ADAMS RESOURCES & ENERGY, INC. - Quarter Report: 2019 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark one)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐ 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

NYSE American LLC

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 every Interactive Data File required to be submitted 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 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

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☑

Emerging growth company

☐

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 ☐ No þ

A total of 4,233,587 shares of Common Stock were outstanding at August 1, 2019.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page No.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Unaudited Condensed Consolidated Balance Sheets

Unaudited Condensed Consolidated Statements of Operations

Unaudited Condensed Consolidated Statements Cash Flows

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30,		December 31,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	127,670	$	117,066
Restricted cash	4,876		—
Accounts receivable, net of allowance for doubtful
accounts of $117 and $153, respectively	74,499		85,197
Accounts receivable – related party	—		425
Inventory	19,977		22,779
Derivative assets	240		162
Income tax receivable	2,217		2,404
Prepayments and other current assets	1,828		1,557
Total current assets	231,307		229,590
Property and equipment, net	55,555		44,623
Operating lease right-of-use assets	10,093		—

Intangible assets	1,936		—
Cash deposits and other assets	2,873		4,657
Total assets	$	301,764	$	278,870

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	116,983	$	116,068
Accounts payable – related party	6		29
Derivative liabilities	236		139
Current portion of finance lease obligations	2,116		883
Current portion of operating lease liabilities	2,097		—
Other current liabilities	9,913		6,148
Total current liabilities	131,351		123,267
Other long-term liabilities:
Asset retirement obligations	1,550		1,525
Finance lease obligations	5,473		3,209
Operating lease liabilities	7,999		—
Deferred taxes and other liabilities	5,283		4,271
Total liabilities	151,656		132,272

Commitments and contingencies (Note 14)

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, 4,233,587 and 4,217,596 shares outstanding, respectively	423		422
Contributed capital	12,497		11,948
Retained earnings	137,188		134,228
Total shareholders’ equity	150,108		146,598
Total liabilities and shareholders’ equity	$	301,764	$	278,870

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018
Revenues:
Marketing	$	467,040	$	438,791	$	896,801	$	812,429
Transportation	17,393		13,626		32,800		27,244

Total revenues	484,433		452,417		929,601		839,673

Costs and expenses:
Marketing	463,774		431,683		884,315		800,866
Transportation	14,436		11,890		27,537		24,191

General and administrative	2,582		2,284		5,266		4,567
Depreciation and amortization	4,284		2,262		7,873		4,674
Total costs and expenses	485,076		448,119		924,991		834,298

Operating (losses) earnings	(643)		4,298		4,610		5,375

Other income (expense):
Gain on dissolution of investment	75		—		573		—



Interest income	731		498		1,387		885
Interest expense	(117)		(15)		(182)		(34)
Total other income (expense), net	689		483		1,778		851

Earnings before income taxes	46		4,781		6,388		6,226
Income tax provision	(40)		(1,161)		(1,474)		(1,468)

Net earnings	$	6	$	3,620	$	4,914	$	4,758

Earnings per share:
Basic net earnings per common share	$	—	$	0.86	$	1.16	$	1.13
Diluted net earnings per common share	$	—	$	0.86	$	1.16	$	1.13


Dividends per common share	$	0.24	$	0.22	$	0.46	$	0.44

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Six Months Ended June 30,

	2019		2018
Operating activities:
Net earnings	$	4,914	$	4,758
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization	7,873		4,674
Gains on sales of property	(434)		(446)

Provision for doubtful accounts	(36)		(32)
Stock-based compensation expense	197		3
Deferred income taxes	1,012		(832)
Net change in fair value contracts	19		(3)


Gain on dissolution of AREC	(573)		—
Changes in assets and liabilities:
Accounts receivable	11,812		2,852
Accounts receivable/payable, affiliates	(23)		—
Inventories	2,802		(9,321)
Income tax receivable	187		1,317
Prepayments and other current assets	(271)		67
Accounts payable	1,505		15,634
Accrued liabilities	3,765		2,441
Other	999		125
Net cash provided by operating activities	33,748		21,237

Investing activities:
Property and equipment additions	(13,121)		(2,728)
Asset acquisition	(5,611)		—

Proceeds from property sales	1,287		655
Proceeds from dissolution of AREC	998		—
Insurance and state collateral (deposits) refunds	774		465
Net cash used in investing activities	(15,673)		(1,608)

Financing activities:
Principal repayments of finance lease obligations	(651)		(167)
Dividends paid on common stock	(1,944)		(1,856)
Net cash used in financing activities	(2,595)		(2,023)

Increase in cash and cash equivalents, including restricted cash	15,480		17,606
Cash and cash equivalents, including restricted cash, at beginning of period	117,066		109,393
Cash and cash equivalents, including restricted cash, at end of period	$	132,546	$	126,999

See Notes to Unaudited Condensed Consolidated Financial Statements.

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, 2019	$	422	$	11,948	$	134,228	$	146,598
Net earnings	—		—		4,908		4,908
Stock-based compensation expense	—		123		—		123
Dividends declared:
Common stock, $0.22/share	—		—		(928)		(928)
Awards under LTIP, $0.22/share	—		—		(2)		(2)
Balance, March 31, 2019	422		12,071		138,206		150,699
Net earnings	—		—		6		6
Stock-based compensation expense	—		74		—		74
Issuance of common shares for acquisition	1		391		—		392
Cancellation of shares withheld to cover taxes upon vesting of restricted awards	—		(39)		—		(39)
Dividends declared:
Common stock, $0.24/share	—		—		(1,016)		(1,016)
Awards under LTIP, $0.24/share	—		—		(8)		(8)
Balance, June 30, 2019	$	423	$	12,497	$	137,188	$	150,108


							Total
	Common		Contributed		Retained		Shareholders’
	Stock		Capital		Earnings		Equity

Balance, January 1, 2018	$	422	$	11,693	$	135,004	$	147,119
Net earnings	—		—		1,138		1,138
Dividends declared:
Common stock, $0.22/share	—		—		(928)		(928)
Balance, March 31, 2018	422		11,693		135,214		147,329
Net earnings	—		—		3,620		3,620
Stock-based compensation expense	—		3		—		3
Dividends declared:
Common stock, $0.22/share	—		—		(928)		(928)
Balance, June 30, 2018	$	422	$	11,696	$	137,906	$	150,024

See Notes to Unaudited Condensed Consolidated Financial Statements.

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”) is a publicly traded Delaware corporation organized in 1973, the common shares of which are listed on the NYSE American LLC under the ticker symbol “AE”. We, through our subsidiaries, are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.

We operate and report in two business segments: (i) crude oil marketing, transportation and storage, and (ii) tank truck transportation of liquid chemicals and dry bulk.

Basis of Presentation

Our results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of results expected for the full year of 2019. 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, 2018 (the “2018 Form 10-K”) filed with the SEC on March 8, 2019. All significant intercompany transactions and balances have been eliminated in consolidation.

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. Summary of Significant Accounting Policies

Cash, Cash Equivalents and Restricted Cash

Restricted cash represents an amount held in a segregated bank account by Wells Fargo as collateral for amounts outstanding under our letter of credit facility. In June 2019, the amount of outstanding letters of credit under our letter of credit facility exceeded the borrowing base as defined in the letter of credit facility agreement. As a result, we were required to deposit cash with the lender as security for the outstanding letters of credit. See “Letter of Credit Facility” within this Note 2 for further information. Our borrowing base is based on our net receivable balance, and due to customer prepayments, our borrowing base as outlined in the letter of credit facility did not fully

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

support the outstanding letters of credit that have been issued. As a result, on July 1, 2019, we canceled the letter of credit facility, and secured the outstanding letters of credit with our restricted cash balance.

The following table provides a reconciliation of cash and cash equivalents and restricted cash as reported with the unaudited condensed consolidated balance sheet that totals to the amounts shown in the unaudited condensed consolidated statements of cash flow (in thousands):


	June 30,
	2019

Cash and cash equivalents	$	127,670
Restricted cash	4,876
Total cash, cash equivalents and restricted cash shown in the
unaudited condensed consolidated statements of cash flow	$	132,546

Earnings Per Share

Basic earnings (losses) per share is computed by dividing our net earnings (losses) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (losses) per share is computed by giving effect to all potential shares of common stock outstanding, including our stock related to unvested restricted stock unit awards. Unvested restricted stock unit awards granted under the Adams Resources & Energy, Inc. 2018 Long-Term Incentive Plan (“2018 LTIP”) are not considered to be participating securities as the holders of these shares do not have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares (see Note 10 for further discussion).

A reconciliation of the calculation of basic and diluted earnings per share is as follows (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,

	2019		2018		2019		2018
Earnings per share — numerator:
Net earnings	$	6	$	3,620	$	4,914	$	4,758

Denominator:
Basic weighted average number of shares outstanding	4,227		4,218		4,223		4,218

Basic earnings per share	$	—	$	0.86	$	1.16	$	1.13

Diluted earnings per share:
Diluted weighted average number of shares outstanding:
Common shares	4,227		4,218		4,223		4,218
Restricted stock unit awards	—		—		6		—
Performance share unit awards⁽¹⁾	—		—		—		—
Total	4,227		4,218		4,229		4,218

Diluted earnings per share	$	—	$	0.86	$	1.16	$	1.13

_______________

(1) The dilutive effect of performance share awards are included in the calculation of diluted earnings per share when the performance share award performance conditions have been achieved. The performance conditions for the performance share unit awards granted in 2018 were achieved as of December 31, 2018. For the three and six months ended June 30, 2019, the effect of the performance share awards on earning per share is anti-dilutive.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 these 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 10 for further information).

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of these items and their respective tax basis.

Letter of Credit Facility

We maintained a Credit and Security Agreement with Wells Fargo Bank, National Association to provide for the issuance of up to $60.0 million in stand-by letters of credit primarily used to support crude oil purchases within our crude oil marketing segment and for other purposes. We used the letter of credit facility for letters of credit related to our insurance program. This facility was collateralized by the eligible accounts receivable within our crude oil marketing segment and expires on August 30, 2019.

The issued stand-by letters of credit were canceled as the underlying purchase obligations were satisfied by cash payment when due. The letter of credit facility placed certain restrictions on GulfMark Energy, Inc., one of our wholly owned subsidiaries. These restrictions included the maintenance of positive net earnings excluding inventory valuation changes, as defined, among other restrictions. At June 30, 2019 and December 31, 2018, we had $4.6 million and $4.6 million, respectively, of letters of credit outstanding under this facility. On July 1, 2019, we canceled the letter of credit facility, and secured the outstanding letters of credit with our restricted cash balance.

Property and Equipment

Property and equipment is recorded at cost. Expenditures for additions, improvements and other enhancements to property and equipment are capitalized, and minor replacements, maintenance and repairs that do not extend asset life or add value are charged to expense as incurred. When property and equipment assets are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in results of operations in operating costs and expenses for the respective period. Property and equipment, except for land, is depreciated using the straight-line method over the estimated average useful lives ranging from two to thirty-nine years.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We review our long-lived assets for impairment whenever there is evidence that the carrying value of these 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. For properties requiring impairment, the fair value is estimated based on an internal discounted cash flow model of future cash flows.

See Note 5 for additional information regarding our property and equipment.

Stock-Based Compensation

We measure all share-based payments, including the issuance of restricted stock units and performance share units to employees and board members, using a fair-value based method. The cost of services received from employees and non-employee board members in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period. The fair value of restricted stock unit awards and performance share unit awards is based on the closing price of our common stock on the grant date. We account for forfeitures as they occur. See Note 11 for additional information regarding our 2018 LTIP.

Common Shares Outstanding

The following table reconciles our outstanding common stock for the periods indicated:


						Common
						shares

Balance, January 1, 2019						4,217,596
Vesting of restricted stock unit awards						375
Balance, March 31, 2019						4,217,971
Issuance of shares in acquisition (see Note 6)						11,145
Vesting of restricted stock unit awards (see Note 11)						5,354
Shares withheld to cover taxes upon vesting of restricted stock unit awards						(883)
Balance, June 30, 2019						4,233,587

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Revenue Recognition

Revenue Disaggregation

The following table disaggregates our revenue by segment and by major source for the periods indicated (in thousands):


	Reporting Segments
	Marketing		Transportation		Total

Three Months Ended June 30, 2019
Revenues from contracts with customers	$	390,407	$	17,393	$	407,800
Other ⁽¹⁾	76,633		—		76,633
Total revenues	$	467,040	$	17,393	$	484,433

Timing of revenue recognition:
Goods transferred at a point in time	$	390,407	$	—	$	390,407
Services transferred over time	—		17,393		17,393
Total revenues from contracts with customers	$	390,407	$	17,393	$	407,800

Three Months Ended June 30, 2018
Revenues from contracts with customers	$	419,365	$	13,626	$	432,991
Other ⁽¹⁾	19,426		—		19,426
Total revenues	$	438,791	$	13,626	$	452,417

Timing of revenue recognition:
Goods transferred at a point in time	$	419,365	$	—	$	419,365
Services transferred over time	—		13,626		13,626
Total revenues from contracts with customers	$	419,365	$	13,626	$	432,991

Six Months Ended June 30, 2019
Revenues from contracts with customers	$	751,138	$	32,800	$	783,938
Other ⁽¹⁾	145,663		—		145,663
Total revenues	$	896,801	$	32,800	$	929,601

Timing of revenue recognition:
Goods transferred at a point in time	$	751,138	$	—	$	751,138
Services transferred over time	—		32,800		32,800
Total revenues from contracts with customers	$	751,138	$	32,800	$	783,938

Six Months Ended June 30, 2018
Revenues from contracts with customers	$	779,450	$	27,244	$	806,694
Other ⁽¹⁾	32,979		—		32,979
Total revenues	$	812,429	$	27,244	$	839,673

Timing of revenue recognition:
Goods transferred at a point in time	$	779,450	$	—	$	779,450
Services transferred over time	—		27,244		27,244
Total revenues from contracts with customers	$	779,450	$	27,244	$	806,694

_______________

(1) Other marketing revenues are recognized under ASC 815, Derivatives and Hedging, and ASC 845, Nonmonetary Transactions – Purchases and Sales of Inventory with the Same Counterparty.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Marketing Revenue

Certain of the commodity purchase and sale contracts utilized by our crude oil marketing business qualify as derivative instruments with certain specifically identified contracts also designated as trading activity. From the time of contract origination, these contracts are marked-to-market and recorded on a net revenue basis in the accompanying consolidated financial statements.

Certain of our crude oil contracts may be with a single counterparty to provide for similar quantities of crude oil to be bought and sold at different locations. These contracts are entered into for a variety of reasons, including effecting the transportation of the commodity, to minimize credit exposure, and/or to meet the competitive demands of the customer. These buy/sell arrangements are reflected on a net revenue basis in the accompanying 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						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018

Revenue gross-up	$	223,043	$	56,335	$	465,166	$	102,026

Note 4. Prepayments and Other Current Assets

The components of prepayments and other current assets were as follows at the dates indicated (in thousands):


	June 30,		December 31,
	2019		2018

Insurance premiums	$	705	$	677
Rents, licenses and other	1,123		880
Total	$	1,828	$	1,557

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Property and Equipment

The historical costs of our property and equipment and related accumulated depreciation balances were as follows at the dates indicated (in thousands):


	Estimated
	Useful Life	June 30,		December 31,
	in Years	2019		2018

Tractors and trailers ⁽¹⁾	5 – 6	$	106,046	$	96,523
Field equipment ⁽²⁾	2 – 20	24,895		20,725
Buildings	5 – 39	16,003		15,746
Office equipment	2 – 5	1,923		1,863
Land		1,790		1,790
Construction in progress		2,538		2,794
Total		153,195		139,441
Less accumulated depreciation		(97,640)		(94,818)
Property and equipment, net		$	55,555	$	44,623

_______________

(1) Amounts include assets held under finance leases for certain tractors in our marketing segment. Gross property and equipment associated with these assets held under finance leases were $5.5 million and $4.7 million at June 30, 2019 and December 31, 2018, respectively. Accumulated amortization associated with assets held under these finance leases were $1.2 million and $0.7 million at June 30, 2019 and December 31, 2018, respectively (see Note 13 for further information).

(2) At June 30, 2019, amount includes assets held under finance leases for certain tank storage and throughput arrangements in our marketing segment. Gross property and equipment associated with these assets held under finance leases were $3.3 million. Accumulated amortization associated with these assets held under finance leases was $0.2 million (see Note 13 for further information).

Components of depreciation and amortization expense were as follows for the periods indicated (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018
Depreciation and amortization, excluding amounts
under finance leases	$	3,828	$	2,171	$	7,172	$	4,493
Amortization of property and equipment under
finance leases	456		91		701		181
Total depreciation and amortization	$	4,284	$	2,262	$	7,873	$	4,674

Note 6. Asset Acquisition

On April 10, 2019, we entered into a purchase and sale agreement with EH Transport, Inc. and affiliates (collectively, “EH Transport”), a Houston, Texas based bulk carrier trucking company, for the purchase of certain transportation assets. On May 6, 2019, we closed on the asset acquisition for approximately $6.4 million, which consisted of $5.6 million in cash after post-closing adjustments related to equipment qualifications, 11,145 of our common shares valued at $0.4 million and contingent consideration valued at approximately $0.4 million.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

This acquisition added approximately 39 tractors and 53 trailers to our existing transportation fleet, and these assets will be included in our transportation segment. This acquisition adds new customers and new product lines to our transportation segment portfolio, which allows us to grow into new markets. In addition to general chemical products, we expect to haul liquefied petroleum gas, asphalt, bleach and crude oil for customers.

We incurred approximately $0.1 million of acquisition costs in connection with this acquisition, which has been included in the allocation of the purchase price to the assets acquired.

The following table summarizes the consideration paid for the EH Transport assets and the estimated fair value of the assets acquired at the acquisition date (in thousands):


Consideration:
Cash	$	5,611
Value of AE common shares issued	392
Contingent consideration arrangement	431
Fair value of total consideration transferred	$	6,434

Recognized amounts of identifiable assets acquired:
Property and equipment — tractors and trailers	$	4,408
Shop, office and telecommunication equipment	19
Intangible assets — customer relationships	2,007
Total purchase price	$	6,434

The fair market value of the common shares issued in this transaction was determined based upon the closing share price of AE common stock on May 6, 2019 of $35.15.

We assumed no liabilities in this acquisition. The estimated fair value of the acquired property and equipment was determined using the estimated market value of each type of asset. The estimated fair value of the acquired customer relationship intangible assets was determined using an income approach, specifically a discounted cash flow analysis. The income approach estimates the future benefits of the customer relationships and deducts the expenses incurred in servicing the relationships and the contributions from the other business assets to derive the future net benefits of these assets. The future net benefits are discounted back to present value using the appropriate discount rate, which results in the value of the customer relationships.

A customer relationship intangible asset is the relationship between EH Transport and various customers in which we did not have a previous relationship. The customer relationships we acquired in this transaction provide us with access to those customers in which we did not have a previous relationship and allows us to enter product markets in which we had not previously participated. Because of the highly competitive and fragmented transportation market, we believe access to these customers and product lines will provide us with an entry into new markets.

The discounted cash flow analysis used to estimate the fair value of the EH Transport customer relationships relied on Level 3 fair value inputs. Level 3 fair values are based on unobservable inputs. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date. With respect to the EH Transport customer relationships, the Level 3 inputs include the rate of retention of the current customers of EH Transport as of the valuation date, our transportation segment historical customer retention rate and projected future revenues associated with the customers. The EH Transport customers expected to remain with us after the transaction were included in the valuation of the customer relationships. We expect to amortize the customer relationship intangible assets over a period of seven years, using a modified straight-line approach.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the six months ended June 30, 2019, we recorded $0.1 million of amortization expense related to these intangible assets.

The purchase and sale agreement includes a contingent consideration arrangement that requires us to pay the former owner of the assets up to a quarterly maximum amount of $146,875 (undiscounted) plus interest for the first four quarters following the closing date of the acquisition. The amount to be paid is based upon the number of qualified truck drivers that are employed by us at the end of each quarter. The potential undiscounted amount of all future payments that could be required to be paid under the contingent consideration arrangement is between $0 and $587,500. The fair value of the contingent consideration arrangement of $0.4 million was estimated by applying an income valuation approach, which is based on Level 3 inputs, including the number of qualified truck drivers we expect to be employed at each payment date.

Note 7. Cash Deposits and Other Assets

Components of cash deposits and other assets were as follows at the dates indicated (in thousands):


	June 30,		December 31,
	2019		2018

Amounts associated with liability insurance program:
Insurance collateral deposits	$	1,071	$	1,453
Excess loss fund	821		1,916
Accumulated interest income	527		788
Other amounts:
State collateral deposits	61		57
Materials and supplies	393		443

Total	$	2,873	$	4,657

We have established certain deposits to support participation in our liability insurance program and remittance of state crude oil severance taxes and other state collateral deposits. Insurance collateral deposits are held by the insurance company to cover past or potential open claims based upon a percentage of the maximum assessment under our insurance policies. Insurance collateral deposits are invested at the discretion of our insurance carrier. Excess amounts in our loss fund represent premium payments in excess of claims incurred to date that we may be entitled to recover through settlement or commutation as claim periods are closed. Interest income is earned on the majority of amounts held by the insurance companies and will be paid to us upon settlement of policy years.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Segment Reporting

We operate and report in two business segments: (i) crude oil marketing, transportation and storage, and (ii) tank truck transportation of liquid chemicals and dry bulk.

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


	Reporting Segments
	Marketing		Transportation		Other		Total

Three Months Ended June 30, 2019
Revenues	$	467,040	$	17,393	$	—	$	484,433
Segment operating earnings ⁽¹⁾	962		977		—		1,939
Depreciation and amortization	2,304		1,980		—		4,284
Property and equipment additions ⁽²⁾	1,348		3,422		—		4,770

Three Months Ended June 30, 2018
Revenues	$	438,791	$	13,626	$	—	$	452,417
Segment operating earnings ⁽¹⁾	5,772		810		—		6,582
Depreciation and amortization	1,336		926		—		2,262
Property and equipment additions	277		1,572		—		1,849

Six Months Ended June 30, 2019
Revenues	$	896,801	$	32,800	$	—	$	929,601
Segment operating (losses) earnings ⁽¹⁾	8,060		1,816		—		9,876
Depreciation, depletion and amortization	4,426		3,447		—		7,873
Property and equipment additions ⁽²⁾	3,002		10,119		—		13,121

Six Months Ended June 30, 2018
Revenues	$	812,429	$	27,244	$	—	$	839,673
Segment operating (losses) earnings ⁽¹⁾	8,730		1,212		—		9,942
Depreciation, depletion and amortization	2,833		1,841		—		4,674
Property and equipment additions	1,070		1,645		—		2,715

_______________

(1) Our crude oil marketing segment’s operating earnings included inventory valuation losses of $1.0 million and inventory liquidation gains of $1.9 million for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, our marketing segment’s operating earnings included inventory liquidation gains of $3.5 million and $2.5 million, respectively.

(2) Our crude oil marketing segment’s property and equipment additions do not include approximately $3.6 million and $4.1 million of tractors and tank storage and throughput arrangements acquired under finance leases during the three and six months ended June 30, 2019, respectively.

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 and amortization expense and are reconciled to earnings before income taxes, as follows for the periods indicated (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,

	2019		2018		2019		2018

Segment operating earnings	$	1,939	$	6,582	$	9,876	$	9,942
General and administrative	(2,582)		(2,284)		(5,266)		(4,567)
Operating earnings	(643)		4,298		4,610		5,375
Gain on dissolution of investment	75		—		573		—



Interest income	731		498		1,387		885
Interest expense	(117)		(15)		(182)		(34)
Earnings before income taxes	$	46	$	4,781	$	6,388	$	6,226

Identifiable assets by business segment were as follows at the dates indicated (in thousands):


	June 30,		December 31,
	2019		2018

Reporting segment:
Marketing	$	113,554	$	119,370
Transportation	47,688		34,112

Cash and other	140,522		125,388
Total assets	$	301,764	$	278,870

There were no intersegment sales during the three and six months ended June 30, 2019 and 2018, respectively. Other identifiable assets are primarily corporate cash, corporate accounts receivable 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 9. 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.

Activities with affiliates were as follows for the periods indicated (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018


Affiliate billings to us	$	26	$	25	$	43	$	40
Billings to affiliates	1		1		2		3
Rentals paid to affiliate	122		122		244		244

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Derivative Instruments and Fair Value Measurements

Derivative Instruments

In the normal course of our operations, our crude oil marketing segment purchases and sells 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, these 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 these contracts at fair value, unless the normal purchase and sale exception is applicable. These types of underlying contracts are standard for the industry and are the governing document for our crude oil marketing segment. None of our derivative instruments have been designated as hedging instruments.

At June 30, 2019, we had in place eight commodity purchase and sale contracts, of which six of these contracts had no fair value associated with them as the contractual prices of crude oil were within the range of prices specified in the agreements. These commodity purchase and sale contracts encompassed approximately:

•322 barrels per day of crude oil during July 2019 through August 2019;

•516 barrels per day of crude oil during September 2019 through December 2019; and

•258 barrels per day of crude oil during January 2020 through February 2020.

The estimated fair value of forward month commodity contracts (derivatives) reflected in the accompanying unaudited condensed consolidated balance sheet were as follows at the date indicated (in thousands):


	June 30, 2019
	Balance Sheet Location and Amount
	Current		Other		Current		Other
	Assets		Assets		Liabilities		Liabilities
Asset derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation	$	240	$	—	$	—	$	—
Liability derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation	—		—		236		—
Less counterparty offsets	—		—		—		—
As reported fair value contracts	$	240	$	—	$	236	$	—

At December 31, 2018, we had in place 10 commodity purchase and sale contracts with fair value associated with them as the contractual prices of crude oil were outside of the range of prices specified in the agreements. These commodity purchase and sale contracts encompassed approximately:

•322 barrels per day of crude oil during January 2019 through April 2019;

•258 barrels per day of crude oil during May 2019;

•322 barrels per day of crude oil during June 2019 through August 2019; and

•258 barrels per day of crude oil during September 2019 through December 2019.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	December 31, 2018
	Balance Sheet Location and Amount
	Current		Other		Current		Other
	Assets		Assets		Liabilities		Liabilities
Asset derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation	$	162	$	—	$	—	$	—
Liability derivatives:
Fair value forward hydrocarbon commodity
contracts at gross valuation	—		—		139		—
Less counterparty offsets	—		—		—		—
As reported fair value contracts	$	162	$	—	$	139	$	—

We only enter into commodity contracts with creditworthy counterparties and evaluate our exposure to significant counterparties on an ongoing basis. At June 30, 2019 and December 31, 2018, 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):


	Gains (losses)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018

Revenues – marketing	$	—	$	1	$	(20)	$	2

Fair Value Measurements

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 the dates indicated (in thousands):


	June 30, 2019
	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	$	—	$	240	$	—	$	—	$	240
Current liabilities	—		(236)		—		—		(236)
Net value	$	—	$	4	$	—	$	—	$	4

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	December 31, 2018
	Fair Value Measurements Using
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical Assets		Observable		Unobservable
	and Liabilities		Inputs		Inputs		Counterparty
	(Level 1)		(Level 2)		(Level 3)		Offsets		Total
Derivatives:
Current assets	$	—	$	162	$	—	$	—	$	162
Current liabilities	—		(139)		—		—		(139)
Net value	$	—	$	23	$	—	$	—	$	23

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 these 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 June 30, 2019 and December 31, 2018, 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.

Note 11. Share-Based Compensation Plan

We have in place a long-term incentive plan under which any employee or non-employee director who provides services to us is eligible to participate in the plan. The 2018 LTIP, which is overseen by the Compensation Committee of our Board of Directors, provides for the grant of various types of equity awards, of which restricted stock unit awards and performance-based compensation awards have been granted. The maximum number of shares authorized for issuance under the 2018 LTIP is 150,000 shares, and the 2018 LTIP is effective until May 8, 2028. After giving effect to awards granted under the 2018 LTIP and assuming the potential achievement of the maximum amounts of the performance factors through June 30, 2019, a total of 98,213 shares were available for issuance.

Compensation expense recognized in connection with equity-based awards was as follows for the periods presented (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018

Compensation expense	$	74	$	3	$	197	$	3

At June 30, 2019 and December 31, 2018, we had $15,602 and $9,533, respectively, of accrued dividend amounts for awards granted under the 2018 LTIP.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Unit Awards

The following table presents restricted stock unit award activity for the periods indicated:


		Weighted-
		Average Grant
	Number of	Date Fair Value
	Shares	per Share ⁽¹⁾

Restricted stock unit awards at January 1, 2019	13,733	$	43.00
Granted ⁽²⁾	14,376	$	34.00
Vested	(5,729)	$	43.00
Forfeited	(325)	$	43.00
Restricted stock unit awards at June 30, 2019	22,055

_______________

(1) Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.

(2) The aggregate grant date fair value of restricted stock unit awards issued during 2019 was $0.5 million based on a grant date market price of our common shares of $34.00 per share.

Unrecognized compensation cost associated with restricted stock unit awards was approximately $0.7 million at June 30, 2019. Due to the graded vesting provisions of these awards, we expect to recognize the remaining compensation cost for these awards over a weighted-average period of 1.8 years.

Performance Share Unit Awards

The following table presents performance share unit award activity for the periods indicated:


		Weighted-
		Average Grant
	Number of	Date Fair Value
	Shares	per Share ⁽¹⁾

Performance share unit awards at January 1, 2019	3,966	$	43.00
Granted ⁽²⁾	8,094	$	34.00
Performance factor decrease ⁽³⁾	(185)	$	43.00
Vested	—	$	—
Forfeited	(117)	$	43.00
Performance share unit awards at June 30, 2019	11,758

_______________

(1) Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.

(2) The aggregate grant date fair value of performance share unit awards issued during 2019 was $0.3 million based on a grant date market price of our common shares of $34.00 per share and assuming a performance factor of 100 percent.

(3) The performance factor for awards granted during 2018 was lowered to 47.5 percent based upon a comparison of actual results for 2018 to performance goals.

Unrecognized compensation cost associated with performance share unit awards was approximately $0.4 million at June 30, 2019. We expect to recognize the remaining compensation cost for these awards over a weighted-average period of 2.6 years.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Supplemental Cash Flow Information

Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):


	Six Months Ended
	June 30,
	2019		2018

Cash paid for interest	$	182	$	34
Cash paid for federal and state income taxes	233		210

Non-cash transactions:
Change in accounts payable related to property and equipment additions	(1,179)		(44)
Property and equipment acquired under finance leases	4,148		—
Issuance of common shares in asset acquisition (see Note 6)	392		—

See Note 13 for information related to non-cash transactions related to the adoption of the new lease accounting standard.

Note 13. Leases

Adoption of ASC 842

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Codification 842, Leases (“ASC 842”), which requires lessees to recognize a right-of-use (“ROU”) asset and a corresponding lease liability for leases with terms longer than twelve months. We adopted the new standard effective January 1, 2019, using a modified retrospective transition method and applied certain optional transitional practical expedients.

We elected an optional transition method that allowed application of the new standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment to previously reported results. In accordance with this approach, our consolidated financial statements for periods prior to January 1, 2019 were not revised to reflect the new lease accounting guidance. We also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the carry forward of historical lease classification. We did not elect the practical expedient related to hindsight.

ASC 842 changes the way our operating leases are recorded, presented and disclosed in our consolidated financial statements. Upon adoption of ASC 842 on January 1, 2019, we recognized a ROU asset and a corresponding lease liability based on the present value of then existing operating lease obligations of approximately $11.4 million on our consolidated balance sheet. In addition, there are several key accounting policy elections that we made upon adoption of ASC 842 including:

•We did not recognize ROU assets and lease liabilities for short-term leases and instead record them in a manner similar to operating leases under ASC 840, Leases, lease accounting guidelines. A short term lease is one with a maximum lease term of 12 months or less and does not include a purchase option or renewal option the lessee is reasonably certain to exercise.

•We have also elected the non-lease component practical expedient for any asset class where lease and non-lease components are comingled and the non-lease component is determined to be insignificant when compared to the lease component.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Lease Recognition

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, other current liabilities and operating lease liabilities in the condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities and other long-term liabilities in the condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. At adoption, the ROU asset also includes any lease payment made and excludes lease incentives and initial direct costs. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Our lease agreements do not contain any leases with variable lease payments (i.e., payments that depend on a percentage of sales of a lessee or payments that increase based upon an index such as CPI), residual value guarantees probable of being paid or material restrictive covenants. Lease agreements with lease and non-lease components are generally accounted for separately when practical. For leases where the lease and non-lease component are comingled and the non-lease component is determined to be insignificant when compared to the lease component, the lease and the non-lease components are treated as a single lease component for all asset classes.

We are a lessee in noncancellable (1) operating leases for office space, equipment and lease and terminal access contracts for tank storage and dock access for our crude oil marketing business, and (2) finance leases for tractors and tank storage and throughput for our crude oil marketing business. Leases with an initial term of twelve months or less are not included on the balance sheet.

Some leases include one or more options to renew, with renewal terms that can extend the lease term for generally one year with exercise of lease renewal options being at our sole discretion as lessee.

The following table provides the components of lease expense for the period indicated (in thousands):


	Three Months		Six Months
	Ended		Ended
	June 30,		June 30,
	2019		2019
Finance lease cost:
Amortization of ROU assets	$	456	$	701
Interest on lease liabilities	81		127
Operating lease cost	717		1,579
Short-term lease cost	2,863		4,828


Total lease expense	$	4,117	$	7,235

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides supplemental cash flow and other information related to leases for the period indicated (in thousands):


	Six Months
	Ended
	June 30,
	2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases ⁽¹⁾	$	1,274
Operating cash flows from finance leases	94
Financing cash flows from finance leases	651

ROU assets obtained in exchange for new lease liabilities:
Finance leases	4,148
Operating leases	11,111

______________

(1) Amount is included in Other operating activities on the unaudited condensed consolidated cash flow statement.

The following table provides the lease term and discount rate for the period indicated:


						Six Months
						Ended
						June 30,
						2019
Weighted-average remaining lease term (years):
Finance leases						3.52
Operating leases						5.24

Weighted-average discount rate:
Finance leases						4.9%
Operating leases						5.0%

The following table provides supplemental balance sheet information related to leases at the date indicated (in thousands):


	June 30,
	2019
Assets
Finance lease assets ⁽¹⁾	$	7,490
Operating lease ROU assets	10,093

Liabilities
Current
Finance lease liabilities	2,116
Operating lease liabilities	2,097
Noncurrent
Finance lease liabilities	5,473
Operating lease liabilities	7,999

______________

(1) Amount is included in Property and equipment, net on the unaudited condensed consolidated balance sheet.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides maturities of undiscounted lease liabilities at June 30, 2019 (in thousands):


	Finance		Operating
	Lease		Lease

Remainder of 2019	$	1,213	$	1,280
2020	2,426		2,498
2021	2,426		2,102
2022	1,492		1,770
2023	642		1,668
Thereafter	37		2,112
Total lease payments	8,236		11,430
Less: Interest	(647)		(1,334)
Present value of lease liabilities	7,589		10,096
Less: Current portion of lease obligation	(2,116)		(2,097)
Total long-term lease obligation	$	5,473	$	7,999

The following table provides maturities of undiscounted lease liabilities at December 31, 2018 (in thousands):


	Finance		Operating
	Lease		Lease

2019	$	1,052	$	4,242
2020	1,052		2,258
2021	1,052		2,107
2022	909		1,782
2023	451		1,495
Thereafter	—		1,488
Total lease payments	4,516		$	13,372
Less: Interest	(424)
Present value of lease liabilities	4,092
Less: Current portion of lease obligation	(883)
Total long-term lease obligation	$	3,209

Note 14. Commitments and Contingencies

Insurance Policies

We establish a liability under our automobile and workers’ compensation insurance policies for expected claims incurred but not reported on a monthly basis. As claims are paid, the liability is relieved. Our accruals for automobile and workers’ compensation claims are presented in the table below.

For periods prior to October 1, 2017, we pre-funded our estimated claims, and therefore, we could either receive a return of premium paid or be assessed for additional premiums up to pre-established limits. Additionally, in certain instances, the risk of insured losses was shared with a group of similarly situated entities through an insurance captive. We have appropriately recognized estimated expenses and liabilities related to these policies for losses incurred but not reported to us or our insurance carrier. The amount of pre-funded insurance premiums left to cover potential future losses are presented in the table below. If the potential insurance claims do not further develop, the pre-funded premiums will be returned to us as a premium refund.

Table of Contents

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The amount of pre-funded insurance premiums left to cover potential future losses related to periods prior to October 1, 2017, and our accruals for automobile and workers’ compensation claims were as follows at the dates indicated (in thousands):


	June 30,		December 31,
	2019		2018

Pre-funded premiums for losses incurred but not reported	$	236	$	427
Accrued automobile and workers’ compensation claims	3,007		2,246

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 individual medical claims exceeding a certain minimum threshold. In addition, we maintain $1.0 million of umbrella insurance coverage for annual aggregate medical claims exceeding approximately $9.6 million. Medical accrual amounts were as follows at the dates indicated (in thousands):


	June 30,		December 31,
	2019		2018

Accrued medical claims	$	1,387	$	1,181

Litigation

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.

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, 2018 (the “2018 Form 10-K”), as filed on March 8, 2019 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 2018 Form 10-K and within Part II, Item 1A of this quarterly report. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements. The forward-looking statements in this quarterly report speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.

Overview of Business

Adams Resources & Energy, Inc. (“AE”), a Delaware corporation organized in 1973, and its subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.

We operate and report in two business segments: (i) crude oil marketing, transportation and storage, and (ii) tank truck transportation of liquid chemicals and dry bulk.

Recent Developments

On May 6, 2019, we completed the purchase of the assets of EH Transport, Inc. and affiliates (collectively, “EH Transport”), a Houston, Texas based bulk carrier trucking company, for approximately $6.4 million. This acquisition will add approximately 39 tractors and 53 trailers to our existing transportation fleet, and will be included in our transportation segment. See Note 6 in our Unaudited Condensed Consolidated Financial Statements for further information.

Table of Contents

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							Six Months Ended
	June 30,							June 30,
	2019		2018		Change ⁽¹⁾	2019		2018		Change ⁽¹⁾

Revenues	$	467,040	$	438,791	6%	$	896,801	$	812,429	10%
Operating earnings	962		5,772		(83%)	8,060		8,730		(8%)
Depreciation and amortization	2,304		1,336		72%	4,426		2,833		56%
Driver compensation	5,678		3,001		89%	11,711		6,056		93%
Insurance	2,241		1,125		99%	4,232		2,414		75%
Fuel	2,349		1,653		42%	4,798		3,168		51%

_______________

(1) Represents the percentage increase (decrease) from the prior year period.

Volume and price information were as follows for the periods indicated:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018
Field level purchase volumes – per day⁽¹⁾
Crude oil – barrels	101,884		70,389		107,551		67,815

Average purchase price
Crude oil – per barrel	$	60.02	$	68.24	$	57.00	$	66.22

_______________

(1) Reflects the volume purchased from third parties at the field level of operations.

Three Months Ended June 30, 2019 vs. Three Months Ended June 30, 2018. Crude oil marketing revenues increased by $28.2 million during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018, primarily as a result of higher overall crude oil volumes, which increased revenues by approximately $144.4 million, partially offset by a decrease in the market price of crude oil, which decreased revenues by approximately $116.2 million. The average crude oil price received was $68.24 for the three months ended June 30, 2018, which decreased to $60.02 for the three months ended June 30, 2019. Volumes increased approximately 31,000 barrels per day during the three months ended June 30, 2019 primarily as a result of the Red River acquisition on October 1, 2018. The purchase price for Red River volumes is based on a contractual price for volumes in North Texas and Oklahoma, which has been slightly lower than the purchase price for legacy volumes. Revenues from legacy volumes are based upon the market price in our other market areas, primarily in the Gulf Coast.

Our crude oil marketing operating earnings for the three months ended June 30, 2019 decreased by $4.8 million as compared to the same period in 2018, primarily due to inventory valuation changes (as shown in the following table) and higher fuel, insurance and driver compensation costs, partially offset by increased crude oil volumes.

Driver compensation increased by $2.7 million during the three months ended June 30, 2019 as compared to the same period in 2018, primarily as a result of an increase in the number of drivers in the 2019 period as compared to the 2018 period due to the Red River acquisition on October 1, 2018. In connection with the Red River acquisition, we hired over one hundred additional drivers.

Table of Contents

Insurance costs increased by $1.1 million during the three months ended June 30, 2019 as compared to the same period in 2018, primarily due to a higher driver count and additional miles driven in the 2019 period. Fuel costs increased by $0.7 million during the three months ended June 30, 2019 as compared to the same period in 2018, consistent with a higher driver count in the current period and additional miles driven, primarily as a result of the additional drivers hired for the Red River assets.

Depreciation and amortization expense increased by $1.0 million during the three months ended June 30, 2019 as compared to the same period in 2018, primarily as a result of the acquisition of the Red River assets, consisting of approximately 113 tractors and 126 trailers on October 1, 2018, which increased depreciation expense by approximately $0.9 million per quarter. In addition, we purchased four new tractors and other field equipment during the second quarter of 2019.

Six Months Ended June 30, 2019 vs. Six Months Ended June 30, 2018. Crude oil marketing revenues increased by $84.4 million during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily as a result of higher overall crude oil volumes, which increased revenues by approximately $331.4 million, partially offset by a decrease in the market price of crude oil, which decreased revenues by approximately $247.0 million. The average crude oil price received was $66.22 for the six months ended June 30, 2018, which decreased to $57.00 for the six months ended June 30, 2019. Volumes increased approximately 40,000 barrels per day primarily as a result of the Red River acquisition on October 1, 2018.

Our crude oil marketing operating earnings for the six months ended June 30, 2019 decreased by $0.7 million as compared to the same period in 2018, primarily due to inventory valuation changes (as shown in the following table) and higher fuel, insurance and driver compensation costs, partially offset by increased crude oil volumes.

Driver compensation increased by $5.7 million during the six months ended June 30, 2019 as compared to the same period in 2018, primarily as a result of an increase in the number of drivers in the 2019 period as compared to the 2018 period due to the Red River acquisition on October 1, 2018.

Insurance costs increased by $1.8 million during the six months ended June 30, 2019 as compared to the same period in 2018, primarily due to a higher driver count and additional miles driven in the 2019 period. Fuel costs increased by $1.6 million during the six months ended June 30, 2019 as compared to the same period in 2018, consistent with a higher driver count in the current period and additional miles driven, primarily as a result of the additional drivers hired for the Red River assets.

Depreciation and amortization expense increased by $1.6 million during the six months ended June 30, 2019 as compared to the same period in 2018, primarily as a result of the acquisition of the Red River assets, consisting of approximately 113 tractors and 126 trailers on October 1, 2018, which increased depreciation expense by approximately $0.9 million per quarter. In addition, we purchased approximately twelve new tractors and other field equipment during the first half of 2019.

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. 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 can be affected by the valuations of our forward month commodity contracts (derivative instruments). These non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. We generally enter into these derivative contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level). The valuation of derivative instruments at period end requires the recognition of non-cash “mark-to-market” gains and losses.

Table of Contents

The impact of inventory liquidations and derivative valuations on our crude oil marketing segment operating earnings is summarized in the following reconciliation of our non-GAAP financial measure for the periods indicated (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018

As reported segment operating earnings ⁽¹⁾	$	962	$	5,772	$	8,060	$	8,730
Add (subtract):
Inventory liquidation gains	—		(1,923)		(3,510)		(2,475)
Inventory valuation losses	952		—		—		—
Derivative valuation (gains) losses	—		(1)		20		(2)
Field level operating earnings⁽²⁾	$	1,914	$	3,848	$	4,570	$	6,253

_______________

(1) Segment operating earnings included inventory valuation losses of $1.0 million and inventory liquidation gains of $1.9 million for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019, segment operating earnings included inventory liquidation gains of $3.5 million and $2.5 million, respectively.

(2) The use of field level operating earnings is unique to us, not a substitute for a GAAP measure and may not be comparable to any similar measures developed by industry participants. We utilize this data to evaluate the profitability of our operations.

Field level operating earnings and field level purchase volumes 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 six months ended June 30, 2019 as compared to the same periods in 2018 primarily due to higher fuel, insurance and driver compensation costs, partially offset by increased crude oil volumes, which increased revenues.

We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels):


	June 30, 2019				December 31, 2018
		Average			Average
	Barrels	Price		Barrels	Price

Crude oil inventory	326,716	$	61.15	415,523	$	54.82

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 2018 Form 10-K.

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							Six Months Ended
	June 30,							June 30,
	2019		2018		Change ⁽¹⁾	2019		2018		Change ⁽¹⁾

Revenues	$	17,393	$	13,626	28%	$	32,800	$	27,244	20%
Operating earnings	$	977	$	810	21%	$	1,816	$	1,212	50%
Depreciation and amortization	$	1,980	$	926	114%	$	3,447	$	1,841	87%
Driver commissions	$	2,935	$	2,726	8%	$	5,764	$	5,606	3%
Insurance	$	1,497	$	1,202	25%	$	3,178	$	2,604	22%
Fuel	$	1,760	$	1,722	2%	$	3,480	$	3,598	(3%)
Maintenance expense	$	1,072	$	1,548	(31%)	$	2,091	$	3,075	(32%)
Mileage (000s)	5,639		4,699		20%	10,714		9,769		10%

_______________

(1) Represents the percentage increase (decrease) from the prior year period.

Our revenue rate structure includes a component for fuel costs in which fuel cost fluctuations are largely passed through to the customer over time. Revenues, net of fuel cost, were as follows for the periods indicated (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019		2018		2019		2018

Total transportation revenue	$	17,393	$	13,626	$	32,800	$	27,244
Diesel fuel cost	(1,760)		(1,722)		(3,480)		(3,598)
Revenues, net of fuel cost⁽¹⁾	$	15,633	$	11,904	$	29,320	$	23,646

_______________

(1) Revenues, net of fuel cost, is a non-GAAP financial measure and is utilized for internal analysis of the results of our transportation segment.

Three Months Ended June 30, 2019 vs. Three Months Ended June 30, 2018. Transportation revenues increased by $3.8 million during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018, primarily as a result of the EH Transport asset acquisition (see Note 6 in the Notes to Unaudited Condensed Consolidated Financial Statements), which increased revenues by approximately $1.0 million and increased miles traveled in the current period, and due to higher transportation rates in full effect in the 2019 period as a result of negotiations during 2018 with customers. Revenues, net of fuel cost, increased by $3.7 million during the three months ended June 30, 2019, primarily as a result of the higher transportation revenues and miles traveled during the 2019 period. Although the overall market has softened from 2018 levels, transportation activity has continued to increase for our transportation segment as we continue to pursue our strategy of streamlining operations and diversifying offerings in our transportation segment. We continue to work with customers to maintain our increased transportation rates as well as streamline operations in low margin areas. This increase in services has resulted in an increase in revenues and an increase in variable expenses related to transportation activities.

Fuel costs during the three months ended June 30, 2019 were consistent with fuel costs in the 2018 period, primarily as a result of a decrease in the price of diesel during the 2019 period as compared to the 2018 period, offset by an increase in miles traveled. Depreciation and amortization expense increased by $1.1 million during the three months ended June 30, 2019 as compared to the same period in 2018, primarily as a result of the acquisition of the assets of EH Transport during the second quarter of 2019 and the purchase of new tractors in 2018 and 2019.

Table of Contents

Six Months Ended June 30, 2019 vs. Six Months Ended June 30, 2018. Transportation revenues increased by $5.6 million during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily as a result of the EH Transport asset acquisition, which increased revenues by approximately $1.0 million and increased miles traveled in the current period and higher transportation rates in full effect in the 2019 period as a result of negotiations during 2018 with customers. Revenues, net of fuel cost, increased by $5.7 million during the six months ended June 30, 2019, primarily as a result of the higher transportation revenues and miles traveled during the 2019 period.

Fuel costs decreased by $0.1 million as a result of a decrease in the price of diesel during the 2019 period as compared to the 2018 period, partially offset by an increase in miles traveled. Depreciation and amortization expense increased by $1.6 million during the six months ended June 30, 2019 as compared to the same period in 2018, primarily as a result of the acquisition of the assets of EH Transport during the second quarter of 2019 and the purchase of new tractors in 2018 and 2019.

General and Administrative Expense

General and administrative expense increased by $0.3 million during the three months ended June 30, 2019 as compared to the same period in 2018 primarily due to higher salaries and wages, outside service fees and audit fees and an increase in expenses related to the amortization of equity awards (see Note 11 in the Notes to Unaudited Condensed Consolidated Financial Statements), partially offset by lower legal fees.

General and administrative expense increased by $0.7 million during the six months ended June 30, 2019 as compared to the same period in 2018 primarily due higher to salaries and wages, outside service fees and insurance costs and an increase in expenses related to the amortization of equity awards, partially offset by lower legal fees.

Gain on Dissolution of Investment

During 2019, we received a cash payment from Adams Resources Exploration Corporation (“AREC”) totaling approximately $1.0 million, related to the final settlement of its bankruptcy and dissolution. AREC had been one of our wholly owned subsidiaries, until its bankruptcy filing in April 2017. Of the amount received, approximately $0.4 million was offset against a receivable that had been set up as of December 31, 2018 and $0.6 million was recorded as a gain in our unaudited condensed consolidated financial statements.

Income Taxes

Provision for (benefit from) income taxes is based upon federal and state tax rates, and variations in amounts are consistent with taxable income (loss) in the respective accounting periods.

Outlook

We plan to operate our remaining business segments with internally generated cash flows during the remainder of 2019, but intend to remain flexible as the focus will be on increasing efficiencies and on business development opportunities. During the remainder of 2019, we plan to leverage our investment in our transportation segment’s Houston terminal with the continued efforts to diversify service offerings, and we plan to grow in new or existing areas with our crude oil marketing segment.

Table of Contents

Liquidity and Capital Resources

Liquidity

Our liquidity is from our cash balance and net cash provided by operating activities and is therefore dependent on the success of future operations. If our cash inflow subsides or turns negative, we will evaluate our investment plan accordingly and remain flexible.

At June 30, 2019 and December 31, 2018, we had no bank debt or other forms of debenture obligations. We maintain cash balances 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):


	June 30,		December 31,
	2019		2018

Cash and cash equivalents	$	127,670	$	117,066
Working capital	99,956		106,323

We maintained a letter of credit facility with Wells Fargo Bank, National Association, to provide for the issuance of up to $60.0 million in stand-by letters of credit primarily used to support crude oil purchases within our crude oil marketing segment and for other purposes. Stand-by letters of credit were issued as needed and were canceled as the underlying purchase obligations were satisfied by cash payment when due. The issuance of stand-by letters of credit enabled us to avoid posting cash collateral when procuring crude oil supply. We used the letter of credit facility for letters of credit related to our insurance program. At June 30, 2019 and December 31, 2018, we had $4.6 million and $4.6 million, respectively, of letters of credit outstanding under this facility. On July 1, 2019, we canceled the letter of credit facility, and secured the outstanding letters of credit with our restricted cash balance.

We believe current cash balances, together with expected cash generated from future operations, and the ease of financing truck and trailer additions through leasing arrangements (should the need arise) will be sufficient to meet our short-term and long-term liquidity needs.

We utilize cash from operations to make discretionary investments in our crude oil marketing and transportation businesses. With the exception of operating and finance lease commitments primarily associated with storage tank terminal arrangements, leased office space and tractors, our future commitments and planned investments can be readily curtailed if operating cash flows decrease. See “Other Items” below for information regarding our operating and finance lease obligations.

The most significant item affecting future increases or decreases in liquidity is earnings from operations, and these earnings are dependent on the success of future operations. See “Part I, Item 1A. Risk Factors” in our 2018 Form 10-K.

Table of Contents

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):


	Six Months Ended
	June 30,
	2019		2018

Cash provided by (used in):
Operating activities	$	33,748	$	21,237
Investing activities	(15,673)		(1,608)
Financing activities	(2,595)		(2,023)

Operating activities. Net cash flows provided by operating activities for the six months ended June 30, 2019 increased by $12.5 million when compared to the same period in 2018. This increase was primarily due to an increase in revenues and operating expenses and the timing of collections of accounts receivable and payments of accounts payable.

At various times each month, we may make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within our crude oil marketing operations. Crude oil supply prepayments are recouped and advanced from month to month as the suppliers deliver product to us. In addition, in order to secure crude oil supply, we may also “early pay” our suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. These “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):


	June 30,		December 31,
	2019		2018

Early payments received	$	49,626	$	38,539
Early payments to suppliers	—		—

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 first six months of 2019, we received several early payments from certain customers in our crude oil marketing operations. Our cash balance increased by approximately $10.6 million as of June 30, 2019 relative to the year ended December 31, 2018 primarily as a result of the timing of the receipt of these early payments received during each period.

Investing activities. Net cash flows used in investing activities for the six months ended June 30, 2019 increased by $14.1 million when compared to the same period in 2018. This increase was primarily due to an increase of $10.4 million in capital spending for property and equipment (see following table) and the payment of $5.6 million for the purchase of the EH Transport assets in May 2019, partially offset by an increase of $0.6 million in cash proceeds from the sales of assets, an increase of $0.3 million in insurance and state collateral refunds and the receipt of $1.0 million in cash proceeds related to the final settlement of AREC’s bankruptcy.

Table of Contents

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


	Six Months Ended
	June 30,
	2019		2018
Crude oil marketing ⁽¹⁾	$	3,002	$	1,070
Transportation ^{(2) (3)}	10,119		1,645

Capital spending	$	13,121	$	2,715

_______________

(1) 2019 amount primarily relates to the purchase of 13 tractors and other field equipment. 2018 amount primarily relates to construction of a pipeline connection.

(2) 2019 amount relates to the purchase of 51 tractors, 12 trailers and other field equipment. 2018 amount primarily relates to the purchase of 10 tractors, five of which were placed into service in June 2018 and five of which were placed into service in July 2018.

(3) 2019 amount does not include approximately $5.6 million of capital spending related to the EH Transport asset acquisition.

Financing activities. Cash used in financing activities for the six months ended June 30, 2019 increased by $0.6 million when compared to the same period in 2018. The increase was primarily due to an increase of $0.5 million in principal repayments made for finance lease obligations for certain of our tractors and tank storage and throughput in our crude oil marketing segment. During the six months ended June 30, 2019 and 2018, we paid cash dividends of $0.46 per common share, or a total of $1.9 million, and $0.44 per common share, or a total of $1.9 million, respectively. See “Other Items” below for further information regarding our finance leases.

Other Items

Contractual Obligations

The following table summarizes our significant contractual obligations at June 30, 2019 (in thousands):


			Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Finance lease obligations ⁽¹⁾	$	8,236	$	2,426	$	3,665	$	2,145	$	—
Operating lease obligations ⁽²⁾	11,430		2,537		4,268		3,345		1,280
Purchase obligations⁽³⁾	18,096		18,096		—		—		—
Total contractual obligations	$	37,762	$	23,059	$	7,933	$	5,490	$	1,280

_______________

(1) Amounts represent our principal contractual commitments, including interest, outstanding under finance leases for certain tractors and tank storage and throughput arrangements in our crude oil marketing segment.

(2) Amounts represent rental obligations under non-cancelable operating leases and terminal arrangements with terms in excess of one year.

(3) Amount represents commitments to purchase 95 new tractors and 54 new trailers in connection with our transportation business.

See Note 13 in the Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding our finance and operating leases.

Table of Contents

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably expected to have a material current or future effect on our financial position, results of operations or cash flows.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements.

Related Party Transactions

For more information regarding related party transactions, see Note 9 in the Notes to Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Use of Estimates

A discussion of our critical accounting policies and estimates is included in our 2018 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 2018 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 2018 Form 10-K.

Item 4. Disclosure Controls and Procedures

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.

Changes in Internal Control over Financial Reporting

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 June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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 2018 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 Item 1A of our 2018 Annual Report on Form 10-K or our other SEC filings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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			Bylaws of Adams Resources & Energy, Inc., as amended (incorporated by reference to Exhibit 3(b) to Form 10-K for the year ended December 31, 2012).
10.1			Asset Purchase Agreement, dated as of April 10, 2019, between EH Transport, Inc. and EH Trucking, Inc. and Edis J. Hobson, as sellers, and Service Transport Company, as purchaser (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated May 6, 2019 ).
31.1*			Sarbanes-Oxley Section 302 certification of Executive Chairman pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*			Sarbanes-Oxley Section 302 certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*			Sarbanes-Oxley Section 906 certification of Executive Chairman pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*			Sarbanes-Oxley Section 906 certification of Chief Financial Officer pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.CAL*			XBRL Calculation Linkbase Document
101.DEF*			XBRL Definition Linkbase Document
101.INS*			XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.LAB*			XBRL Labels Linkbase Document
101.PRE*			XBRL Presentation Linkbase Document
101.SCH*			XBRL Schema Document

____________

+ Management contract or compensation plan or arrangement.

*Filed or furnished (in the case of Exhibit 32.1 and 32.2) with this report.

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:	August 7, 2019	By:	/s/ Townes G. Pressler
			Townes G. Pressler
			Executive Chairman
			(Principal Executive Officer)

		By:	/s/ Tracy E. Ohmart
			Tracy E. Ohmart
			Chief Financial Officer
			(Principal Financial Officer and Principal
			Accounting Officer)