ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Operating activities: | | | | | | |
Net earnings | | $ | 3,487 | | | $ | 11,888 | | | $ | 995 | |
Adjustments to reconcile net earnings to net cash | | | | | | |
provided by (used in) operating activities: | | | | | | |
Depreciation and amortization | | 22,707 | | | 19,797 | | | 18,573 | |
Gains on sales of property | | (2,512) | | | (733) | | | (1,859) | |
Provision for doubtful accounts | | (20) | | | (6) | | | (27) | |
Stock-based compensation expense | | 1,022 | | | 854 | | | 643 | |
Deferred income taxes | | (2,136) | | | (1,401) | | | 6,389 | |
Net change in fair value contracts | | 353 | | | (14) | | | (9) | |
Changes in assets and liabilities: | | | | | | |
Accounts receivable | | (46,577) | | | (37,984) | | | (5,162) | |
Accounts receivable/payable, affiliates | | 33 | | | (2) | | | (5) | |
Inventories | | (7,334) | | | 394 | | | 4,751 | |
Income tax receivable | | 6,424 | | | 6,864 | | | (10,719) | |
Prepayments and other current assets | | (592) | | | 575 | | | (1,401) | |
Accounts payable | | 34,762 | | | 82,170 | | | (61,116) | |
Accrued liabilities | | 4,327 | | | (692) | | | 5,052 | |
Other | | (167) | | | (684) | | | (104) | |
Net cash provided by (used in) operating activities | | 13,777 | | | 81,026 | | | (43,999) | |
| | | | | | |
Investing activities: | | | | | | |
Property and equipment additions | | (7,491) | | | (12,382) | | | (5,008) | |
Acquisition of Firebird and Phoenix, net of cash acquired | | (33,147) | | | — | | | — | |
Asset acquisitions | | — | | | — | | | (20,200) | |
Proceeds from property sales | | 3,102 | | | 2,286 | | | 4,515 | |
Insurance and state collateral refunds | | 1,533 | | | — | | | 1,030 | |
Net cash used in investing activities | | (36,003) | | | (10,096) | | | (19,663) | |
| | | | | | |
Financing activities: | | | | | | |
Borrowings under Credit Agreement | | 117,000 | | | 8,000 | | | — | |
Repayments under Credit Agreement | | (92,625) | | | (8,000) | | | — | |
Principal repayments of finance lease obligations | | (4,741) | | | (4,367) | | | (2,336) | |
Cash paid for debt issuance costs | | (1,679) | | | — | | | — | |
Payment for financed portion of VEX acquisition | | — | | | (10,000) | | | — | |
Repurchase of common shares from KSA | | (69,928) | | | — | | | — | |
Net proceeds from sale of equity | | 1,724 | | | 2,830 | | | — | |
Payment of contingent consideration liability | | — | | | — | | | (111) | |
Dividends paid on common stock | | (3,775) | | | (4,141) | | | (4,081) | |
Net cash used in financing activities | | (54,024) | | | (15,678) | | | (6,528) | |
| | | | | | |
(Decrease) Increase in cash and cash equivalents, including restricted cash | | (76,250) | | | 55,252 | | | (70,190) | |
Cash and cash equivalents, including restricted cash, at beginning of period | | 107,317 | | | 52,065 | | | 122,255 | |
Cash and cash equivalents, including restricted cash, at end of period | | $ | 31,067 | | | $ | 107,317 | | | $ | 52,065 | |
See Notes to Consolidated Financial Statements.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Total |
| | Common | | Contributed | | Retained | | Shareholders’ |
| | Stock | | Capital | | Earnings | | Equity |
| | | | | | | | |
Balance, January 1, 2020 | | $ | 423 | | | $ | 12,778 | | | $ | 138,440 | | | $ | 151,641 | |
Net earnings | | — | | | — | | | 995 | | | 995 | |
Stock-based compensation expense | | — | | | 643 | | | — | | | 643 | |
Cancellation of shares withheld to cover | | | | | | | | |
taxes upon vesting of restricted awards | | — | | | (81) | | | — | | | (81) | |
Dividends declared: | | | | | | | | |
Common stock, $0.96 per share | | — | | | — | | | (4,070) | | | (4,070) | |
Awards under LTIP, $0.96 per share | | — | | | — | | | (36) | | | (36) | |
Balance, December 31, 2020 | | 423 | | | 13,340 | | | 135,329 | | | 149,092 | |
Net earnings | | — | | | — | | | 11,888 | | | 11,888 | |
Stock-based compensation expense | | — | | | 854 | | | — | | | 854 | |
Shares sold under at-the-market | | | | | | | | |
offering program | | 9 | | | 2,821 | | | — | | | 2,830 | |
Vesting of restricted awards | | 1 | | | (1) | | | — | | | — | |
Cancellation of shares withheld to cover | | | | | | | | |
taxes upon vesting of restricted awards | | — | | | (101) | | | — | | | (101) | |
Dividends declared: | | | | | | | | |
Common stock, $0.96 per share | | — | | | — | | | (4,112) | | | (4,112) | |
Awards under LTIP, $0.96 per share | | — | | | — | | | (65) | | | (65) | |
Balance, December 31, 2021 | | 433 | | | 16,913 | | | 143,040 | | | 160,386 | |
Net earnings | | — | | | — | | | 3,487 | | | 3,487 | |
Stock-based compensation expense | | — | | | 1,022 | | | — | | | 1,022 | |
Vesting of restricted awards | | 2 | | | (2) | | | — | | | — | |
Cancellation of shares withheld to cover | | | | | | | | |
taxes upon vesting of restricted awards | | — | | | (110) | | | — | | | (110) | |
Shares sold under at-the-market | | | | | | | | |
offering program | | 5 | | | 1,719 | | | — | | | 1,724 | |
Issuance of common shares for acquisition | | 2 | | | 423 | | | — | | | 425 | |
Repurchase of common shares | | (194) | | | — | | | (69,734) | | | (69,928) | |
Dividends declared: | | | | | | | | |
Common stock, $0.96 per share | | — | | | — | | | (3,746) | | | (3,746) | |
Awards under LTIP, $0.96 per share | | — | | | — | | | (83) | | | (83) | |
Balance, December 31, 2022 | | $ | 248 | | | $ | 19,965 | | | $ | 72,964 | | | $ | 93,177 | |
See Notes to Consolidated Financial Statements.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
Adams Resources & Energy, Inc. 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”. Through our subsidiaries, we are primarily engaged in crude oil marketing, truck and pipeline transportation of crude oil, terminalling and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). In addition, we conduct tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with nineteen terminals across the U.S. We also recycle and repurpose off-specification fuels, lubricants, crude oil and other chemicals from producers in the U.S. Unless the context requires otherwise, references to “we,” “us,” “our,” “Adams” or the “Company” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.
On August 12, 2022, we completed our acquisition of all of the equity interests of Firebird Bulk Carriers, Inc. (“Firebird”) and Phoenix Oil, Inc. (“Phoenix”). The consolidated financial statements prior to August 12, 2022 reflect only the historical results of Adams. The consolidated financial statements since the completion of the Firebird and Phoenix acquisition have included the results of Firebird and Phoenix using the acquisition method of accounting. See Note 6 for further information regarding the acquisition.
We operate and report in four business segments: (i) crude oil marketing, transportation and storage; (ii) tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk; (iii) pipeline transportation, terminalling and storage of crude oil; and (iv) beginning in the third quarter of 2022, interstate bulk transportation logistics of crude oil, condensate, fuels, oils and other petroleum products and recycling and repurposing of off-specification fuels, lubricants, crude oil and other chemicals, which includes the businesses we acquired in August 2022 (see Note 6 for further information regarding the acquisition). See Note 9 for further information regarding our business segments.
The consolidated financial statements and the accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules of the U.S. Securities and Exchange Commission (“SEC”). 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 the consolidated financial statements are appropriate, actual results could differ from those estimates.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting Policies
We adhere to the following significant accounting policies in the preparation of our consolidated financial statements.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable associated with crude oil marketing activities comprise approximately 88 percent of our total receivables, and industry practice requires payment for these sales to occur within 20 days of the end of the month following a transaction. Our customer makeup, credit policies and the relatively short duration of receivables mitigate the uncertainty typically associated with receivables management. We manage our crude oil marketing receivables by participating in a monthly settlement process with each of our counterparties. Ongoing account balances are monitored monthly, and we reconcile outstanding balances with counterparties. We also place great emphasis on collecting cash balances due.
We maintain and monitor our allowance for doubtful accounts. Our allowance for doubtful accounts is determined based on specific identification combined with a review of the general status of the aging of all accounts. We consider the following factors in our review of our allowance for doubtful accounts: (i) historical experience with customers, (ii) the perceived financial stability of customers based on our research, (iii) the levels of credit we grant to customers, and (iv) the duration of the receivable. We may increase the allowance for doubtful accounts in response to the specific identification of customers involved in bankruptcy proceedings and similar financial difficulties. On a routine basis, we review estimates associated with the allowance for doubtful accounts to ensure we have recorded sufficient reserves to cover potential losses. Customer payments are regularly monitored. However, a degree of risk remains due to the custom and practices of the industry. See Note 19 for further information regarding credit risk.
The following table presents our allowance for doubtful accounts activity for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Balance at beginning of period | $ | 108 | | | $ | 114 | | | $ | 141 | |
Charges to costs and expenses | — | | | — | | | — | |
Deductions | (20) | | | (6) | | | (27) | |
Balance at end of period | $ | 88 | | | $ | 108 | | | $ | 114 | |
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents represent unrestricted cash on hand and highly liquid investments with original maturities of less than three months from the date of purchase. Cash and cash equivalents are maintained with major financial institutions, and deposit amounts may exceed the amount of federally backed insurance provided. While we regularly monitor the financial stability of these institutions, cash and cash equivalents ultimately remain at risk subject to the financial viability of these institutions.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of cash and cash equivalents and restricted cash as reported in the consolidated balance sheets that totals to the amounts shown in the consolidated statements of cash flows at the dates indicated (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
Cash and cash equivalents | | $ | 20,532 | | | $ | 97,825 | |
Restricted cash: | | | | |
Collateral for outstanding letters of credit (1) | | 892 | | | — | |
Captive insurance subsidiary (2) | | 9,643 | | | 9,492 | |
Total cash, cash equivalents and restricted cash shown in the | | | | |
consolidated statements of cash flows | | $ | 31,067 | | | $ | 107,317 | |
_______________
(1)Represents amounts that are held in a segregated bank account by Wells Fargo Bank as collateral for an outstanding letter of credit.
(2)$1.5 million of the restricted cash balance relates to the initial capitalization of our captive insurance company formed in late 2020, and the remainder represents amounts paid to our captive insurance company for insurance premiums.
Common Shares Outstanding
The following table reconciles our outstanding common stock for the periods indicated:
| | | | | | | | |
| | Common |
| | shares |
| | |
Balance, January 1, 2020 | | 4,235,533 | |
Vesting of restricted stock unit awards (see Note 15) | | 10,290 | |
Shares withheld to cover taxes upon vesting of restricted stock unit awards | | (2,107) | |
Balance, December 31, 2020 | | 4,243,716 | |
Vesting of restricted stock unit awards (see Note 15) | | 14,244 | |
Vesting of performance share unit awards (see Note 15) | | 2,461 | |
Shares withheld to cover taxes upon vesting of equity awards | | (3,043) | |
Shares sold under at-the-market offering program | | 97,623 | |
Balance, December 31, 2021 | | 4,355,001 | |
Vesting of restricted stock unit awards (see Note 15) | | 21,814 | |
Vesting of performance share unit awards (see Note 15) | | 3,125 | |
Shares withheld to cover taxes upon vesting of equity awards | | (3,806) | |
Shares sold under at-the-market offering program | | 46,524 | |
Issuance of shares in acquisition (see Note 6) | | 15,259 | |
Repurchase of common shares (see Note 10) | | (1,942,433) | |
Balance, December 31, 2022 | | 2,495,484 | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 product 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.
Earnings Per Share
Basic earnings per share is computed by dividing our net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by giving effect to all potential common shares outstanding, including shares related to unvested restricted stock unit awards. Unvested restricted stock unit awards granted under the Adams Resources & Energy, Inc. 2018 Long-Term Incentive Plan, as amended and restated (“2018 LTIP”), or granted as employment inducement awards outside of the 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 15 for further information).
A reconciliation of the calculation of basic and diluted earnings per share was as follows for the periods indicated (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Earnings per share – numerator: | | | | | |
Net earnings | $ | 3,487 | | | $ | 11,888 | | | $ | 995 | |
| | | | | |
Denominator: | | | | | |
Basic weighted average number of shares outstanding (1) | 4,053 | | | 4,283 | | | 4,240 | |
Basic earnings per share | $ | 0.86 | | | $ | 2.78 | | | $ | 0.23 | |
| | | | | |
Diluted earnings per share: | | | | | |
| | | | | |
Diluted weighted average number of shares outstanding: | | | | | |
Common shares (1) | 4,053 | | | 4,283 | | | 4,240 | |
Restricted stock unit awards | 23 | | | 23 | | | 11 | |
Performance share unit awards (2) | 15 | | | 17 | | | 3 | |
Total | 4,091 | | | 4,323 | | | 4,254 | |
| | | | | |
Diluted earnings per share | $ | 0.85 | | | $ | 2.75 | | | $ | 0.23 | |
_______________
(1)On October 31, 2022, we repurchased 1,942,433 shares from an affiliate (see Note 10 for further information). As these shares were outstanding for the majority of 2022, the weighted average number of shares outstanding reflects the impact of those shares being outstanding through October 31, 2022.
(2)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 2020, 2021 and 2022 were achieved as of December 31, 2020, 2021 and 2022, respectively.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Benefits
We maintain a 401(k) savings plan for the benefit of our employees. We do not maintain any other pension or retirement plans. Our 401(k) plan contributory expenses were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Contributory expenses | $ | 1,283 | | | $ | 1,159 | | | $ | 1,100 | |
Equity At-The-Market Offerings
On December 23, 2020, we entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc., as agent (“Agent”), under which we may offer to sell our common shares through or to the Agent for cash from time to time. Shares sold under the agreement were as follows for the periods indicated (in thousands, except share data):
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
| | | | |
Gross proceeds from sale of common shares | | $ | 1,869 | | | $ | 2,996 | |
Less offering costs paid to Agent | | (84) | | | (135) | |
Less other offering costs | | (61) | | | (31) | |
Net proceeds from sale of common shares | | $ | 1,724 | | | $ | 2,830 | |
| | | | |
Number of common shares sold | | 46,524 | | | 97,623 | |
Average price per share | | $ | 40.20 | | | $ | 30.70 | |
Fair Value Measurements
The carrying amounts reported in the 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. The fair value of our term loan under our credit agreement (see Note 12 for further information) is representative of the carrying value based upon the variable terms and management’s opinion that the current rates available to us with the same maturity and security structure are equivalent to that of the debt.
Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk, in the principal market of the asset or liability at a specified measurement date. Recognized valuation techniques employ inputs such as contractual prices, quoted market prices or rates, operating costs, discount factors and business growth rates. These inputs may be either readily observable, corroborated by market data or generally unobservable. In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the highest extent possible. Accordingly, we utilize valuation techniques (such as the market approach) that maximize the use of observable inputs and minimize the use of unobservable inputs.
A three-tier hierarchy has been established that classifies fair value amounts recognized in the financial statements based on the observability of inputs used to estimate such fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The characteristics of the fair value amounts classified within each level of the hierarchy are described as follows:
•Level 1 fair values are based on quoted prices, which are available in active markets for identical assets or liabilities as of the measurement date. Active markets are defined as those in which transactions for identical assets or liabilities occur with sufficient frequency so as to provide pricing information on an ongoing basis. For Level 1 valuation of marketable securities, we utilize market quotations provided by our primary financial institution. For the valuations of derivative financial instruments, we utilize the New York Mercantile Exchange (“NYMEX”) for certain commodity valuations.
•Level 2 fair values are based on (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical assets or liabilities but in markets that are not actively traded or in which little information is released to the public, (c) observable inputs other than quoted prices, and (d) inputs derived from observable market data. Source data for Level 2 inputs include information provided by the NYMEX, published price data and indices, third party price survey data and broker provided forward price statistics.
•Level 3 fair values are based on unobservable market data inputs for assets or liabilities.
See Note 6 for a discussion of the Level 3 inputs used in the determination of the fair value of the intangible assets acquired in asset acquisitions and intangible assets acquired and contingent consideration issued in a business combination.
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 of the current reporting periods (see Note 13 for further information).
Fair value estimates are based on assumptions that market participants would use when pricing an asset or liability, and we use a fair value hierarchy of three levels that prioritizes the information used to develop those assumptions. Currently, for all items presented herein, we utilize a market approach to valuing our contracts. On a contract by contract, forward month by forward month basis, we obtain observable market data for valuing our contracts. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data.
Impairment Testing for Long-Lived Assets and Goodwill
Long-lived assets (primarily property and equipment and intangible assets) are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Long-lived assets with carrying values that are not expected to be recovered through future cash flows are written-down to their estimated fair values. The carrying value of a long-lived asset is deemed not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the asset’s carrying value exceeds the sum of its undiscounted cash flows, a non-cash asset impairment charge equal to the excess of the asset’s carrying value over its estimated fair value is recorded. Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. We measure fair value using market price indicators or, in the absence of such data, appropriate valuation techniques.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill, which represents the cost of an acquired business in excess of the fair value of its net assets at the acquisition date, is subject to annual impairment testing in the fourth quarter of each year or when events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable. We recognized goodwill in a business combination, which occurred in August 2022 (see Note 6 for further information). We will test goodwill for impairment at the reporting unit (or operating segment) level following guidance in ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. An impairment of goodwill represents the amount by which a reporting unit’s carrying value (including its respective goodwill) exceeds its fair value, not to exceed the carrying amount of the reporting unit’s goodwill.
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 such items and their respective tax basis (see Note 14 for further information). On December 22, 2017, the Tax Cut and Jobs Act was enacted into law resulting in a reduction in the federal corporate income tax rate from 35 percent to 21 percent for years beginning in 2018, which impacted our income tax provision or benefit.
We are subject to income taxes in the U.S. and numerous states. We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not the tax positions will be sustained on the basis of technical merits of the position and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in our consolidated statements of operations.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating losses (“NOL”) incurred in tax years 2018, 2019 and 2020 to offset 100 percent of taxable income and be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.
The NOL carryback provision in the CARES Act resulted in cash benefits to us for the fiscal years 2018, 2019 and 2020. We carried back our NOL for fiscal year 2018 to 2013 and received a cash refund of approximately $2.7 million in June 2020. We carried back our NOL for the fiscal year 2019 to 2014 and received a cash refund of approximately $3.7 million in April 2021. We carried back our NOL for fiscal year 2020 to 2015 and 2016 and received a cash refund of approximately $6.9 million in June 2022.
Inventory, and Linefill and Base Gas
Inventory consists of crude oil held in storage tanks and at third-party pipelines as part of our crude oil marketing and pipeline and storage operations. Crude oil inventory is carried at the lower of cost or net realizable value. At the end of each reporting period, we assess the carrying value of our inventory and make adjustments necessary to reduce the carrying value to the applicable net realizable value. Any resulting adjustments are a component of marketing costs and expenses or pipeline and storage expenses on our consolidated statements of operations. During the year ended December 31, 2020, we recorded a charge of $24.2 million related to the write-down of our crude oil inventory in our crude oil marketing segment due to declines in prices in 2020. There were no charges recognized during the years ended December 31, 2022 and 2021.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Linefill and base gas in assets we own are recorded at historical cost and consist of crude oil. We classify as linefill or base gas our proportionate share of barrels used to fill a pipeline that we own and barrels that represent the minimum working requirements in storage tanks that we own. These crude oil barrels are not considered to be available for sale because the volumes must be maintained in order to continue normal operation of the related pipeline or tanks. Linefill and base gas are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Linefill and base gas are included in “Property and equipment” on our Consolidated Balance Sheets. See Note 5 for additional information regarding linefill and base gas.
Investment in Unconsolidated Affiliate
We own an approximate 15 percent equity interest (less than 3 percent voting interest) in VestaCare, Inc., a California corporation (“VestaCare”), which we purchased for a $2.5 million cash payment in 2016. VestaCare provides an array of software as a service (SaaS) electronic payment technologies to medical providers, payers and patients including VestaCare’s product offering, VestaPay™. VestaPay™ allows medical care providers to structure fully automated and dynamically updating electronic payment plans for their patients. We account for this investment under the cost method of accounting. During 2017, we reviewed our investment in VestaCare and determined that the current projected operating results did not support the carrying value of the investment. As a result, during 2017, we recognized an impairment charge of $2.5 million to write-off our investment in VestaCare. At December 31, 2022, we continue to own an approximate 15 percent equity interest in VestaCare.
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 of two to thirty-nine years.
Asset retirement obligations (“AROs”) are legal obligations associated with the retirement of tangible long-lived assets that result from their acquisition, construction, development and/or normal operation. When an ARO is incurred, we record a liability for the ARO and capitalize an equal amount as an increase in the carrying value of the related long-lived asset. ARO amounts are measured at their estimated fair value using expected present value techniques. Over time, the ARO liability is accreted to its present value (through accretion expense), and the capitalized amount is depreciated over the remaining useful life of the related long-lived asset. We will incur a gain or loss to the extent that our ARO liabilities are not settled at their recorded amounts.
See Note 5 for additional information regarding our property and equipment and AROs.
Stock-Based Compensation
We measure all share-based payment awards, including the issuance of restricted stock unit awards and performance share unit awards 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 statements of operations based on the estimated fair value of those awards on the grant date and is 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 15 for additional information regarding our 2018 LTIP.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Revenue Recognition
We account for our revenues under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. ASC 606’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.
Our revenues are primarily generated from the marketing, transportation, storage and terminalling of crude oil and other related products, the tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk and the recycling and repurposing of off-specification fuels, lubricants, crude oil and other chemicals. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. To identify the performance obligations, we considered all of the products or services promised in the contracts with customers, whether explicitly stated or implied based on customary business practices. Revenue is recognized when, or as, each performance obligation is satisfied under terms of the contract. Payment is typically due in full within 30 days of the invoice date.
The following information describes the nature of our significant revenue streams by segment and type:
Crude oil marketing segment. Crude oil marketing activities generate revenues from the sale and delivery of crude oil purchased either directly from producers or on the open market. Most of our crude oil purchase and sale contracts qualify and are designated as non-trading activities, and we consider these contracts as normal purchases and sales activity. For normal purchases and sales, our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the product to the customer. Revenue is recognized based on the transaction price and the quantity delivered.
The majority of our crude oil sales contracts have multiple distinct performance obligations as the promise to transfer the individual goods (e.g., barrels of crude oil) is separately identifiable from the other goods promised within the contracts. Our performance obligations are satisfied at a point in time. For normal sales arrangements, revenue is recognized in the month in which control of the physical product is transferred to the customer, generally upon delivery of the product to the customer.
Transportation segment. Transportation activities generate revenue from the truck transportation of liquid chemicals, pressurized gases, asphalt or dry bulk from point A to point B for customers. Each sales order is associated with our master transportation agreements and is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the goods and services are delivered.
Pipeline and storage segment. Pipeline and storage activities generate revenue by transporting crude oil on our pipeline and providing storage and terminalling services for our customers. Our operations generally consist of fee-based activities associated with the transportation of crude oil and providing storage and terminalling services for crude oil. Revenues from pipeline tariffs and fees are associated with the transportation of crude oil at a published tariff. We primarily recognize pipeline tariff and fee revenues over time as services are rendered, based on the volumes transported. As is common in the pipeline transportation industry, our tariffs incorporate a loss allowance factor. We recognize the allowance volumes collected as part of the transaction price and record this non-cash consideration at fair value, measured as of the contract inception date.
Storage fees are typically recognized in revenue ratably over the term of the contract regardless of the actual storage capacity utilized as our performance obligation is to make available storage capacity for a period of time. Terminalling fees are recognized as the crude oil enters or exits the terminal and is received from or delivered to the connecting carrier or third-party terminal, as applicable.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Logistics and repurposing segment. Logistics activities generate revenue from the truck transportation of crude oil, condensate, fuels, oils and other petroleum products from point A to point B for customers. Each sales order is associated with our master transportation agreements and is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the goods and services are delivered.
Recycling and repurposing activities generate revenue by repurposing off-specification fuels, lubricants, crude oil and other chemicals. These recycling and repurposing activities generate revenues from the sale and delivery of product purchased directly from the customer. Our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the product to the customer. Revenue is recognized based on the transaction price and the quantity delivered.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and customer advances and deposits (contract liabilities) on our consolidated balance sheets. Currently, we do not record any contract assets in our financial statements due to the timing of revenue recognized and when our customers are billed. Our crude oil marketing customers are generally billed monthly based on contractually agreed upon terms. However, we sometimes receive advances or deposits from customers before revenue is recognized, resulting in contract liabilities. These contract assets and liabilities, if any, are reported on our consolidated balance sheets at the end of each reporting period.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Disaggregation
The following table disaggregates our revenue by segment and by major source for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Crude oil marketing: | | | | | |
Revenue from contracts with customers: | | | | | |
Goods transferred at a point in time | $ | 3,189,660 | | | $ | 1,898,160 | | | $ | 915,438 | |
Services transferred over time | — | | | — | | | — | |
Total revenues from contracts with customers | 3,189,660 | | | 1,898,160 | | | 915,438 | |
Other (1) | 42,533 | | | 31,882 | | | 34,988 | |
Total crude oil marketing revenue | $ | 3,232,193 | | | $ | 1,930,042 | | | $ | 950,426 | |
| | | | | |
Transportation: | | | | | |
Revenue from contracts with customers: | | | | | |
Goods transferred at a point in time | $ | — | | | $ | — | | | $ | — | |
Services transferred over time | 112,376 | | | 94,498 | | | 71,724 | |
Total revenues from contracts with customers | 112,376 | | | 94,498 | | | 71,724 | |
Other | — | | | — | | | — | |
Total transportation revenue | $ | 112,376 | | | $ | 94,498 | | | $ | 71,724 | |
| | | | | |
Pipeline and storage: (2) | | | | | |
Revenue from contracts with customers: | | | | | |
Goods transferred at a point in time | $ | — | | | $ | — | | | $ | — | |
Services transferred over time | — | | | 664 | | | 272 | |
Total revenues from contracts with customers | — | | | 664 | | | 272 | |
Other | — | | | — | | | — | |
Total pipeline and storage revenue | $ | — | | | $ | 664 | | | $ | 272 | |
| | | | | |
Logistics and repurposing: (3) | | | | | |
Revenue from contracts with customers: | | | | | |
Goods transferred at a point in time | $ | 12,865 | | | $ | — | | | $ | — | |
Services transferred over time | 9,483 | | | — | | | — | |
Total revenues from contracts with customers | 22,348 | | | — | | | — | |
Other | — | | | — | | | — | |
Total logistics and repurposing revenue | $ | 22,348 | | | $ | — | | | $ | — | |
| | | | | |
Subtotal: | | | | | |
Total revenues from contracts with customers | $ | 3,324,384 | | | $ | 1,993,322 | | | $ | 987,434 | |
Total other (1) | 42,533 | | | 31,882 | | | 34,988 | |
Total consolidated revenues | $ | 3,366,917 | | | $ | 2,025,204 | | | $ | 1,022,422 | |
_______________
(1)Other crude oil marketing revenues are recognized under ASC 815, Derivatives and Hedging, and ASC 845, Nonmonetary Transactions – Purchases and Sales of Inventory with the Same Counterparty.
(2)All pipeline and storage revenue earned in 2022 and a substantial portion of the revenue earned in 2021 were from an affiliated shipper, GulfMark Energy, Inc., our subsidiary, and eliminated in consolidation.
(3)On August 12, 2022, we acquired a transportation logistics and recycling and repurposing business, resulting in a new operating segment. See Note 6 and Note 9 for further information.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Crude Oil Marketing Revenue
Certain of the commodity purchase and sale contracts utilized by our crude oil marketing segment 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):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Revenue gross-up | $ | 1,557,510 | | | $ | 761,369 | | | $ | 419,127 | |
Note 4. Prepayments and Other Current Assets
The components of prepayments and other current assets were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
Insurance premiums | $ | 1,220 | | | $ | 641 | |
Vendor prepayment | — | | | 602 | |
Rents, licenses and other | 1,898 | | | 1,146 | |
Total prepayments and other current assets | $ | 3,118 | | | $ | 2,389 | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Property and Equipment
The historical costs of our property and equipment and related accumulated depreciation and amortization balances were as follows at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Estimated | | | | |
| Useful Life | | December 31, |
| in Years | | 2022 | | 2021 |
| | | | | |
Tractors and trailers | 5 – 6 | | $ | 128,223 | | | $ | 106,558 | |
Field equipment | 2 – 5 | | 24,676 | | | 22,851 | |
Finance lease ROU assets (1) | 3 – 6 | | 25,106 | | | 22,349 | |
Pipeline and related facilities | 20 – 25 | | 20,362 | | | 20,336 | |
Linefill and base gas (2) | N/A | | 3,922 | | | 3,922 | |
Buildings | 5 – 39 | | 16,163 | | | 16,163 | |
Office equipment | 2 – 5 | | 2,937 | | | 2,060 | |
Land | N/A | | 2,309 | | | 2,008 | |
Construction in progress | N/A | | 3,629 | | | 3,396 | |
Total property and equipment, at cost | | | 227,327 | | | 199,643 | |
Less accumulated depreciation and amortization | | | (120,902) | | | (111,607) | |
Property and equipment, net | | | $ | 106,425 | | | $ | 88,036 | |
______________
(1)Our finance lease right-of-use (“ROU”) assets arise from leasing arrangements for the right to use various classes of underlying assets including tractors, trailers, a tank storage and throughput arrangement and office equipment (see Note 17 for further information). Accumulated amortization of the assets presented as “Finance lease ROU assets” was $9.9 million and $9.7 million as of December 31, 2022 and 2021, respectively.
(2)Linefill and base gas represents crude oil in the VEX pipeline (Note 6) and storage tanks we own, and the crude oil is recorded at historical cost.
Components of depreciation and amortization expense were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Depreciation and amortization, excluding amounts | | | | | |
under finance leases | $ | 16,330 | | | $ | 14,264 | | | $ | 15,467 | |
Amortization of intangible assets (see Note 8) | 1,177 | | | 789 | | | 559 | |
Amortization of property and equipment under finance leases | 5,200 | | | 4,744 | | | 2,547 | |
Total depreciation and amortization | $ | 22,707 | | | $ | 19,797 | | | $ | 18,573 | |
Gains on Sales of Assets
We sold certain used tractors, trailers and other equipment and recorded net pre-tax gains as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Gains on sales of used tractors, trailers and equipment | $ | 2,512 | | | $ | 733 | | | $ | 1,859 | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligations
We record AROs for the estimated retirement costs associated with certain tangible long-lived assets. The estimated fair value of AROs are recorded in the period in which they are incurred and the corresponding cost is capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the asset. If the liability is settled for an amount other than the recorded amount, an increase or decrease to expense is recognized. The following table reflects a summary of our AROs for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
ARO liability at beginning of year | $ | 2,376 | | | $ | 2,307 | | | $ | 1,573 | |
Liabilities incurred | 29 | | | — | | | — | |
Accretion of discount | 58 | | | 69 | | | 49 | |
Liabilities settled | — | | | — | | | (38) | |
AROs related to pipeline acquisition (see Note 6) | — | | | — | | | 723 | |
ARO liability at end of year | $ | 2,463 | | | $ | 2,376 | | | $ | 2,307 | |
Note 6. Acquisitions
Business Combination — Firebird and Phoenix
On August 12, 2022, we entered into a purchase agreement with each of Scott Bosard, Trey Bosard and Tyler Bosard (collectively, the “Sellers”) to acquire all of the equity interests of Firebird and Phoenix for approximately $39.3 million, consisting of a cash payment of $35.4 million, 45,777 of our common shares valued at $1.4 million, of which 15,259 shares were issued immediately and 30,518 shares will be issued over a three year period, and contingent consideration valued at approximately $2.6 million. We funded the cash consideration using cash on hand at the time of acquisition. Pursuant to the purchase agreement, the purchase price is subject to customary post-closing adjustment provisions, including an earn-out payable to the Sellers to the extent the earnings before interest, taxes, depreciation and amortization (EBITDA) of Phoenix exceeds a specified threshold during the twelve full calendar months after the closing date of the acquisition.
Firebird is an interstate bulk motor carrier of crude oil, condensate, fuels, oils and other petroleum products. Firebird is headquartered in Humble, Texas, with six terminal locations throughout Texas, and operates 130 tractors and 209 trailers largely in the Eagle Ford basin. Phoenix is also headquartered in Humble, Texas, and recycles and repurposes off-specification fuels, lubricants, crude oil and other chemicals from producers in the U.S. Firebird and Phoenix have formed our new logistics and repurposing segment. We expect that this acquisition will offer us the opportunity to expand our value chain and market impact, with numerous synergies benefiting the combined companies.
The following table summarizes the aggregate preliminary consideration paid and issued for Firebird and Phoenix (in thousands):
| | | | | | | | |
Cash | | $ | 35,350 | |
Value of AE common shares issued | | 1,364 | |
Contingent consideration arrangement | | 2,566 | |
Fair value of total consideration transferred | | $ | 39,280 | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 August 12, 2022 of $33.75, discounted to present value using the appropriate discount rate.
We accounted for the acquisition of Firebird and Phoenix under the acquisition method in accordance with ASC 805, Business Combinations. The allocation of purchase consideration was based upon the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.
The following table presents the preliminary purchase price allocation to estimated fair values of the identifiable assets acquired and liabilities assumed at the acquisition date of August 12, 2022 (in thousands):
| | | | | | | | |
Assets acquired: | | |
Cash and cash equivalents | | $ | 2,203 | |
Accounts receivable | | 4,653 | |
Inventory | | 643 | |
Other current assets | | 137 | |
Property and equipment | | 25,054 | |
Intangible assets | | 7,607 | |
Goodwill | | 6,428 | |
Other assets | | 458 | |
Total assets acquired | | $ | 47,183 | |
| | |
Liabilities assumed: | | |
Accounts payable and other accrued liabilities | | $ | (1,696) | |
Deferred tax liabilities | | (6,207) | |
Total liabilities assumed | | $ | (7,903) | |
Net assets acquired | | $ | 39,280 | |
The purchase price allocation is subject to revision as acquisition-date fair value analyses are completed and if additional information about facts and circumstances that existed at the acquisition date becomes available. The purchase price consideration, as well as the estimated fair values of the assets acquired and liabilities assumed, will be finalized as soon as practicable, but no later than one year from the closing of the acquisition.
The estimated fair value of the acquired property and equipment was determined using a combination of the cost approach and the market approach, specifically determining the replacement cost value of each type of asset.
Acquired identifiable intangible assets consists of approximately $5.1 million for customer relationships, $2.2 million for trade names, and $0.3 million for noncompete agreements entered into with the Sellers in connection with the acquisition. The estimated fair value of the acquired customer relationship intangible assets was determined using an income approach, specifically a discounted cash flow analysis, and are being amortized on a modified straight-line basis over a period of ten years, with the amortization more heavily weighted in the earlier years. 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. The estimated fair value of the trade names was determined using the relief from royalty method, a form of the income approach, and are being amortized on a straight-line basis over a period of 15 years. The estimated fair value of the noncompete agreements was determined using an income approach, specifically a discounted cash flow analysis, and are being amortized over a period of five years.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The goodwill of approximately $6.4 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base and with the assembled workforce that we acquired. None of the goodwill is expected to be deductible for tax purposes. We recorded net tax liabilities of approximately $6.2 million related to the tax effect of our estimated fair value allocations.
The discounted cash flow analysis used to estimate the fair value of the Firebird and Phoenix intangible assets 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. The valuations were based on the information that was available as of the acquisition date, and the expectations and assumptions that have been deemed reasonable by our management. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the fair value hierarchy.
This newly acquired business contributed $22.3 million of revenues and $0.2 million of net earnings to our consolidated revenues and net earnings, respectively, for the period from acquisition through December 31, 2022. We incurred approximately $0.4 million of acquisition costs in connection with this acquisition, which have been expensed in general and administrative expense as incurred.
In connection with the acquisition of Firebird and Phoenix, we entered into four operating lease agreements for office and terminal locations with Scott Bosard, one of the Sellers, for periods ranging from two to five years (see Note 10 and Note 17 for further information).
Unaudited Pro Forma Financial Information
The unaudited pro forma condensed consolidated results of operations in the table below are provided for illustrative purposes only and summarize the combined results of our operations and those of Firebird and Phoenix. For purposes of this pro forma presentation, the acquisition of Firebird and Phoenix is assumed to have occurred on January 1, 2021. The pro forma financial information for all periods presented also includes the estimated business combination accounting effects resulting from this acquisition, notably amortization expense from the acquired intangible assets and certain other integration related impacts. This unaudited pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had actually occurred on January 1, 2021, nor of the results of operations that may be obtained in the future (in thousands).
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| | | |
Revenues | $ | 3,411,168 | | | $ | 2,074,803 | |
Net earnings | 5,538 | | | 13,822 | |
| | | |
Basic net earnings per common share | $ | 1.36 | | | $ | 3.22 | |
Diluted net earnings per common share | $ | 1.35 | | | $ | 3.19 | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Pipeline and Related Terminal Facility Assets
On October 22, 2020, we and our subsidiary, GulfMark Terminals, LLC (“GMT”) entered into a purchase and sale agreement with EnLink Midstream Operating, L.P. for the purchase of the outstanding equity interests of Victoria Express Pipeline, LLC (“VEX”) and certain related pipeline terminal facility assets for $20.0 million, plus a cash payment of $0.5 million for working capital items. Of the purchase price, $10.0 million was paid at closing, with the remainder to be paid in four quarterly installments of $2.5 million, plus interest at a rate of 4.0 percent per annum, beginning in March 2021. The equity interests in GMT, VEX and the other acquired assets were pledged to secure the payment of the installment portions of the purchase price as part of the agreement.
The VEX Pipeline System, with truck and storage terminals at both Cuero and the Port of Victoria, Texas, is a crude oil and condensate pipeline system, which connects the heart of the Eagle Ford Basin to the Gulf Coast waterborne market. The VEX Pipeline System includes 56 miles of 12-inch pipeline, which spans DeWitt County to Victoria County, Texas, with 350,000 barrels of above ground storage, two 8 bay truck offload stations, and access to two docks at the Port of Victoria. The VEX Pipeline System is able to receive crude oil by pipeline and truck, and has downstream pipeline connections to two terminals, with potential for additional downstream connection opportunities in the future. The pipeline system has a current capacity of 90,000 barrels per day.
The VEX Pipeline System and related terminal assets have been included in our pipeline and storage segment. We expect that this acquisition will further strengthen our ability to provide excellent service to the producers in the Gulf Coast region, as well as more effectively service our end-user markets along the Gulf Coast. In addition, the VEX Pipeline System complements our existing storage terminal and dock at the Port of Victoria, where we now control approximately 450,000 barrels of storage with three docks after giving effect to the acquisition.
In addition to the purchase price of $20.0 million and a cash payment of $0.5 million for working capital items, we also incurred approximately $0.6 million of acquisition costs in connection with this acquisition, which has been included in the allocation of the total purchase price of $21.0 million to the assets acquired. We accounted for this acquisition as an asset acquisition as substantially all of the fair value of the gross assets is concentrated in a group of similarly identifiable assets.
The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets and liabilities acquired at the acquisition date (in thousands):
| | | | | | | | |
Accounts receivable and other current assets | | $ | 80 | |
Linefill and base gas | | 1,013 | |
Property and equipment — Pipeline and related terminal facilities | | 20,542 | |
Accounts payable and other accrued liabilities | | (598) | |
Total purchase price | | $ | 21,037 | |
The estimated fair value of the acquired property and equipment was determined using the cost approach, specifically determining the replacement cost value of each type of asset.
In connection with the acquisition, we recorded an ARO of approximately $0.7 million related to legal and regulatory requirements to perform specified retirement activities, including purging and sealing the pipeline if it is abandoned.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Transportation Assets — CTL
On May 17, 2020, we entered into a purchase and sale agreement with Comcar Industries, Inc. (“Comcar”), a bulk carrier trucking company, for the purchase of substantially all of the transportation assets of Comcar’s subsidiary, CTL Transportation, LLC (“CTL”). CTL provides short-haul delivery services to customers in the chemical industry, with operations in nine locations in the southeastern United States. On June 26, 2020, we closed on the asset acquisition for approximately $9.0 million in cash. This acquisition added approximately 163 tractors and 328 trailers to our existing transportation fleet, and these assets were included in our transportation segment. This acquisition added new customers, new market areas and new product lines to our transportation segment portfolio. As a result of the acquisition, we added services to new and existing customers in six new market areas, including new terminals in Louisiana, Missouri, Ohio, Georgia and Florida.
We also incurred approximately $0.1 million of acquisition costs in connection with this acquisition, which has been included in the allocation of the total purchase price of $9.2 million to the assets acquired.
The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired at the acquisition date (in thousands):
| | | | | | | | |
Property and equipment — tractors and trailers | | $ | 5,901 | |
Materials and supplies | | 87 | |
Intangible assets — customer relationships | | 3,175 | |
Total purchase price | | $ | 9,163 | |
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 CTL and various customers to whom we did not have a previous relationship. The customer relationships we acquired in this transaction provide us with access to those customers to whom we did not have a previous relationship and allows us to enter product markets in which we have not previously participated. Because of the highly competitive and fragmented transportation market, we believe access to these customers will provide us with an entry into new market areas.
The discounted cash flow analysis used to estimate the fair value of the CTL 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 CTL customer relationships, the Level 3 inputs included the rate of retention of the current customers of CTL as of the valuation date, our transportation segment’s historical customer retention rate and projected future revenues associated with the customers. The CTL customers expected to remain with us after the transaction were included in the valuation of the customer relationships. We are amortizing the customer relationship intangible assets over a period of seven years, using a modified straight-line approach. See Note 8 for further information regarding our intangible assets.
In connection with the acquisition, we entered into a finance lease agreement for an additional 40 trailers with a six year term. See Note 17 for further information regarding finance leases.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Other Assets
Components of other assets were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
Amounts associated with liability insurance program: | | | |
Insurance collateral deposits | $ | 463 | | | $ | 721 | |
Excess loss fund | — | | | 622 | |
Accumulated interest income | — | | | 489 | |
Other amounts: | | | |
State collateral deposits | 23 | | | 36 | |
Materials and supplies | 1,257 | | | 574 | |
Debt issuance costs | 1,595 | | | 292 | |
Other | 360 | | | 293 | |
Total other assets | $ | 3,698 | | | $ | 3,027 | |
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 expected losses under the insurance programs. Excess amounts in our loss fund represented 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. As of December 31, 2022, all previous insurance policies that were funded through a loss fund have been fully commuted and any excess loss fund has been refunded. Interest income was earned on the majority of amounts held by the insurance companies and was paid to us upon commutation of policy years.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Intangible Assets and Goodwill
Intangible Assets
The following table summarizes our intangible assets at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Gross | | Accumulated | | | | Gross | | Accumulated | | |
| Value | | Amortization | | Net | | Value | | Amortization | | Net |
Customer relationships: | | | | | | | | | | | |
EH Transport (1) | $ | 1,703 | | | $ | (1,010) | | | $ | 693 | | | $ | 1,703 | | | $ | (765) | | | $ | 938 | |
CTL (2) | 3,173 | | | (1,286) | | | 1,887 | | | 3,173 | | | (794) | | | 2,379 | |
Phoenix (3) | 5,072 | | | (360) | | | 4,712 | | | — | | | — | | | — | |
Total customer relationships | 9,948 | | | (2,656) | | | 7,292 | | | 4,876 | | | (1,559) | | | 3,317 | |
Trade names (3) | 2,218 | | | (57) | | | 2,161 | | | — | | | — | | | — | |
Noncompete agreements (3) | 317 | | | (25) | | | 292 | | | — | | | — | | | — | |
Intangible assets, net | $ | 12,483 | | | $ | (2,738) | | | $ | 9,745 | | | $ | 4,876 | | | $ | (1,559) | | | $ | 3,317 | |
____________
(1)Amount relates to the acquisition of transportation assets from EH Transport, Inc. in 2019, and are included in our transportation segment. These assets are being amortized using a modified straight-line approach and have a remaining useful life of approximately 3.5 years.
(2)Amounts relates to the acquisition of transportation assets from Comcar in 2020, and are included in our transportation segment. These assets are being amortized using a modified straight-line approach and have a remaining useful life of approximately 4.5 years.
(3)Amounts relate to the acquisition of Firebird and Phoenix in 2022, and are included in our logistics and repurposing segment. Customer relationships, trade names and noncompete agreements have remaining useful lives of approximately 9.5 years, 14.5 years and 4.5 years, respectively. See Note 6 for further information.
During the years ended December 31, 2022, 2021 and 2020, we recorded $1.2 million, $0.8 million and $0.6 million, respectively, of amortization expense related to these intangible assets.
The following table presents our forecast of amortization expense associated with these intangible assets for the years indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Amortization expense | | $ | 1,792 | | | $ | 1,658 | | | $ | 1,555 | | | $ | 1,306 | | | $ | 908 | |
Customer Relationship Intangible Assets. Customer relationship intangible assets represent the estimated economic value assigned to commercial relationships acquired in connection with business and asset acquisitions. The estimated fair value of each customer relationship intangible asset was determined at the time of acquisition using a discounted cash flow analysis, which incorporated various assumptions regarding the acquired business or assets. The assumptions may include Level 3 fair value inputs, including the rate of retention of the customers of the acquisition, the rate of retention of our existing business and projected future revenues associated with the customers. The customer relationship intangible assets are being amortized in a manner that closely resembles the pattern in which we expect to benefit from the relationships.
Trade Names and Noncompete Agreements Intangible Assets. Trade names intangible assets represent the estimated economic value of the commercial trade names acquired in connection with the Firebird and Phoenix acquisition in August 2022. The trade names intangible assets are being amortized on a straight-line basis over the period in which we expect to benefit from the use of the trade names.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Noncompete agreements intangible assets represent the estimated economic value of the three noncompete agreements that we entered into with the former owners of Firebird and Phoenix. The noncompete agreements intangible assets are being amortized on a straight-line basis over the term of the agreements.
Goodwill
Goodwill represents the cost of an acquired business in excess of the fair value of the net assets at acquisition. Our goodwill balance was $6.4 million at December 31, 2022 and relates to the Firebird and Phoenix acquisition included in our logistics and repurposing segment.
Note 9. Segment Reporting
We operate and report in four business segments: (i) crude oil marketing, transportation and storage; (ii) tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk; (iii) pipeline transportation, terminalling and storage of crude oil; and (iv) beginning in the third quarter of 2022, interstate bulk transportation logistics of crude oil, condensate, fuels, oils and other petroleum products and recycling and repurposing of off-specification fuels, lubricants, crude oil and other chemicals, which includes the businesses we acquired in August 2022 (see Note 6 for further information regarding our acquisition). Our business segments are generally organized and managed according to the types of services rendered. See Note 3 for a summary of the types of products and services from which each segment derives its revenues.
Our Chief Operating Decision Maker (“CODM”) (our Chief Executive Officer) evaluates segment performance based on measures including segment operating earnings (losses) and capital spending (property and equipment additions). Segment operating earnings (losses) is calculated as segment revenues less segment operating costs and depreciation and amortization expense.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial information by reporting segment was as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reporting Segments | | |
| Crude oil marketing | | Trans-portation | | Pipeline and storage | | Logistics and repurposing (1) | | Other | | Total |
| | | | | | | | | | | |
Year Ended December 31, 2022 | | | | | | | | | | |
Segment revenues (2) | $ | 3,232,193 | | | $ | 112,653 | | | $ | 3,804 | | | $ | 24,654 | | | $ | — | | | $ | 3,373,304 | |
Less: Intersegment revenues (2) | — | | | (277) | | | (3,804) | | | (2,306) | | | — | | | (6,387) | |
Revenues | $ | 3,232,193 | | | $ | 112,376 | | | $ | — | | | $ | 22,348 | | | $ | — | | | $ | 3,366,917 | |
| | | | | | | | | | | |
Segment operating earnings (losses) (3) | 15,874 | | | 10,891 | | | (3,579) | | | 303 | | | — | | | 23,489 | |
Depreciation and amortization | 7,724 | | | 11,512 | | | 1,077 | | | 2,394 | | | — | | | 22,707 | |
Property and equipment additions (4) (5) | 4,534 | | | 1,608 | | | 1,050 | | | 282 | | | 17 | | | 7,491 | |
| | | | | | | | | | | |
Year Ended December 31, 2021 | | | | | | | | | | |
Segment revenues (2) | $ | 1,930,042 | | | $ | 94,824 | | | $ | 4,524 | | | $ | — | | | $ | — | | | $ | 2,029,390 | |
Less: Intersegment revenues (2) | — | | | (326) | | | (3,860) | | | — | | | — | | | (4,186) | |
Revenues | $ | 1,930,042 | | | $ | 94,498 | | | $ | 664 | | | $ | — | | | $ | — | | | $ | 2,025,204 | |
| | | | | | | | | | | |
Segment operating earnings (losses) (3) | 25,243 | | | 7,104 | | | (2,487) | | | — | | | — | | | 29,860 | |
Depreciation and amortization | 6,673 | | | 12,099 | | | 1,025 | | | — | | | — | | | 19,797 | |
Property and equipment additions (4) (5) | 3,245 | | | 7,960 | | | 1,169 | | | — | | | 8 | | | 12,382 | |
| | | | | | | | | | | |
Year Ended December 31, 2020 | | | | | | | | | | |
Segment revenues (2) | $ | 950,426 | | | $ | 71,724 | | | $ | 272 | | | $ | — | | | $ | — | | | $ | 1,022,422 | |
Less: Intersegment revenues (2) | — | | | — | | | — | | | — | | | — | | | — | |
Revenues | $ | 950,426 | | | $ | 71,724 | | | $ | 272 | | | $ | — | | | $ | — | | | $ | 1,022,422 | |
| | | | | | | | | | | |
Segment operating earnings (losses) (3) | 2,974 | | | 1,873 | | | (310) | | | — | | | — | | | 4,537 | |
Depreciation and amortization | 7,421 | | | 10,963 | | | 189 | | | — | | | — | | | 18,573 | |
Property and equipment additions (4) (5) | 3,130 | | | 1,355 | | | — | | | — | | | 523 | | | 5,008 | |
_______________
(1)On August 12, 2022, we acquired a transportation logistics and recycling and repurposing business, resulting in a new operating segment. See Note 6 for further information.
(2)Segment revenues include intersegment amounts that are eliminated in operating costs and expenses in our consolidated statements of operations. Intersegment activities are conducted at posted tariff rates where applicable, or otherwise at rates similar to those charged to third parties or rates that we believe approximate market at the time the agreement is executed.
(3)Our crude oil marketing segment’s operating earnings included net inventory valuation losses of $2.0 million, net inventory liquidation gains of $10.3 million, and net inventory valuation losses of $15.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(4)Our segment property and equipment additions do not include assets acquired under finance leases during the years ended December 31, 2022, 2021 and 2020. See Note 17 for further information.
(5)Amounts included in property and equipment additions for Other are additions for leasehold improvements and computer equipment at our corporate headquarters, which were not attributed or allocated to any of our reporting segments.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment operating earnings reflect revenues net of operating costs and depreciation and amortization expense and are reconciled to earnings (losses) before income taxes, as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Segment operating earnings | $ | 23,489 | | | $ | 29,860 | | | $ | 4,537 | |
General and administrative | (17,718) | | | (13,701) | | | (10,284) | |
Operating earnings (losses) | 5,771 | | | 16,159 | | | (5,747) | |
| | | | | |
Interest income | 921 | | | 243 | | | 656 | |
Interest expense | (1,287) | | | (746) | | | (444) | |
Earnings (losses) before income taxes | $ | 5,405 | | | $ | 15,656 | | | $ | (5,535) | |
Identifiable assets by industry segment were as follows at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Reporting segment: | | | | | |
Marketing | $ | 215,813 | | | $ | 162,770 | | | $ | 128,441 | |
Transportation | 60,405 | | | 67,167 | | | 72,247 | |
Pipeline and storage | 25,815 | | | 25,569 | | | 24,541 | |
Logistics and repurposing (1) | 45,307 | | | — | | | — | |
Cash and other (2) | 36,819 | | | 119,197 | | | 70,958 | |
Total assets | $ | 384,159 | | | $ | 374,703 | | | $ | 296,187 | |
_________________
(1)On August 12, 2022, we acquired a transportation logistics and recycling and repurposing business, resulting in a new operating segment. See Note 6 for further information.
(2)Other identifiable assets are primarily corporate cash, corporate accounts receivable, properties and operating lease right-of-use assets not identified with any specific segment of our business.
All of our property and equipment is located in the U.S. Substantially all of our consolidated revenues are earned in the U.S. and derived from a wide customer base. Accounting policies for transactions between business segments are consistent with applicable accounting policies as disclosed herein.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Transactions with Affiliates
We enter into certain transactions in the normal course of business with affiliated entities. Activities with affiliates were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
KSA and affiliate billings to us | $ | 7 | | | $ | 13 | | | $ | 18 | |
Billings to KSA and affiliates | 21 | | | 14 | | | 5 | |
Rentals paid to affiliate of KSA | 549 | | | 605 | | | 644 | |
Payments to KSA and affiliates for purchase of vehicles (1) | 78 | | | 469 | | | — | |
Rentals paid to Scott Bosard (2) | 170 | | | — | | | — | |
_________________
(1)Amounts paid to West Point Buick GMC are for the purchase of two and twelve pickup trucks during the years ended December 31, 2022 and 2021, respectively, and are net of trade-in values.
(2)Amounts for rentals paid to Scott Bosard are from the period from August 12, 2022 through December 31, 2022, the period in which Scott Bosard is a related party.
Affiliated transactions include direct cost reimbursement for shared phone and administrative services from KSA Industries, Inc. (“KSA”), an affiliated entity. We lease our corporate office space in a building operated by 17 South Briar Hollow Lane, LLC, an affiliate of KSA. In addition, we purchase pickup trucks from West Point Buick GMC, an affiliate of KSA.
On October 31, 2022, we entered into a Stock Repurchase Agreement (the “Repurchase Agreement”) with KSA and certain members of the family of the late Kenneth Stanley Adams, Jr., our founder (collectively, the “KSA Sellers”). Prior to the transaction, KSA was our largest shareholder. Under the terms of the Repurchase Agreement, we purchased an aggregate of 1,942,433 shares of our common stock from the KSA Sellers for an aggregate purchase price of $69.9 million, at a price of $36.00 per share. The purchase price was funded with the proceeds of the $25.0 million term loan under our new credit agreement with Cadence Bank (see Note 12 for further information), with the balance funded with cash on hand at the time of the transaction.
In connection with the acquisition of Firebird and Phoenix (see Note 6 for further information), we entered into four operating lease agreements for office and terminal locations with Scott Bosard, one of the Sellers, for periods ranging from two to five years.
Note 11. Other Current Liabilities
The components of other current liabilities were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
| | | |
Accrual for payroll, benefits and bonuses | $ | 6,435 | | | $ | 5,210 | |
Accrued automobile and workers’ compensation claims | 5,579 | | | 4,127 | |
Contingent consideration for acquisition (see Note 6) | 2,566 | | | — | |
Accrued medical claims | 1,007 | | | 1,100 | |
Accrued taxes | 2,208 | | | 534 | |
Other | 1,419 | | | 651 | |
Total other current liabilities | $ | 19,214 | | | $ | 11,622 | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Long-Term Debt
Wells Fargo Credit Agreement
On May 4, 2021, we entered into a credit agreement (“Wells Fargo Credit Agreement”) with Wells Fargo Bank, National Association, as Agent and Issuing Lender, under which we could borrow or issue letters of credit in an aggregate of up to $40.0 million under a revolving credit facility (the “Wells Fargo Revolving Credit Facility”), which was to mature on May 4, 2024. On August 11, 2022, we entered into an amendment to our Wells Fargo Credit Agreement, which increased our borrowing capacity up to $60.0 million and extended the maturity of the facility to August 11, 2025.
The Wells Fargo Credit Agreement amendment also provided for the replacement of LIBOR with the Secured Overnight Financing Rate, as administered by the Federal Reserve Bank of New York (“SOFR”). Borrowings under the Wells Fargo Revolving Credit Facility bore interest, at our election, at (i) the Base Rate plus Applicable Margin; or (ii) the Adjusted Term SOFR plus Applicable Margin. Base Rate was the highest of (a) the Prime Rate, (b) the Federal Funds Rate, plus 0.50 percent and (c) Adjusted TERM SOFR for an interest period of one month plus 1.00 percent. The Applicable Margin to be added to a Base Rate borrowing was 0.75 percent. The Applicable Margin to be added to an Adjusted Term SOFR borrowing was 1.75 percent. A commitment fee of 0.25 percent per annum accrued on the daily average unused amount of the commitments under the Wells Fargo Revolving Credit Facility.
On October 27, 2022, we terminated the Wells Fargo Credit Agreement, and we wrote off $0.4 million of unamortized debt issuance costs to interest expense. No further amounts are outstanding under this credit agreement.
Cadence Bank Credit Agreement
On October 27, 2022, we entered into a new Credit Agreement (the “Credit Agreement”) with Cadence Bank, as administrative agent, swingline lender and issuing lender, and the other lenders party thereto (collectively, the “Lenders”). The Credit Agreement provides for (a) a revolving credit facility that allows for borrowings up to $60.0 million in aggregate principal amount from time to time (the “Revolving Credit Facility”) and (b) a Term Loan in aggregate principal amount of $25.0 million (the “Term Loan”).
For each borrowing under the Revolving Credit Facility, we may elect whether such loans bear interest at (i) the Base Rate plus Applicable Margin for Base Rate Loans; or (ii) Term SOFR plus the Applicable Margin for SOFR Loans. The Base Rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5 percent and (c) Adjusted Term SOFR for a one month tenor in effect on the date of determination plus 1.0 percent. The Applicable Margin to be added to a Base Rate borrowing under either (a), (b) or (c) in the preceding sentence is an amount determined quarterly between 1.0 percent and 2.0 percent depending on our consolidated total leverage ratio. The Applicable Margin to be added to a Term SOFR borrowing under the Revolving Credit Facility is an amount determined quarterly between 2.0 percent and 3.0 percent depending on our consolidated total leverage ratio. A commitment fee of 0.25 percent per annum accrues on the daily average unused amount of the commitments of the Lenders under the Revolving Credit Facility. We may obtain letters of credit under the Revolving Credit Facility up to a maximum amount of $30.0 million. The amount of our outstanding letters of credit reduces availability under the Revolving Credit Facility. The Revolving Credit Facility matures on October 27, 2027 unless earlier terminated.
The Term Loan amortizes on a ten year schedule with quarterly payments beginning December 31, 2022, and matures on October 27, 2027 unless earlier accelerated. The Term Loan may be prepaid in whole or in part without premium or penalty, and must be prepaid with proceeds of any future debt issuance, the proceeds of any equity issuance to the extent proceeds exceed $2.0 million in any quarter with limited exceptions, and the proceeds of certain asset dispositions. The Term Loan bears interest at the SOFR Rate plus the Applicable Margin for SOFR Rate Loans as described above. In connection with the KSA stock repurchase (see Note 10), we borrowed $25.0 million under the Term Loan. At December 31, 2022, the weighted average interest rate for the amount outstanding under the Term Loan was 6.29 percent.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the terms of the Credit Agreement, we are required to maintain compliance with the following financial covenants on a pro forma basis, after giving effect to any borrowings (in each case commencing with the fiscal quarter ending December 31, 2022): (i) the Consolidated Total Leverage Ratio shall not be greater than 2.50 to 1.00; (ii) the Asset Coverage Ratio shall not be less than 2.00 to 1.00; and (iii) the Consolidated Fixed Charge Coverage Ratio shall not be less than 1.25 to 1.00. Each of such ratios is calculated as outlined in the Credit Agreement and subject to certain exclusions and qualifications described therein.
The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants. The affirmative covenants require us to provide the Lenders with certain financial statements, business plans, compliance certificates and other documents and reports and to comply with certain laws. The negative covenants restrict our ability to incur additional indebtedness, create additional liens on our assets, make certain investments, dispose of our assets or engage in a merger or other similar transaction or engage in transactions with affiliates, subject, in each case, to the various exceptions and conditions described in the Credit Agreement. The negative covenants further restrict our ability to make certain restricted payments.
Our obligations under the Credit Agreement are secured by a pledge of substantially all of our personal property and substantially all of the personal property of certain other our direct and indirect subsidiaries.
At December 31, 2022, we had $24.4 million outstanding under the Term Loan, no amounts outstanding under the Revolving Credit Facility, and $8.4 million letters of credit outstanding. The following table presents the scheduled maturities of principal amounts of our debt obligations at December 31, 2022 for the next five years, and in total thereafter (in thousands):
| | | | | | | | |
2023 | | $ | 2,500 | |
2024 | | 2,500 | |
2025 | | 2,500 | |
2026 | | 2,500 | |
2027 | | 14,375 | |
Thereafter | | — | |
Total debt maturities | | $ | 24,375 | |
At December 31, 2022, we were in compliance with all covenants under the Credit Agreement. We incurred $1.6 million of debt issuance costs in connection with our entry into the Credit Agreement, which are included in other assets in our consolidated balance sheet and are being amortized to interest expense over the term of the Credit Agreement.
Note 13. Derivative Instruments and Fair Value Measurements
Derivative Instruments
At December 31, 2022, we had in place three commodity purchase and sale contracts, entered into in 2022 for a total of 300,000 barrels of crude oil to be purchased and sold in January 2023, and a commodity purchase contract, also entered into in 2022, for the purchase of 126,000 gallons of diesel fuel per month during January 2023 through December 2023.
At December 31, 2021, we had in place four commodity purchase and sale contracts, of which two had a fair value associated with them as the contractual prices of crude oil were outside the range of prices specified in the agreements. These commodity purchase and sale contracts encompassed approximately 324 barrels per day of crude oil during January 2022 through December 2022.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of forward month commodity contracts (derivatives) reflected in the accompanying consolidated balance sheets were as follows at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Location and Amount |
| Current | | Other | | Current | | Other |
December 31, 2022 | Assets | | Assets | | Liabilities | | Liabilities |
Asset derivatives: | | | | | | | |
Fair value forward hydrocarbon commodity | | | | | | | |
contracts at gross valuation | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Liability derivatives: | | | | | | | |
Fair value forward hydrocarbon commodity | | | | | | | |
contracts at gross valuation | — | | | — | | | 330 | | | — | |
Less counterparty offsets | — | | | — | | | — | | | — | |
As reported fair value contracts | $ | — | | | $ | — | | | $ | 330 | | | $ | — | |
| | | | | | | |
December 31, 2021 | | | | | | | |
Asset derivatives: | | | | | | | |
Fair value forward hydrocarbon commodity | | | | | | | |
contracts at gross valuation | $ | 347 | | | $ | — | | | $ | — | | | $ | — | |
Liability derivatives: | | | | | | | |
Fair value forward hydrocarbon commodity | | | | | | | |
contracts at gross valuation | — | | | — | | | 324 | | | — | |
Less counterparty offsets | — | | | — | | | — | | | — | |
As reported fair value contracts | $ | 347 | | | $ | — | | | $ | 324 | | | $ | — | |
We only enter into commodity contracts with creditworthy counterparties and evaluate our exposure to significant counterparties on an ongoing basis. At December 31, 2022 and 2021, 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 consolidated statements of operations were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Gains (Losses) |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Revenues – marketing | $ | (23) | | | $ | 14 | | | $ | 9 | |
Costs and expenses – marketing | 330 | | | — | | | — | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
The following table reflects, 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | | | |
December 31, 2022 | | | | | | | | | |
Derivatives: | | | | | | | | | |
Current assets | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Current liabilities | — | | | (330) | | | — | | | — | | | (330) | |
Net value | $ | — | | | $ | (330) | | | $ | — | | | $ | — | | | $ | (330) | |
| | | | | | | | | |
December 31, 2021 | | | | | | | | | |
Derivatives: | | | | | | | | | |
Current assets | $ | — | | | $ | 347 | | | $ | — | | | $ | — | | | $ | 347 | |
Current liabilities | — | | | (324) | | | — | | | — | | | (324) | |
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 December 31, 2022 and 2021, credit valuation adjustments were not significant to the overall valuation of our fair value contracts. As a result, applicable fair value assets and liabilities are included in their entirety in the fair value hierarchy.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Income Taxes
The components of our income tax (provision) benefit were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | (3,766) | | | $ | (4,811) | | | $ | 13,246 | |
State | (288) | | | (358) | | | (327) | |
Total current | (4,054) | | | (5,169) | | | 12,919 | |
Deferred: | | | | | |
Federal | 2,386 | | | 1,347 | | | (6,631) | |
State | (250) | | | 54 | | | 242 | |
Total deferred | 2,136 | | | 1,401 | | | (6,389) | |
Total (provision for) benefit from income taxes | $ | (1,918) | | | $ | (3,768) | | | $ | 6,530 | |
A reconciliation of the (provision for) benefit from income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes was as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Pre-tax net book income (loss) | $ | 5,405 | | | $ | 15,656 | | | $ | (5,535) | |
| | | | | |
Statutory federal income tax (provision) benefit | $ | (1,135) | | | $ | (3,288) | | | $ | 1,162 | |
State income tax provision | (478) | | | (224) | | | (16) | |
Permanent differences | (296) | | | (94) | | | (18) | |
2018/2019 carryback | — | | | — | | | 2,664 | |
2020 carryback | — | | | — | | | 2,642 | |
Return to provision adjustments | 8 | | | (88) | | | 13 | |
Other | (17) | | | (74) | | | 83 | |
Total (provision for) benefit from income taxes | $ | (1,918) | | | $ | (3,768) | | | $ | 6,530 | |
Effective income tax rate (1) (2) | 35 | % | | 24 | % | | 118 | % |
_______________
(1)Our effective tax rate for the year ended December 31, 2022 is higher than our statutory tax rate primarily due to non-deductible expenses, the mix of earnings in states with higher tax rates and less earnings before income taxes as compared to prior years.
(2)Excluding the adjustment related to the carryback of the 2018, 2019 and 2020 net operating losses, the effective income tax rate for the year ended December 31, 2020 was 22 percent.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net difference between the financial statement carrying amounts and the underlying income tax basis in these items. The components of the federal deferred tax asset (liability) were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
Long-term deferred tax asset (liability): | | | |
Prepaid and other insurance | $ | (707) | | | $ | (832) | |
Property | (15,208) | | | (9,677) | |
ROU assets | 1,701 | | | 1,388 | |
ROU liabilities | (1,701) | | | (1,389) | |
Amortization | (869) | | | (1,773) | |
Investment in unconsolidated affiliate | 537 | | | 525 | |
Valuation allowance related to investment in unconsolidated affiliate | (537) | | | (525) | |
Net operating loss | 239 | | | 621 | |
Other | 1168 | | | 355 | |
Net long-term deferred tax liability | (15,377) | | | (11,307) | |
Net deferred tax liability | $ | (15,377) | | | $ | (11,307) | |
Financial statement recognition and measurement of positions taken, or expected to be taken, by an entity in its income tax returns must consider the uncertainty and judgment involved in the determination and filing of income taxes. Tax positions taken in an income tax return that are recognized in the financial statements must satisfy a more-likely-than-not recognition threshold, assuming that the tax position will be examined by taxing authorities with full knowledge of all relevant information. We have no significant unrecognized tax benefits. Interest and penalties associated with income tax liabilities are classified as income tax expense.
The earliest tax years remaining open for audit for federal and major states of operations are as follows:
| | | | | |
| Earliest Open |
| Tax Year |
| |
Federal | 2016 |
Texas | 2018 |
Louisiana | 2019 |
Michigan | 2018 |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Stock-Based Compensation Plan
In May 2018, our shareholders approved the 2018 LTIP, a long-term incentive plan under which any employee or non-employee director who provides services to us is eligible to participate in the plan. The 2018 LTIP, which is overseen by the Compensation Committee of our Board of Directors, provides for the grant of various types of equity awards, of which restricted stock unit awards and performance-based compensation awards have been granted. We began awarding stock-based compensation to eligible employees and directors in June 2018. In May 2022, our shareholders approved an amendment and restatement of the 2018 LTIP, in which the maximum number of shares authorized for issuance under the 2018 LTIP was increased by 150,000 shares to a total of 300,000 shares, and the term of the 2018 LTIP was extended through February 23, 2032. After giving effect to awards granted and forfeitures made under the 2018 LTIP, and the achievement of performance factors through December 31, 2022, a total of 170,048 shares were available for issuance.
Compensation expense recognized in connection with equity-based awards was as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Compensation expense | $ | 1,022 | | | $ | 854 | | | $ | 643 | |
On August 12, 2022, we granted equity inducement awards to each of Trey Bosard and Tyler Bosard in connection with the acquisition of Firebird and Phoenix (see Note 6 for further information), pursuant to their respective employment agreements. As an inducement material to each of their accepting employment with Phoenix following the acquisition, the Board of Directors approved a grant of $0.5 million of restricted stock units to each of Trey Bosard and Tyler Bosard. The inducement awards were granted outside the terms of the 2018 LTIP. The inducement awards vest in three separate tranches on each of the first three anniversaries of the grant date.
If dividends are paid with respect to our common shares during the vesting period, an equivalent amount will accrue and be held by us without interest until the restricted stock unit awards and performance share unit awards vest, at which time the amount will be paid to the recipient. If the award is forfeited prior to vesting, the accrued dividends will also be forfeited. At December 31, 2022 and 2021, we had $140,300 and $82,500, respectively, of accrued dividend amounts for awards granted under the 2018 LTIP.
Restricted Stock Unit Awards
A restricted stock unit award is a grant of a right to receive our common shares in the future at no cost to the recipient apart from fulfilling service and other conditions once a defined vesting period expires, subject to customary forfeiture provisions. A restricted stock unit award will either be settled by the delivery of common shares or by the payment of cash based upon the fair market value of a specified number of shares, at the discretion of the Compensation Committee, subject to the terms of the applicable award agreement. The Compensation Committee intends for these awards to vest with the settlement of common shares. Restricted stock unit awards generally vest at a rate of approximately 33 percent per year beginning one year after the grant date and are non-vested until the required service periods expire.
The fair value of a restricted stock unit award is based on the market price per share of our common shares on the date of grant. Compensation expense is recognized based on the grant date fair value over the requisite service or vesting period.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 | 18,782 | | | $ | 37.05 | |
Granted under 2018 LTIP (2) | 20,346 | | | $ | 24.85 | |
Vested | (9,578) | | | $ | 36.36 | |
Forfeited | (2,060) | | | $ | 30.07 | |
Restricted stock unit awards at December 31, 2020 | 27,490 | | | $ | 28.64 | |
Granted under 2018 LTIP (3) | 26,369 | | | $ | 29.70 | |
Vested | (14,244) | | | $ | 30.20 | |
Forfeited | (1,350) | | | $ | 28.92 | |
Restricted stock unit awards at December 31, 2021 | 38,265 | | | $ | 28.78 | |
Granted under 2018 LTIP (4) | 26,796 | | | $ | 31.83 | |
Granted as inducement awards (5) | 30,518 | | | $ | 33.75 | |
Vested | (21,814) | | | $ | 29.22 | |
Forfeited | (3,521) | | | $ | 30.33 | |
Restricted stock unit awards at December 31, 2022 | 70,244 | | | $ | 31.89 | |
____________________
(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 2020 was $0.5 million based on a grant date market price of our common shares ranging from $24.77 to $26.23 per share.
(3)The aggregate grant date fair value of restricted stock unit awards issued during 2021 was $0.8 million based on grant date market prices of our common shares ranging from $29.70 to $30.00 per share.
(4)The aggregate grant date fair value of restricted stock unit awards issued during 2022 was $0.9 million based on grant date market prices of our common shares ranging from $31.80 to $37.42 per share.
(5)These awards were granted in connection with the acquisition of Firebird and Phoenix (see Note 6 for further information). The aggregate grant date fair value of these restricted stock unit awards issued on August 12, 2022 was $1.0 million based on a grant date market price of our common shares of $33.75 per share.
Unrecognized compensation cost associated with restricted stock unit awards was approximately $0.4 million at December 31, 2022. 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 1.4 years.
Performance Share Unit Awards
An award granted as performance-based compensation is awarded to a participant contingent upon attainment of our future performance goals during a performance cycle. Performance goals are pre-established by the Compensation Committee. Following the end of the performance period, the holder of a performance-based compensation award is entitled to receive payment of an amount not exceeding the number of shares of common stock subject to, or the maximum value of, the performance-based compensation award, based on the achievement of the performance measures for the performance period. The performance share unit awards generally vest in full approximately three years after grant date, and are non-vested until the required service period expires.
The fair value of a performance share unit award is based on the market price per share of our common shares on the date of grant. Compensation expense is recognized based on the grant date fair value over the requisite service or vesting period. Compensation expense is generally adjusted for the performance goals on a quarterly basis.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 | | 2,787 | | | $ | 43.00 | |
Granted under 2018 LTIP (2) | | 10,781 | | | $ | 24.92 | |
Performance factor increase (3) | | 3,981 | | | $ | 24.92 | |
Vested | | (713) | | | $ | 28.55 | |
Forfeited | | (595) | | | $ | 30.22 | |
Performance share unit awards at December 31, 2020 | | 16,241 | | | $ | 27.67 | |
Granted under 2018 LTIP (4) | | 12,205 | | | $ | 29.70 | |
Performance factor decrease (3) | | (4,493) | | | $ | 29.70 | |
Vested | | (2,461) | | | $ | 43.00 | |
Forfeited | | — | | | $ | — | |
Performance share unit awards at December 31, 2021 | | 21,492 | | | $ | 26.64 | |
Granted under 2018 LTIP (5) | | 13,458 | | | $ | 31.80 | |
Performance factor increase (3) | | 159 | | | $ | 31.80 | |
Vested | | (3,125) | | | $ | 28.22 | |
Forfeited | | (1,297) | | | $ | 30.87 | |
Performance share unit awards at December 31, 2022 | | 30,687 | | | $ | 28.59 | |
____________________
(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 2020 was $0.3 million based on a grant date market price of our common shares ranging from $24.77 to $26.23 per share and assuming a performance factor of 100 percent.
(3)The performance factor for awards granted in 2020 increased to 138.5 percent based on a comparison of actual results for 2020 to performance goals. The performance factor for awards granted in 2021 decreased to 63.1 percent based upon a comparison of actual results for 2021 to performance goals. The performance factor for awards granted in 2022 increased to 101.4 percent based upon a comparison of actual results for 2022 to performance goals.
(4)The aggregate grant date fair value of performance share unit awards issued during 2021 was $0.4 million based on a grant date market price of our common shares of $29.70 per share and assuming a performance factor of 100 percent.
(5)The aggregate grant date fair value of performance share unit awards issued during 2022 was $0.4 million based on a grant date market price of our common shares of $31.80 per share and assuming a performance factor of 100 percent.
Unrecognized compensation cost associated with performance share unit awards was approximately $0.4 million at December 31, 2022. We expect to recognize the remaining compensation cost for these awards over a weighted-average period of 1.9 years.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Supplemental Cash Flow Information
Supplemental cash flows and non-cash transactions were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Cash paid for interest | $ | 425 | | | $ | 746 | | | $ | 444 | |
Cash paid for federal and state income taxes | 3,020 | | | 2,251 | | | 418 | |
Cash refund for NOL carryback under CARES Act | 6,907 | | | 3,712 | | | 2,703 | |
| | | | | |
Non-cash transactions: | | | | | |
Change in accounts payable related to property and equipment additions | (52) | | | — | | | (1,237) | |
Property and equipment acquired under finance leases | 7,873 | | | 2,083 | | | 11,412 | |
Issuance of common shares in acquisition (see Note 6) | 425 | | | — | | | — | |
| | | | | |
See Note 17 for information related to non-cash transactions related to leases.
Note 17. Leases
We account for leases under ASC 842, Leases, which requires lessees to recognize a ROU asset and a corresponding lease liability for leases with terms longer than twelve months. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, current liabilities and long-term operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current liabilities and long-term finance lease liabilities in the 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. For determining the present value of lease payments, we use the discount rate implicit in the lease when readily determinable. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate in determining the present value of lease payments that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term. 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.
We are a lessee in noncancellable (i) 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 (ii) finance leases for tractors, trailers, a tank storage and throughput arrangement in our crude oil marketing business and office equipment. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Our lease agreements have remaining lease terms ranging from one year to approximately eight years. Fourteen of our finance lease agreements for tractors and trailers contain residual value guarantee provisions, which would become due at the expiration of the finance lease if the fair value of the lease vehicles is less than the guaranteed residual value. At December 31, 2022, we have recorded a liability of $3.4 million for the estimated end of term loss related to these residual value guarantees as we expect that we will pay the full amount of the guarantees at the end of the leases.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our lease agreements do not contain any leases with material 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 other than those noted above 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.
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 periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Finance lease cost: | | | | | | |
Amortization of ROU assets | | $ | 5,200 | | | $ | 4,744 | | | $ | 2,547 | |
Interest on lease liabilities | | 364 | | | 413 | | | 300 | |
Operating lease cost | | 3,019 | | | 2,560 | | | 2,718 | |
Short-term lease cost | | 14,573 | | | 13,880 | | | 11,020 | |
Variable lease cost | | 20 | | | 7 | | | — | |
Total lease expense | | $ | 23,176 | | | $ | 21,604 | | | $ | 16,585 | |
The following table provides supplemental cash flow and other information related to leases for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash paid for amounts included in measurement of lease liabilities: | | | | |
Operating cash flows from operating leases (1) | | $ | 2,929 | | | $ | 2,560 | | | $ | 2,717 | |
Operating cash flows from finance leases (1) | | 356 | | | 326 | | | 291 | |
Financing cash flows from finance leases | | 4,741 | | | 4,367 | | | 2,336 | |
| | | | | | |
ROU assets obtained in exchange for new lease liabilities: | | | | | | |
Finance leases (2) | | 7,873 | | | 2,083 | | | 11,412 | |
Operating leases (3) | | 3,269 | | | 1,385 | | | 819 | |
______________
(1)Amounts are included in Other operating activities on the consolidated cash flow statements.
(2)2020 amount consists of finance lease agreements for 58 tractors with five year terms, 40 trailers with a six year term that we entered into in connection with the CTL acquisition (see Note 6 for further information) and other office equipment.
(3)2022 amount includes four operating lease agreements for office and terminal locations with Scott Bosard, one of the Sellers of Firebird and Phoenix, for periods ranging from two to five years (see Note 6 and Note 10 for further information).
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides lease terms and discount rates for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Weighted-average remaining lease term (years): | | | | | | |
Finance leases | | 3.54 | | 3.60 | | 4.16 |
Operating leases | | 3.52 | | 3.85 | | 4.57 |
| | | | | | |
Weighted-average discount rate: | | | | | | |
Finance leases | | 3.5 | % | | 2.6 | % | | 3.0 | % |
Operating leases | | 4.0 | % | | 3.8 | % | | 4.3 | % |
The following table provides supplemental balance sheet information related to leases at the dates indicated (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Assets | | | | |
Finance lease ROU assets (1) | | $ | 15,264 | | | $ | 12,590 | |
Operating lease ROU assets | | 7,720 | | | 7,113 | |
| | | | |
Liabilities | | | | |
Current | | | | |
Finance lease liabilities | | 4,382 | | | 3,663 | |
Operating lease liabilities | | 2,712 | | | 2,178 | |
Noncurrent | | | | |
Finance lease liabilities | | 12,085 | | | 9,672 | |
Operating lease liabilities | | 5,007 | | | 4,938 | |
______________
(1)Amounts are included in Property and equipment, net on the consolidated balance sheets.
The following table provides maturities of undiscounted lease liabilities at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | |
| | Finance | | Operating |
| | Lease | | Lease |
| | | | |
2023 | | $ | 4,870 | | | $ | 2,958 | |
2024 | | 3,629 | | | 2,617 | |
2025 | | 4,652 | | | 962 | |
2026 | | 2,482 | | | 879 | |
2027 | | 2,179 | | | 570 | |
Thereafter | | — | | | 237 | |
Total lease payments | | 17,812 | | | 8,223 | |
Less: Interest | | (1,345) | | | (504) | |
Present value of lease liabilities | | 16,467 | | | 7,719 | |
Less: Current portion of lease obligation | | (4,382) | | | (2,712) | |
Total long-term lease obligation | | $ | 12,085 | | | $ | 5,007 | |
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides maturities of undiscounted lease liabilities at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | Finance | | Operating |
| | Lease | | Lease |
| | | | |
2022 | | $ | 3,941 | | | $ | 2,399 | |
2023 | | 3,143 | | | 2,080 | |
2024 | | 2,348 | | | 1,911 | |
2025 | | 3,771 | | | 394 | |
2026 | | 801 | | | 333 | |
Thereafter | | — | | | 455 | |
Total lease payments | | 14,004 | | | 7,572 | |
Less: Interest | | (669) | | | (456) | |
Present value of lease liabilities | | 13,335 | | | 7,116 | |
Less: Current portion of lease obligation | | (3,663) | | | (2,178) | |
Total long-term lease obligation | | $ | 9,672 | | | $ | 4,938 | |
Note 18. Commitments and Contingencies
Insurance
We have accrued liabilities for estimated workers’ compensation and other casualty claims incurred based upon claim reserves plus an estimate for loss development and incurred but not reported claims. We self-insure a significant portion of expected losses relating to workers’ compensation, general liability and automobile liability, with a self-insured retention of $1.0 million. Insurance is purchased over our retention to reduce our exposure to catastrophic events. Estimates are recorded for potential and incurred outstanding liabilities for workers’ compensation, auto and general liability claims and claims that are incurred but not reported. Estimates are based on adjusters’ estimates, historical experience and statistical methods commonly used within the insurance industry that we believe are reliable. We have also engaged a third-party actuary to perform a review of our accrued liability for these claims as well as potential funded losses in our captive insurance company. Insurance estimates include certain assumptions and management judgments regarding the frequency and severity of claims, claim development and settlement practices and the selection of estimated loss among estimates derived using different methods. Unanticipated changes in these factors may produce materially different amounts of expense that would be reported under these programs.
On October 1, 2020, we elected to utilize a wholly owned insurance captive to insure the self-insured retention for our workers’ compensation, general liability and automobile liability insurance programs. All accrued liabilities associated with periods from October 1, 2017 through current were transferred to the captive.
We maintain excess property and casualty programs with third-party insurers in an effort to limit the financial impact of significant events covered under these programs. Our operating subsidiaries pay premiums to both the excess and reinsurance carriers and our captive for the estimated losses based on an external actuarial analysis. These premiums held by our wholly owned captive are currently held in a restricted account, resulting in a transfer of risk from our operating subsidiaries to the captive.
We also maintain a self-insurance program for managing employee medical claims in excess of employee deductibles. 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 $1.3 million of umbrella insurance coverage for annual aggregate medical claims exceeding approximately $11.3 million.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our accruals for automobile, workers’ compensation and medical claims were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
Pre-funded premiums for losses incurred but not reported | $ | — | | | $ | 50 | |
Accrued automobile and workers’ compensation claims | 5,579 | | | 4,127 | |
Accrued medical claims | 1,007 | | | 1,100 | |
Litigation
From time to time as incidental to our operations, we may become involved in various lawsuits and/or disputes. 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, results of operations or cash flows.
Guarantees
We issue parent guarantees of commitments associated with the activities of our subsidiary companies. The guarantees generally result from subsidiary commodity purchase obligations, subsidiary operating lease commitments and subsidiary banking transactions. The nature of these arrangements is to guarantee the performance of the subsidiary in meeting their respective underlying obligations. We would only be called upon to perform under the guarantee in the event of a payment default by the applicable subsidiary company. In satisfying these obligations, we would first look to the assets of the defaulting subsidiary company.
At December 31, 2022, parental guaranteed obligations were approximately $80.2 million. Currently, neither we nor any of our subsidiaries has any other types of guarantees outstanding that require liability recognition, except for the residual value guarantees for certain of our finance leases (see Note 17 for further discussion).
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Concentration of Credit Risk
We may incur credit risk to the extent our customers do not fulfill their obligations to us pursuant to contractual terms. Risks of nonpayment and nonperformance by our customers are a major consideration in our business, and our credit procedures and policies may not be adequate to sufficiently eliminate customer credit risk. Managing credit risk involves a number of considerations, such as the financial profile of the customer, the value of collateral held, if any, specific terms and duration of the contractual agreement, and the customer’s sensitivity to economic developments. We have established various procedures to manage credit exposure, including initial credit approval, credit limits and rights of offset. We also utilize letters of credit and guarantees to limit exposure.
Our largest customers consist of large multinational integrated crude oil companies and independent domestic refiners of crude oil. In addition, we transact business with independent crude oil producers, major chemical companies, crude oil trading companies and a variety of commercial energy users. Within this group of customers, we derive approximately 50 percent of our revenues from four to five large crude oil refining customers. While we have ongoing established relationships with certain domestic refiners of crude oil, alternative markets are readily available since we supply less than one percent of U.S. domestic refiner demand. As a fungible commodity delivered to major Gulf Coast supply points, our crude oil sales can be readily delivered to alternative end markets.
The following tables reflect the percentages of individual customer sales in excess of 10 percent of our consolidated revenues and individual customer receivables in excess of 10 percent of our total consolidated receivables for the periods indicated. We believe that a loss of any of the customers where we currently derive more than 10 percent of our revenues would not have a material adverse effect on our operations as we would be able to replace that customer’s activity with a similar customer or customers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individual customer sales | | Individual customer receivables in excess |
in excess of 10% of revenues | | of 10% of total receivables |
Year Ended December 31, | | December 31, |
2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
22.4 | % | | 23.7 | % | | 24.0 | % | | — | % | | 11.5 | % | | 11.3 | % |
11.3 | % | | 11.6 | % | | 10.8 | % | | — | % | | — | % | | 10.9 | % |
| | | | | | — | % | | — | % | | 10.7 | % |
| | | | | | 10.8 | % | | 17.0 | % | | 10.4 | % |
| | | | | | 16.0 | % | | 12.6 | % | | |