Investments in unconsolidated affiliates
3,200

 
2,500

Cash deposits and other assets
4,932

 
5,529

Total assets
$
248,529

 
$
246,872

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
89,339

 
$
79,897

Accounts payable – related party

 
53

Derivative liabilities

 
64

Current portion of capital lease obligations
306

 

Other current liabilities
5,860

 
6,060

Total current liabilities
95,505

 
86,074

Other long-term liabilities:
 
 
 
Asset retirement obligations
1,263

 
2,329

Capital lease obligations
1,465

 

Deferred taxes and other liabilities
5,943

 
7,157

Total liabilities
104,176

 
95,560

 
 
 
 
Commitments and contingencies (Note 10)

 

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock – $1.00 par value, 960,000 shares
 
 
 
authorized, none outstanding

 

Common stock – $0.10 par value, 7,500,000 shares
 
 
 
authorized, 4,217,596 shares outstanding
422

 
422

Contributed capital
11,693

 
11,693

Retained earnings
132,238

 
139,197

Total shareholders’ equity
144,353

 
151,312

Total liabilities and shareholders’ equity
$
248,529

 
$
246,872


See notes to unaudited condensed consolidated financial statements.

3


Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
Operating activities:
 
 
 
Net (losses) earnings
$
(4,175
)
 
$
2,681

Adjustments to reconcile net (losses) earnings to net cash
 
 
 
provided by (used in) operating activities:
 
 
 
Depreciation, depletion and amortization
10,772

 
14,385

Gains on sale of property
(347
)
 
(1,948
)
Impairment of oil and natural gas properties
3

 
87

Provision for doubtful accounts
(9
)
 
19

Deferred income taxes
(1,198
)
 
(1,170
)
Net change in fair value contracts
48

 
(305
)
Losses from equity investment

 
468

Impairment of investments in unconsolidated affiliates
2,500

 
1,732

Loss on deconsolidation of subsidiary (Note 3)
3,505

 

Changes in assets and liabilities:
 
 
 
Accounts receivable
5,228

 
(1,767
)
Accounts receivable/payable, affiliates
266

 

Inventories
(9,328
)
 
(8,395
)
Income tax receivable
(1,412
)
 
113

Prepayments and other current assets
927

 
(1,570
)
Accounts payable
9,482

 
(8,795
)
Accrued liabilities
465

 
1,378

Other
(240
)
 
(252
)
Net cash provided by (used in) operating activities
16,487

 
(3,339
)
 
 
 
 
Investing activities:
 
 
 
Property and equipment additions
(2,465
)
 
(7,186
)
Proceeds from property sales
430

 
3,536

Investments in unconsolidated affiliates

 
(4,700
)
Insurance and state collateral (deposits) refunds
439

 
1,081

Net cash used in investing activities
(1,596
)
 
(7,269
)
 
 
 
 
Financing activities:
 
 
 
Dividends paid on common stock
(2,784
)
 
(2,784
)
Net cash used in financing activities
(2,784
)
 
(2,784
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
12,107

 
(13,392
)
Cash and cash equivalents at beginning of period
87,342

 
91,877

Cash and cash equivalents at end of period
$
99,449

 
$
78,485



See notes to unaudited condensed consolidated financial statements.


4


Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)

 
 
 
 
 
 
 
Total
 
Common
 
Contributed
 
Retained
 
Shareholders’
 
Stock
 
Capital
 
Earnings
 
Equity
 
 
 
 
 
 
 
 
Balance, January 1, 2017
$
422

 
$
11,693

 
$
139,197

 
$
151,312

Net losses

 

 
(4,175
)
 
(4,175
)
Dividends paid on common stock

 

 
(2,784
)
 
(2,784
)
Balance, September 30, 2017
$
422

 
$
11,693

 
$
132,238

 
$
144,353






 
 
 
 
 
 
 
Total
 
Common
 
Contributed
 
Retained
 
Shareholders’
 
Stock
 
Capital
 
Earnings
 
Equity
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
422

 
$
11,693

 
$
140,395

 
$
152,510

Net earnings

 

 
2,681

 
2,681

Dividends paid on common stock

 

 
(2,784
)
 
(2,784
)
Balance, September 30, 2016
$
422

 
$
11,693

 
$
140,292

 
$
152,407




See notes to unaudited condensed consolidated financial statements.


5



Table of Contents
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”), a Delaware corporation organized in 1973, and its subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage, tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation. 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) oil and natural gas exploration and production. We exited the oil and natural gas exploration and production business during the third quarter of 2017 with the sale of our oil and natural gas exploration and production assets.

Basis of Presentation

Our results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of results expected for the full year of 2017. 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, 2016 (the “2016 Form 10-K”) filed with the SEC on March 31, 2017. All significant intercompany transactions and balances have been eliminated in consolidation.


6



Table of Contents
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.


Note 2. General Accounting and Disclosure Matters

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.

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 8 for further information).

Investments in Unconsolidated Affiliates

At September 30, 2017, we had no remaining balances in our medical-related investments. We currently do not have any plans to pursue additional medical-related investments.

Bencap. Through February 2017, 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 for our investment in Bencap under the equity method of accounting. Underlying the terms of the investment agreement, Bencap had the option to request borrowings from us 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. During the third quarter of 2016, we recognized an after-tax net loss of $1.4 million 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

7



Table of Contents
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 terms of the investment agreement, Bencap requested additional funding of approximately $0.5 million from us. We declined the additional funding request and as a result, forfeited our 30% member interest in Bencap. At September 30, 2017, we had no further ownership interest in Bencap.

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 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 million stand-by letter of credit facility used to support crude oil purchases within our crude oil marketing segment. This facility is collateralized by the eligible accounts receivable within our crude oil marketing segment.

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 Gulfmark 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. No letter of credit amounts were outstanding at September 30, 2017 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.

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



8



Table of Contents
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Property and Equipment

We capitalize expenditures for major renewals and betterments, and we expense expenditures for maintenance and repairs as incurred. We capitalize interest costs incurred in connection with major capital expenditures and amortize these costs over the lives of the related assets. When properties are retired or sold, the related cost and accumulated depreciation, depletion and amortization is removed from the accounts and any gain or loss is reflected in earnings, and is included 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 volumes for the period. All other property and equipment is depreciated using the straight-line method over the estimated average useful lives of three to twenty years.

We review our long-lived assets for impairment whenever there is evidence that the carrying value of such 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 estimated future production, 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.

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.


9



Table of Contents
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):
 
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, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). 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.


10



Table of Contents
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.

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, we anticipate that this new lease guidance will cause significant changes to the way 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.


11



Table of Contents
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



On August 1, 2017, a hearing was held before the Bankruptcy Court seeking approval of asset purchase and sales agreements under Section 363 of the Bankruptcy Code with three unaffiliated parties 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 closed on the sales of these assets during the third quarter of 2017.

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 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 plan during the fourth quarter of 2017.

DIP Financing – Related Party Relationship

In connection with the bankruptcy filing, AREC entered into a Debtor in Possession Credit and Security Agreement with AE (“DIP Credit Agreement”) dated as of April 25, 2017, in an aggregate amount of up to $1.25 million, of which 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 closing of the sale of substantially all of AREC’s assets, (c) the effective date of 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 defined in the DIP Credit Agreement. 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.


Note 4. Property and Equipment

Components of property and equipment were as follows at the dates indicated (in thousands):
 
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 capital leases for certain trucks in our marketing segment. Gross property and equipment recorded under capital leases were $1.8 million at September 30, 2017. Accumulated amortization associated with capital leases was less than $0.1 million at September 30, 2017 (see Note 10 for further information).     

    

12



Table of Contents
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,
 
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



Note 5. 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,
 
2017
 
2016
 
 
 
 
Amounts associated with liability insurance program:
 
 
 
Insurance collateral deposits
$
2,252

 
$
2,599

Excess loss fund
1,495

 
1,450

Accumulated interest income
777

 
812

Other amounts:
 
 
 
State collateral deposits
51

 
143

Materials and supplies
320

 
354

Other
37

 
171

Total
$
4,932

 
$
5,529


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. 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 all amounts held by the insurance company 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).

13



Table of Contents
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 6. 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) oil and natural gas exploration and production. Our 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.

Information concerning our various business activities was as follows for the periods indicated (in thousands):
 
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



14



Table of Contents
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
 
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


Identifiable assets by industry segment were as follows at the dates indicated (in thousands):
 
September 30,
 
December 31,
 
2017
 
2016
 
 
 
 
Reporting segment:
 
 
 
Marketing
$
107,388

 
$
107,257

Transportation
29,492

 
32,120

Oil and Gas (1)
3,200

 
7,279

Cash and other assets
108,449

 
100,216

Total assets
$
248,529

 
$
246,872

____________________
(1)
At September 30, 2017, amount represents our cost method investment in this segment.

Intersegment sales are insignificant and all sales occurred in the United States. 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. 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, 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 such services at a discounted amount from its standard charge to non-affiliates. As discussed further in Note 2, at September 30, 2017, we have no further ownership interest in Bencap.


15



Table of Contents
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
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Overhead recoveries
$

 
$
2

 
$

 
$
30

Affiliate billings to us
16

 
13

 
52

 
51

Billings to affiliates
1

 
1

 
3

 
3

Rentals paid to affiliate
137

 
155

 
462

 
473

Fees paid to Bencap (1)

 
309

 
108

 
439

___________________
(1)
Amounts represent 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 third quarter of 2017 with proceeds from 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).


Note 8. Derivative Instruments and Fair Value Measurements

Derivative Instruments

Our crude oil marketing segment is involved in the purchase and sale of 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, such 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 such contracts at fair value, unless the normal purchase and sale exception is applicable. Such 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, our commodity purchase and sale contracts had a fair value of zero. At December 31, 2016, the estimated fair value of forward month commodity contracts (derivatives) reflected in the accompanying unaudited condensed consolidated balance sheet were as follows (in thousands):
 
December 31, 2016
 
Balance Sheet Location and Amount
 
Current
 
Other
 
Current
 
Other
 
Assets
 
Assets
 
Liabilities
 
Liabilities
Asset derivatives:
 
 
 
 
 
 
 
Fair value forward hydrocarbon commodity
 
 
 
 
 
 
 
contracts at gross valuation
$
378

 
$

 
$

 
$

Liability derivatives:
 
 
 
 
 
 
 
Fair value forward hydrocarbon commodity
 
 
 
 
 
 
 
contracts at gross valuation

 

 
330

 

Less counterparty offsets
(266
)
 

 
(266
)
 

As reported fair value contracts
$
112

 
$

 
$
64

 
$



16



Table of Contents
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, 2017 and December 31, 2016, 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


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, 2016 (in thousands):
 
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


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 such 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, 2017 and December 31, 2016, 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.


17



Table of Contents
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. The following table presents categories of long-lived assets that were subject to non-recurring 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
 
 
 
 
 
 
 
 
 
 
Investment in AREC
$
3,200

 
$

 
$
3,200

 
$

 
$
3,505

Investment in VestaCare

 

 

 

 
2,500

 
 
 
 
 
 
 
 
 
$
6,005



Note 9. 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,
 
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

 




18



Table of Contents
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 10. Commitments and Contingencies

Capital Lease Obligations

During the third quarter of 2017, we entered into capital leases for certain of our trucks in our marketing segment. The following table summarizes our principal contractual commitments outstanding under our capital leases at September 30, 2017 for the next five years, and in total thereafter (in thousands):
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


Insurance Policies

Under our automobile and workers’ compensation insurance policies, we can 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 is shared with a group of similarly situated entities. We have appropriately recognized estimated expenses and liabilities related to these policies for losses incurred but not reported to us or our insurance carrier as follows at the dates indicated (in thousands):
 
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 million. Medical accrual amounts were as follows at the dates indicated (in thousands):
 
September 30,
 
December 31,
 
2017
 
2016
Accrued medical claims
$
1,424

 
$
1,411



19



Table of Contents
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.



20


Table of Contents

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, 2016 (the “2016 Form 10-K”), as filed on March 31, 2017 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 2016 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, tank truck transportation of liquid chemicals and dry bulk and ISO tank container storage and transportation. 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) oil and natural gas exploration and production. We exited the oil and natural gas exploration and production business during the third quarter of 2017 with the sale of our oil and natural gas exploration and production assets.

Recent Developments

Subsidiary Bankruptcy, Deconsolidation and Sale

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.


21


Table of Contents

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 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 plan during the fourth quarter of 2017.

In connection with the bankruptcy filing, AREC entered into a DIP Credit Agreement with AE, which was repaid with proceeds from the sale of the assets. See Note 3 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 resulted in an increase in personnel expenses of approximately $1.4 million, of which approximately $1.0 million was included in general and administrative expenses and $0.4 million was included in operating expenses.


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,
 
 
 
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.


22


Table of Contents

Supplemental volume 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.

Revenues and Operating Earnings. Crude oil marketing revenues increased during the three months ended September 30, 2017 primarily as a result of an increase in the market price of crude oil and an increase in crude oil volumes. 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 operating earnings, partially offset by inventory valuation changes (as shown in the table below). Operating earnings were also impacted by the implementation in August 2017 of a voluntary early retirement program for certain employees, which resulted in an increase in personnel expenses of approximately $0.4 million.

Crude oil marketing revenues increased during the nine months ended September 30, 2017 primarily as a result of an increase in the market price of crude oil. The increase in crude oil prices during the 2017 period has offset the decline in crude oil marketing volumes during the nine months ended September 30, 2017 as compared to the same period in 2016. Our marketing operating earnings for the nine months ended September 30, 2017 were adversely affected by 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. Operating earnings were also impacted by inventory valuation changes (as shown in the table below) and the voluntary early retirement program discussed above.
  
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 during the three months ended September 30, 2017 as compared to the same period in 2016 consistent with increased marketing volumes and an increase in the price of diesel fuel during the 2017 period as compared to the same period in 2016. Fuel costs decreased during the nine months ended September 30, 2017 as compared to the same period in 2016 consistent with decreased marketing volumes during the 2017 period as compared to the same period in 2016.

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 also 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 “mark-to-market” gains and losses.

23


Table of Contents

The impact of inventory liquidations and derivative valuations on our 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,
 
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.

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 decreased during the three and nine months ended September 30, 2017 as compared to the same periods in 2016 due to increased personnel costs related to the voluntary early retirement program, partially offset by increased volumes and the effects of a newly negotiated barge contract, which reduced operating expenses, during the third quarter of 2017.

We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels):
 
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 2016 Form 10-K.


24


Table of Contents

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,
 
 
 
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.

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 costs were as follows for the periods indicated (in thousands):
 
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.

Revenues, net of fuel costs increased during the three and nine months ended September 30, 2017 primarily as a result of increased activity in our transportation segment. During the third quarter of 2017, demand for our services increased slightly as indicated by the increased mileage during the 2017 period as compared to the same period in 2016. We began to see an increase in transportation activity by the end of September 2017, and we continue to work on our strategy of streamlining operations and diversifying offerings in our transportation segment. This increase in services resulted in an increase in variable expenses related to transportation activities. Fuel increased as a result of increased mileage and an increase in the price of diesel during the 2017 periods as compared to the same periods in 2016. Our operating results 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.

Oil and Gas

Oil and natural gas segment revenues and operating earnings (losses) are primarily a function of crude oil and natural gas prices and volumes. As a result of AREC’s bankruptcy filing in April 2017 and our loss of control of this subsidiary, we deconsolidated AREC effective with the bankruptcy filing and recorded our investment in AREC under the cost method of accounting. Our results for the 2017 periods are only through April 30, 2017, during the period in which AREC was consolidated.


25


Table of Contents

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 with its bankruptcy filing in April 2017 (four months of revenues and expenses in 2017 versus nine months of revenues and expenses in 2016) as well as production declines offsetting commodity price increases in the 2017 period.

Supplemental volume 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, as compared to the same periods in 2016 primarily due to higher salaries as a result of a voluntary early retirement program for certain employees, which resulted in increased personnel expenses of approximately $1.0 million, partially offset by lower legal fees.


26


Table of Contents

Investments in Unconsolidated Affiliates

During the second quarter of 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, during the second quarter of 2017, we recorded a non-cash charge of $1.6 million related to 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. During the third quarter of 2017, we recognized an additional loss of $1.9 million as a result of the sale of these assets and the net proceeds expected to be paid to us upon settlement of the bankruptcy proceedings, net of anticipated remaining closing costs identified as part of the liquidation plan.

During the third quarter of 2017, we reviewed our investment in VestaCare, Inc. (“VestaCare”) 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 to our investment in VestaCare.

Outlook
    
We plan to operate our remaining business segments with internally generated cash flows during 2017, but intend to remain flexible as the focus will be on increasing efficiencies and business development opportunities. During 2017, we plan to leverage our investment in the transportation segment’s Houston terminal with the continued efforts to diversify service offerings and grow in new or existing areas with our crude oil marketing segment. We completed the exit of the upstream oil and gas business during 2017.


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 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 the auction process, AREC sold its assets for approximately $5.2 million during the third quarter of 2017.

At September 30, 2017 and December 31, 2016, we had no bank debt or other forms of debenture obligations. 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,
 
2017
 
2016
 
 
 
 
Cash
$
99,449

 
$
87,342

Working capital
112,934

 
106,444



27


Table of Contents

We maintain a stand-by letter of credit facility with Wells Fargo Bank, National Association to provide for the issuance of up to $60 million in stand-by letters of credit for the benefit of suppliers of crude oil. 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 use the letter of credit facility for other reasons such as replacement of insurance related cash collateral.

Management believes 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 utilize cash from operations to make discretionary investments in our marketing and transportation businesses. With the exception of operating lease commitments totaling approximately $5.0 million associated with storage tank terminal arrangements and leased office space, our future commitments and planned investments can be readily curtailed if operating cash flows decrease. See “Contractual Obligations” below for information regarding our capital lease obligations.

The most significant item affecting future increases or decreases in liquidity is earnings from operations, and such earnings are dependent on the success of future operations. See “Part I, Item 1A. Risk Factors” in our 2016 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,
 
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, 2017 increased by $19.8 million when compared to the same period in 2016. This increase was primarily due to an increase in revenues, partially offset by increased operating and general and administrative expenses.

At various times each month, we make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within our 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. Such “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,
 
2017
 
2016
 
 
 
 
Early payments received
$
8,715

 
$
15,032

Early payments to suppliers
2,608

 
14,382


28


Table of Contents

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, we elected to make several early payments in our crude oil marketing operations. Our cash balance increased by approximately $12.1 million as of September 30, 2017 relative to the year ended December 31, 2016 as the year end 2016 balance was slightly lower than normal as a result of these early payments made during the fourth quarter of 2016.

Investing activities. Net cash flows used in investing activities for the nine months ended September 30, 2017 decreased by $5.7 million when compared to the same period in 2016. The decrease was primarily due to a $4.7 million decrease in capital spending for property and equipment (see table below) and a $4.7 million decrease in investments in unconsolidated affiliates, partially offset by a $3.1 million decrease in cash proceeds from the sales of assets. During 2016, we invested a total of $4.7 million in two medical-related investments, VestaCare and Bencap LLC.

Capital spending was as follows for the periods indicated (in thousands):
 
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

 
Financing activities. Cash used in financing activities was $2.8 million for each of the nine month periods ended September 30, 2017 and 2016 as we paid a quarterly dividend of $0.22 per common share, or $0.9 million, during each of the first, second and third quarters of 2017 and 2016.


Other Items

Contractual Obligations

During the third quarter of 2017, we entered into capital leases for certain of our trucks in our marketing segment. The following table summarizes our principal contractual commitments, including interest, outstanding under these capital leases at September 30, 2017 (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

 
$


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 7 in the Notes to Unaudited Condensed Consolidated Financial Statements.


29


Table of Contents

Critical Accounting Policies and Use of Estimates

A discussion of our critical accounting policies and estimates is included in our 2016 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 2016 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 2016 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)
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 entry to the general ledger.
Considering repositioning the personnel in the financial close group to allow for more segregation of duties within the group.
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.

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.

30


Table of Contents

Changes in Internal Control over Financial Reporting

Other than what is stated above, there 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, 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 of this quarterly report, which subsection is incorporated by reference into this Part II, 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 2016 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 factors from those disclosed in our 2016 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.


31


Table of Contents

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
101.LAB*
XBRL Labels Linkbase Document
101.PRE*
XBRL Presentation Linkbase Document
101.SCH*
XBRL Schema Document
____________
*Filed or furnished (in the case of Exhibit 32.1 and 32.2) with this report.


32


Table of Contents

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)
 
 
 
 
 
 
 
 
 
Date: November 9, 2017
By:
/s/ Townes G. Pressler
 
 
Townes G. Pressler
 
 
Executive Chairman
 
 
(Principal Executive Officer)
 
 
 
 
By:
/s/ Josh C. Anders
 
 
Josh C. Anders
 
 
Chief Financial Officer
 
 
(Principal Financial Officer and Principal
 
 
Accounting Officer)


33