SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
(Mark
One)
| x |
Quarterly
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934 |
For the
quarterly period ended March 31, 2005
| o |
Transition
report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934 |
For the
transition period from ______________to
Commission
File Number1-7908
ADAMS
RESOURCES & ENERGY, INC.
(Exact
name of Registrant as specified in its charter)
|
Delaware |
|
74-1753147 |
|
(State
or other jurisdiction of
incorporation
or organization) |
|
(I.R.S.
Employer
Identification
No.) |
|
4400
Post Oak Pkwy Ste 2700 , Houston, Texas 77027 |
|
(Address
of principal executive office & Zip
Code) |
Registrant's
telephone number, including area code (713)
881-3600
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO
o
Indicate
by check mark whether the registrant is an accelerated filer as defined in Rule
12b-2 of the Act. YES
o NO
x
A total
of 4,217,596 shares of Common Stock were outstanding at May 9,
2004.
PART
1 - FINANCIAL INFORMATION
Item
1. Financial Statements
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS
(In
thousands, except per share data)
| |
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
REVENUES: |
|
|
|
|
|
|
|
|
Marketing
(includes $164,065 and $148,685, respectively, |
|
$ |
512,320 |
|
$ |
448,698 |
|
|
of
proceeds from buy/sell arrangements) |
|
|
|
|
|
|
|
|
Transportation |
|
|
13,049 |
|
|
10,066 |
|
|
Oil
and gas |
|
|
2,439 |
|
|
2,551 |
|
| |
|
|
527,808 |
|
|
461,315 |
|
| |
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES: |
|
|
|
|
|
|
|
|
Marketing
(includes $166,320 and $146,570, respectively, |
|
|
508,080 |
|
|
445,777 |
|
|
of
costs associated with buy/sell arrangements) |
|
|
|
|
|
|
|
|
Transportation |
|
|
11,295 |
|
|
9,104 |
|
|
Oil
and gas |
|
|
440 |
|
|
1,570 |
|
|
General
and administrative |
|
|
2,152 |
|
|
1,603 |
|
|
Depreciation,
depletion and amortization |
|
|
1,458 |
|
|
1,418 |
|
| |
|
|
523,425 |
|
|
459,472 |
|
| |
|
|
|
|
|
|
|
|
Operating
earnings |
|
|
4,383 |
|
|
1,843 |
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
Interest
income |
|
|
21 |
|
|
16 |
|
|
Interest
expense |
|
|
(20 |
) |
|
(40 |
) |
|
Earnings
from continuing operations before income taxes |
|
|
4,384 |
|
|
1,819 |
|
| |
|
|
|
|
|
|
|
|
Income
tax provision |
|
|
1,533 |
|
|
628 |
|
| |
|
|
|
|
|
|
|
|
Earnings
from continuing operations |
|
|
2,851 |
|
|
1,191 |
|
|
Loss
from discontinued operation, net of tax |
|
|
|
|
|
|
|
|
benefit
of $130 in 2004 |
|
|
- |
|
|
(253 |
) |
| |
|
|
|
|
|
|
|
|
Net
earnings |
|
$ |
2,851 |
|
$ |
938 |
|
| |
|
|
|
|
|
|
|
|
EARNINGS
(LOSS) PER SHARE: |
|
|
|
|
|
|
|
|
From
continuing operations |
|
$ |
.68 |
|
$ |
.28 |
|
|
From
discontinued operation |
|
|
- |
|
|
(.06 |
) |
|
Basic
and diluted net earnings |
|
|
|
|
|
|
|
|
per
common share |
|
$ |
.68 |
|
$ |
.22 |
|
| |
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE |
|
$ |
- |
|
$ |
- |
|
The
accompanying notes are an integral part of these financial
statements
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED BALANCE SHEET
(In
thousands)
| |
|
March
31, |
|
December
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
ASSETS |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
23,066 |
|
$ |
19,942 |
|
|
Accounts
receivable, net of allowance for doubtful |
|
|
|
|
|
|
|
|
accounts
of $360 and $384, respectively |
|
|
174,988 |
|
|
161,885 |
|
|
Inventories |
|
|
13,354 |
|
|
11,372 |
|
|
Risk
management receivables |
|
|
6,732 |
|
|
7,795 |
|
|
Income
tax receivable |
|
|
672 |
|
|
- |
|
|
Prepayments |
|
|
2,677 |
|
|
8,345 |
|
| |
|
|
|
|
|
|
|
|
Total
current assets |
|
|
221,489 |
|
|
209,339 |
|
| |
|
|
|
|
|
|
|
|
Property
and equipment |
|
|
91,600 |
|
|
88,681 |
|
|
Less
- accumulated depreciation, |
|
|
|
|
|
|
|
|
depletion
and amortization |
|
|
(60,607 |
) |
|
(59,605 |
) |
| |
|
|
30,993 |
|
|
29,076 |
|
| |
|
|
|
|
|
|
|
|
Other
assets |
|
|
438 |
|
|
439 |
|
| |
|
$ |
252,920 |
|
$ |
238,854 |
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
174,521 |
|
$ |
160,387 |
|
|
Risk
management payables |
|
|
6,082 |
|
|
7,165 |
|
|
Accrued
and other liabilities |
|
|
3,868 |
|
|
5,904 |
|
|
Current
deferred taxes |
|
|
94 |
|
|
94 |
|
|
Total
current liabilities |
|
|
184,565 |
|
|
173,550 |
|
| |
|
|
|
|
|
|
|
|
Long-term
debt |
|
|
11,475 |
|
|
11,475 |
|
| |
|
|
|
|
|
|
|
|
Other
liabilities: |
|
|
|
|
|
|
|
|
Asset
retirement obligations |
|
|
744 |
|
|
723 |
|
|
Deferred
taxes and other |
|
|
3,710 |
|
|
3,531 |
|
| |
|
|
200,494 |
|
|
189,279 |
|
|
Commitments
and contingencies (Note 7) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Shareholders’
equity: |
|
|
|
|
|
|
|
|
Preferred
stock - $1.00 par value, 960,000 shares |
|
|
|
|
|
|
|
|
authorized,
none outstanding |
|
|
- |
|
|
- |
|
|
Common
stock - $.10 par value, 7,500,000 shares |
|
|
|
|
|
|
|
|
authorized,
4,217,596 shares outstanding |
|
|
422 |
|
|
422 |
|
|
Contributed
capital |
|
|
11,693 |
|
|
11,693 |
|
|
Retained
earnings |
|
|
40,311 |
|
|
37,460 |
|
|
Total
shareholders’ equity |
|
|
52,426 |
|
|
49,575 |
|
| |
|
$ |
252,920 |
|
$ |
238,854 |
|
The
accompanying notes are an integral part of these financial
statements.
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(In
thousands)
| |
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
CASH
PROVIDED BY OPERATIONS: |
|
|
|
|
|
|
|
|
Earnings
from continuing operations |
|
$ |
2,851 |
|
$ |
1,191 |
|
|
Adjustments
to reconcile earnings from continuing |
|
|
|
|
|
|
|
|
operations
to net cash (used in) provided by
operating
activities - |
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization |
|
|
1,458 |
|
|
1,418 |
|
|
Gains
on property sales |
|
|
(612 |
) |
|
(5 |
) |
|
Impairment
on non-producing oil and gas properties |
|
|
103 |
|
|
167 |
|
|
Other,
net |
|
|
(17 |
) |
|
33 |
|
|
Changes
in operating assets and liabilities - |
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable, net |
|
|
(13,103 |
) |
|
(2,977 |
) |
|
Decrease
(increase) in inventories |
|
|
(1,982 |
) |
|
(2,373 |
) |
|
Risk
management activities |
|
|
(20 |
) |
|
(163 |
) |
|
Decrease
(increase) in tax receivable |
|
|
(672 |
) |
|
336 |
|
|
Decrease
(increase) in prepayments |
|
|
5,668 |
|
|
(1,180 |
) |
|
Increase
(decrease) in accounts payable |
|
|
14,038 |
|
|
3,024 |
|
|
Increase
(decrease) in accrued and other liabilities |
|
|
(2,036 |
) |
|
(210 |
) |
|
Deferred
taxes |
|
|
183 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by (used in) continuing operations |
|
|
5,859 |
|
|
(739 |
) |
|
Net
cash provided by discontinued operation |
|
|
- |
|
|
3,750 |
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by operating activities |
|
|
5,859
|
|
|
3,011 |
|
| |
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES: |
|
|
|
|
|
|
|
|
Property
and equipment additions |
|
|
(3,490 |
) |
|
(2,195 |
) |
|
Proceeds
from property sales |
|
|
755 |
|
|
5 |
|
|
Net
cash used in investing activities |
|
|
(2,735 |
) |
|
(2,190 |
) |
| |
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents |
|
|
3,124
|
|
|
821 |
|
| |
|
|
|
|
|
|
|
|
Cash
at beginning of period |
|
|
19,942 |
|
|
28,342 |
|
| |
|
|
|
|
|
|
|
|
Cash
at end of period |
|
$ |
23,066 |
|
$ |
29,163 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Interest
paid during the period |
|
$ |
20 |
|
$ |
40 |
|
| |
|
|
|
|
|
|
|
|
Income
taxes paid during the period |
|
$ |
2,021 |
|
$ |
177 |
|
The
accompanying notes are an integral part of these financial
statements.
ADAMS
RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED
CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 -
Basis of Presentation
The
accompanying consolidated financial statements are unaudited but, in the opinion
of the Company's management, include all adjustments (consisting of normal
recurring accruals) necessary for the fair presentation of its financial
position at March 31, 2005 and December 31, 2004 and its results of operations
for the three months ended March 31, 2005 and 2004 and its cash flows for the
three months ended March 31, 2005 and 2004. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to Securities and Exchange Commission rules and regulations.
Although the Company believes the disclosures made are adequate to make the
information presented not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the financial statements, and
the notes thereto, included in the Company's latest annual report on Form 10-K.
The interim statement of operations is not necessarily indicative of results to
be expected for a full year.
Note 2 -
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Adams
Resources & Energy, Inc., a Delaware corporation, and its wholly owned
subsidiaries (the "Company") after elimination of all significant intercompany
accounts and transactions.
Nature
of Operations
The
Company is engaged in the business of crude oil, natural gas and petroleum
products marketing, as well as tank truck transportation of liquid chemicals and
oil and gas exploration and production. Its primary area of operation is within
a 500-mile radius of Houston, Texas.
Cash
and Cash Equivalents
Cash and
cash equivalents include any treasury bill, commercial paper, money market fund
or federal funds with maturity of 30 days or less. Included in the cash balance
at March 31, 2005 and December 31, 2004 is a deposit of $2 million to
collateralize the Company's month-to-month crude oil letter of credit facility.
Inventories
Crude oil
and petroleum product inventories are carried at the lower of cost or market.
Petroleum products inventory includes gasoline, lubricating oils and other
petroleum products purchased for resale and valued at cost determined on the
first-in, first-out basis, while crude oil inventory is valued at average cost.
Components of inventory are as follows (in
thousands):
| |
|
March
31, |
|
December
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
Crude
oil |
|
$ |
11,707 |
|
$ |
9,663 |
|
|
Petroleum
products |
|
|
1,647 |
|
|
1,709 |
|
| |
|
|
|
|
|
|
|
| |
|
$ |
13,354 |
|
$ |
11,372 |
|
Property
and Equipment
Expenditures
for major renewals and betterments are capitalized, and expenditures for
maintenance and repairs are expensed as incurred. Interest costs incurred in
connection with major capital expenditures are capitalized and amortized over
the lives of the related assets. When properties are retired or sold, the
related cost and accumulated depreciation, depletion and amortization
("DD&A") is removed from the accounts and any gain or loss is reflected in
earnings.
Oil and
gas exploration and development expenditures are accounted for in accordance
with the successful efforts method of accounting. Direct costs of acquiring
developed or undeveloped leasehold acreage, including lease bonus, brokerage and
other fees, are capitalized. Exploratory drilling costs are initially
capitalized until the properties are evaluated and determined to be either
productive or nonproductive. Such evaluations are made on a quarterly basis. If
an exploratory well is determined to be nonproductive, the capitalized costs of
drilling the well are charged to expense. Costs incurred to drill and complete
development wells, including dry holes, are capitalized. As of March 31, 2005,
the Company had no unevaluated or suspended exploratory drilling
costs.
Producing
oil and gas leases, equipment and intangible drilling costs are depleted or
amortized over the estimated recoverable reserves using the units-of-production
method. Other property and equipment is depreciated using the straight-line
method over the estimated average useful lives of three to twenty years for
marketing, three to fifteen years for transportation and ten to twenty years for
all others.
The
Company is required to periodically review long-lived assets for impairment
whenever there is evidence that the carrying value of such assets may not be
recoverable. This consists of comparing the carrying value of the asset with the
asset’s expected future undiscounted cash flows without interest costs.
Estimates of expected future cash flows represent management’s best estimate
based on reasonable and supportable assumptions. Proved oil and gas properties
are reviewed for impairment on a field-by-field basis. Any impairment recognized
is permanent and may not be restored. In addition, management evaluates the
carrying value of non-producing properties and may deem them impaired for lack
of drilling activity. Such evaluations are made on a quarterly basis.
Accordingly, a $103,000 and a $167,000 impairment provision on non-producing
properties was recorded in the three month period ended March 31, 2005 and 2004,
respectively.
Revenue
Recognition
Commodity
purchases and sales associated with the Company’s natural gas marketing
activities qualify as derivative instruments under Statement of Financial
Accounting Standards No. 133. Therefore, natural gas purchases and sales are
recorded on a net revenue basis in the accompanying financial statements. In
contrast, substantially all purchases and sales of crude oil qualify, and have
been designated as, normal purchases and sales. Therefore, crude oil purchases
and sales are recorded on a gross revenue basis in the accompanying financial
statements. The Company’s natural gas and crude oil marketing customers are
invoiced based on contractually agreed upon terms on a monthly basis. Revenue is
recognized in the month in which the physical product is delivered to the
customer. Where required, the Company also recognizes fair value or
mark-to-market gains and losses related to its natural gas and crude oil trading
activities. A detailed discussion of the Company’s risk management activities is
included later in this footnote.
Customers
of the Company’s petroleum products marketing subsidiary are invoiced and
revenue is recognized in the period when the customer physically takes
possession and title to the product upon delivery at their facility.
Transportation customers are invoiced, and the related revenue is recognized, as
the service is provided. Oil and gas revenue from the Company’s interests in
producing wells is recognized as title and physical possession of the oil and
gas passes to the purchaser.
Included
in marketing segment revenues and costs is the gross proceeds and costs
associated with certain crude oil buy/sell arrangements. Crude oil buy/sell
arrangements result from a single contract or concurrent contracts with a single
counterparty to provide for similar quantities of crude oil to be bought and
sold at two different locations. Such contracts may be entered into for a
variety of reasons, including to effect the transportation of the commodity, to
minimize credit exposure, and to meet the competitive demands of the customer.
The gross proceeds included in revenues and the gross costs included in
marketing costs and expenses typically constitute approximately 35 percent of
marketing revenues and costs. The Company believes its accounting treatment is
consistent with the normal purchase and sale presentation under SFAS No. 133 as
amended by SFAS No. 137 and No. 138. See discussion under “Price Risk Management
Activities” below. Presently, the EITF in Issue 01-13 is reviewing the
accounting presentation for buy/sell arrangements and may require that such
items be reported net on the Statement of Operations. In such circumstances,
marketing segment revenues presented herein would be reduced by $164,065,000 and
$148,685,000 for the first three months of 2005 and 2004, respectively. Net
earnings from operations would be unaffected by such change in
presentation.
Earnings
Per Share
The
Company computes and presents earnings per share in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share”, which
requires the presentation of basic earnings per share and diluted earnings per
share for potentially dilutive securities. Earnings per share are based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. The weighted average number of shares outstanding
was 4,217,596 for the three-month periods ended March 31, 2005 and 2004. There
were no potentially dilutive securities during 2005 and 2004.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Examples of significant estimates used in the accompanying
consolidated financial statements include the accounting for depreciation,
depletion and amortization, income taxes, contingencies and price risk
management activities.
Price
Risk Management Activities
SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities”, as amended
by SFAS No. 137 and No. 138, establishes accounting and reporting standards that
require every derivative instrument (including certain derivative instruments
embedded in other contracts) to be recorded on the balance sheet as either an
asset or liability measured at its fair value, unless the derivative qualifies
and has been designated as a normal purchase or sale. Changes in fair value are
recognized immediately in earnings unless the derivatives qualify for, and the
Company elects, cash flow hedge accounting. For cash flow hedges, the effected
portion of the change in fair value will be deferred in other comprehensive
income until the related hedge item impacts earnings. The Company had no
contracts designated for hedge accounting under SFAS No. 133 during any current
reporting periods.
The
Company’s trading and non-trading transactions give rise to market risk, which
represents the potential loss that may result from a change in the market value
of a particular commitment. The Company closely monitors and manages its
exposure to market risk to ensure compliance with the Company’s risk management
policies. Such policies are regularly assessed to ensure their appropriateness
given management’s objectives, strategies and current market
conditions.
The
Company’s forward crude oil contracts are designated as normal purchases and
sales. Natural gas forward contracts and energy trading contracts on crude oil
and natural gas are recorded at fair value, depending on management’s
assessments of the numerous accounting standards and positions that comply with
generally accepted accounting principles. The undiscounted fair value of such
contracts is reflected on the Company’s balance sheet as risk management assets
and liabilities. The revaluation of such contracts is recognized in the
Company’s results of operations. Current market price quotes from actively
traded liquid markets are used in all cases to determine the contracts’
undiscounted fair value. Risk management assets and liabilities are classified
as short-term or long-term depending on contract terms. The estimated future net
cash inflow based on market prices as of March 31, 2005 is $650,000, all of
which will be received in 2005 and 2006. The estimated future cash inflow
approximates the net fair value recorded in the Company’s risk management assets
and liabilities.
The
following table illustrates the factors impacting the change in the net value of
the Company’s risk management assets and liabilities for the three-month period
ended March 31, 2005 and 2004 (in
thousands):
| |
|
|
2005 |
|
|
2004 |
|
|
Net
fair value on January 1, |
|
$ |
630 |
|
$ |
692 |
|
|
Activity
during the period |
|
|
|
|
|
|
|
|
-Cash
paid (received) from settled contracts |
|
|
(520 |
) |
|
(335 |
) |
|
-Net
realized gain from prior years’ contracts |
|
|
115 |
|
|
31 |
|
|
-Net
unrealized (loss) from prior years’ contracts |
|
|
- |
|
|
(27 |
) |
|
-Net
unrealized gain from prior years’ contracts |
|
|
63 |
|
|
- |
|
|
-Net
unrealized gain from current year contracts |
|
|
362 |
|
|
494 |
|
|
Net
fair value on March 31, |
|
$ |
650 |
|
$ |
855 |
|
Asset
Retirement Obligations
On
January 1, 2003, the Company adopted SFAS No. 143 “Accounting for Asset
Retirement Obligations.” The objective of SFAS No. 143 is to establish an
accounting model for accounting and reporting obligations associated with
retirement of tangible long-lived assets and associated retirement costs. SFAS
No. 143 requires that the fair value of a liability for an asset's retirement
obligation be recorded in the period in which it is incurred and the
corresponding cost 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
related asset. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. A summary of the recording of the
estimated fair value of the Company’s asset retirement obligations is presented
as follows (in thousands):
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
Balance
on January 1, |
|
$ |
723 |
|
$ |
706 |
|
|
Liabilities
incurred |
|
|
6 |
|
|
8 |
|
|
Accretion
of discount |
|
|
21 |
|
|
9 |
|
|
Liabilities
settled |
|
|
(6 |
) |
|
- |
|
|
Revisions
to estimates |
|
|
- |
|
|
- |
|
|
Balance
on March 31, |
|
$ |
744 |
|
$ |
723 |
|
In
addition to an accrual for asset retirement obligations, the Company maintains
$75,000 in escrow cash, which is legally restricted for the potential purpose of
settling asset retirement costs in accordance with certain state regulations.
Such cash deposits are included in other assets on the accompanying balance
sheet.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment, which
established accounting standards for all transactions in which an entity
exchanges its equity instruments for goods and services. SFAS No. 123(R) focuses
primarily on accounting for such transactions with employees. As of March 31,
2005, the Company had no stock-based employee compensation plans, nor any other
share-based payment arrangements.
On
November 30, 2004, the FASB issued SFAS No. 151, Inventory
Costs. This
statement clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). This statement
requires that these items be charged to expense regardless of whether they meet
the “so abnormal” criterion outlined in Accounting Research Bulletin 43. This
statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this statement is not expected to
have any material effect on our financial position, results of operations or
cash flows.
In
December 2004, the FASB issued SFAS No. 153, Exchanges
of Nonmonetary Assets an
amendment of APB No.
29. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. The
Statement specifies that a nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date this Statement is issued. Retroactive
application is not permitted. Management is analyzing the requirements of this
new Statement and believes that its adoption will not have any significant
impact on the Company’s financial position, results of operations or cash flows.
Note 3 -
Discontinued Operations
During
2003, management decided to withdraw from its New England region retail natural
gas marketing business, which was included in the marketing segment. This
business had negative operating margins of $279,000 and after tax losses
totaling $253,000 for the three months ended March 31, 2004. Because of the
losses sustained during 2002 and 2003, and the desire to reduce working capital
requirements, management decided to exit this region and type of account. As of
March 31, 2004, the Company had completed its exit from this
business.
Note 4 -
Segment Reporting
The
Company is primarily engaged in the business of marketing crude oil, natural gas
and petroleum products; tank truck transportation of liquid chemicals; and oil
and gas exploration and production. Information concerning the Company’s various
business activities is summarized as follows (in
thousands):
| |
|
|
|
Segment |
|
Depreciation |
|
Property
and |
|
| |
|
|
|
Operating |
|
Depletion
and |
|
Equipment |
|
| |
|
|
Revenues |
|
|
Earnings |
|
|
Amortization |
|
|
Additions |
|
|
For
the three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
$ |
512,320 |
|
$ |
3,851 |
|
$ |
389 |
|
$ |
67 |
|
|
Transportation |
|
|
13,049 |
|
|
1,169 |
|
|
585 |
|
|
1,845 |
|
|
Oil
and gas |
|
|
2,439 |
|
|
1,515 |
|
|
484 |
|
|
1,578 |
|
| |
|
$ |
527,808 |
|
$ |
6,535 |
|
$ |
1,458 |
|
$ |
3,490 |
|
|
For
the three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
$ |
448,698 |
|
$ |
2,544 |
|
$ |
377 |
|
$ |
93 |
|
|
Transportation |
|
|
10,066 |
|
|
415 |
|
|
547 |
|
|
1,176 |
|
|
Oil
and gas |
|
|
2,551 |
|
|
487 |
|
|
494 |
|
|
926 |
|
| |
|
$ |
461,315 |
|
$ |
3,446 |
|
$ |
1,418 |
|
$ |
2,195 |
|
Identifiable
assets by industry segment are as follows (in
thousands):
| |
|
March
31, |
|
December
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Marketing |
|
$ |
189,360 |
|
$ |
178,691 |
|
|
Transportation |
|
|
21,918 |
|
|
22,308 |
|
|
Oil
and gas |
|
|
16,187 |
|
|
15,354 |
|
|
Other |
|
|
25,455 |
|
|
22,501 |
|
| |
|
$ |
252,920 |
|
$ |
238,854 |
|
Intersegment
sales are insignificant. Other identifiable assets are primarily corporate cash,
accounts receivable, and properties not identified with any specific segment of
the Company’s business. All sales by the Company occurred in the United
States.
Segment
operating earnings reflect revenues net of operating costs and depreciation,
depletion and amortization. Segment earnings reconcile to earnings from
continuing operations before income taxes as follows (in
thousands):
| |
|
Three
months ended |
|
| |
|
March
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Segment
operating earnings |
|
$ |
6,535 |
|
$ |
3,446 |
|
|
General
and administrative |
|
|
(2,152 |
) |
|
(1,603 |
) |
|
Operating
earnings |
|
|
4,383 |
|
|
1,843 |
|
|
Interest
income |
|
|
21 |
|
|
16 |
|
|
Interest
expense |
|
|
(20 |
) |
|
(40 |
) |
|
Earnings
from continuing operations
before
income taxes |
|
$ |
4,384 |
|
$ |
1,819 |
|
Note 5 -
Marketing Joint Venture
Commencing
in May 2000, the Company entered into a joint venture arrangement with a third
party for the purpose of purchasing, distributing and marketing crude oil in the
offshore Gulf of Mexico region. The intent behind the joint venture was to
combine the Company’s marketing expertise with stronger financial and credit
support from the co-venture participant. The venture operated as
Williams-Gulfmark Energy Company pursuant to the terms of a joint venture
agreement. The Company held a 50 percent interest in the operations of the
venture and accounted for its interest under the equity method of accounting.
Effective
November 1, 2001, the joint venture participants agreed to dissolve the venture
pursuant to the terms of a joint venture dissolution agreement. Subsequently, in
April 2003, the Company received a demand for arbitration seeking monetary
damages and a re-audit of the joint venture activity for the period of its
existence from May 2000 through October 2001. In July 2004, the Company and the
joint venture co-participant settled all matters arising from this dispute. As a
condition of the settlement, the Company assumed full responsibility for the
final wind-down and settlement of open trade account items arising from the
joint venture’s former activities. As a further term of settlement, the Company
was relieved from any cash obligations otherwise due to the joint venture. In
connection with the resolution of the dispute, the Company recorded $1,476,000
of operating income as a reduction of marketing costs and expenses during the
third quarter of 2004.
The
Company continues to implement the final wind-down and settlement of open trade
account items. As the venture either collects or funds cash proceeds in
settlement of such accounts, the Company will receive or pay the entire balance
of such cash proceeds or requirements.
Note 6 -
Transactions with Affiliates
Mr. K. S.
Adams, Jr., Chairman and Chief Executive Officer, and certain of his family
limited partnerships and affiliates have participated as working interest owners
with the Company’s subsidiary, Adams Resources Exploration Corporation. Mr.
Adams and such affiliates participate on terms no better than those afforded
other non-affiliated working interest owners. In recent years, such related
party transactions tend to result after the Company has first identified oil and
gas prospects of interest. Due to capital budgeting constraints, typically the
available dollar commitment to participate in such transactions is greater than
the amount management is comfortable putting at risk. In such event, the Company
first determines the percentage of the transaction it wants to obtain, which
allows a related party to participate in the investment to the extent there is
excess available. Such related party transactions are individually reviewed and
approved by a committee of independent directors on the Company’s Board of
Directors. As of March 31, 2005, the Company owed a combined net total of
$331,644 to these related parties. In connection with the operation of certain
oil and gas properties, the Company also charges such related parties for
administrative overhead primarily as prescribed by the Council of Petroleum
Accountants Society (“COPAS”) Bulletin 5. Such overhead recoveries totaled
$48,000 during the first three months of 2005.
David B.
Hurst, Secretary of the Company, is a partner in the law firm of Chaffin &
Hurst. The Company has been represented by Chaffin & Hurst since 1974 and
plans to use the services of that firm in the future. Chaffin & Hurst
currently leases office space from the Company. Transactions with Chaffin &
Hurst are on the same terms as those prevailing at the time for comparable
transactions with unrelated entities.
The
Company also enters into certain transactions in the normal course of business
with other affiliated entities. These transactions with affiliated companies are
on the same terms as those prevailing at the time for comparable transactions
with unrelated entities.
Note 7 -
Commitments and Contingencies
In March
2004, a suit styled Le
Petit Chateau De Luxe, et. al. vs Great Southern Oil & Gas
Co., et. al. was
filed in the Civil District Court for Orleans Parish, Louisiana against the
Company and its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish, Louisiana
was environmentally contaminated by oil and gas exploration and production
activities during the 1970s and 1980s. An alleged amount of damage has not been
specified. Management believes the Company has consistently conducted its oil
and gas exploration and production activities in accordance with all
environmental rules and regulations in effect at the time of operation.
Management notified its insurance carrier about this claim, and thus far the
insurance carrier has declined to offer coverage. The Company is litigating this
matter with its insurance carrier. In any event, management does not believe the
outcome of this matter will have a material adverse effect on the Company’s
financial position or results of operations.
From time
to time as incident to its operations, the Company becomes involved in various
lawsuits and/or disputes. Primarily as an operator of an extensive trucking
fleet, the Company is a party to motor vehicle accidents, worker compensation
claims or other items of general liability as would be typical for the industry.
Except as disclosed herein, management of the Company is presently unaware of
any claims against the Company 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 the Company’s financial
position or results of operations.
Note 8 -
Guarantees
Pursuant
to arranging operating lease financing for truck tractors and tank trailers,
individual subsidiaries of the Company may guarantee the lessor a minimum
residual sales value upon the expiration of a lease and sale of the underlying
equipment. Aggregate guaranteed residual values for tractors and trailers under
operating leases as of March 31, 2005 are as follows (in
thousands):
| |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Thereafter |
|
|
Total |
|
|
Lease
residual values |
|
$ |
167 |
|
$ |
150 |
|
$ |
- |
|
$ |
304 |
|
$ |
1,475 |
|
$ |
705 |
|
$ |
2,801 |
|
Presently,
neither the Company nor any of its subsidiaries have any other types of
guarantees outstanding that in the future would require liability recognition
under the provisions of Interpretation No. 45.
Adams
Resources & Energy, Inc. frequently issues parent guarantees of commitments
resulting from the ongoing activities of its subsidiary companies. The
guarantees generally result as incident to subsidiary commodity purchase
obligation, subsidiary lease commitments and subsidiary bank debt. The nature of
such guarantees is to guarantee the performance of the subsidiary companies in
meeting their respective underlying obligations. Except for operating lease
commitments, all such underlying obligations are recorded on the books of the
subsidiary companies and are included in the consolidated financial statements
included herein. Therefore, no such obligation is recorded again on the books of
the parent. The parent would only be called upon to perform under the guarantee
in the event of a payment default by the applicable subsidiary company. In
satisfying such obligations, the parent would first look to the assets of the
defaulting subsidiary company. As of March 31, 2005, the amount of parental
guaranteed obligations are as follows (in
thousands):
| |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Thereafter |
|
|
Total |
|
|
Bank
debt |
|
$ |
- |
|
$ |
1,434 |
|
$ |
5,738 |
|
$ |
4,303 |
|
$ |
- |
|
$ |
- |
|
$ |
11,475 |
|
|
Operating
leases |
|
|
3,330 |
|
|
3,841 |
|
|
3,530 |
|
|
3,329 |
|
|
1,199 |
|
|
233 |
|
|
15,462 |
|
|
Lease
residual values |
|
|
167 |
|
|
150 |
|
|
- |
|
|
304 |
|
|
1,475 |
|
|
705 |
|
|
2,801 |
|
|
Commodity
purchases |
|
|
19,618 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
19,618 |
|
|
Letters
of credit |
|
|
25,600 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
25,600 |
|
| |
|
$ |
48,715 |
|
$ |
5,425 |
|
$ |
9,268 |
|
$ |
7,936 |
|
$ |
2,674 |
|
$ |
938 |
|
$ |
74,956 |
|
Item 2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results
of Operations
Marketing
division revenues, operating earnings and depreciation are presented as follows
(in
thousands):
| |
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
512,320 |
|
$ |
448,698 |
|
| |
|
|
|
|
|
|
|
|
Operating
earnings |
|
$ |
3,851 |
|
$ |
2,544 |
|
| |
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
389 |
|
$ |
377 |
|
Supplemental
volume and price information is as follows:
| |
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Wellhead
Purchases - Per day (1) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Crude
oil - barrels |
|
|
70,700 |
|
|
76,000 |
|
| |
|
|
|
|
|
|
|
|
Natural
gas - mmbtu’s |
|
|
337,000 |
|
|
298,000 |
|
| |
|
|
|
|
|
|
|
|
Average
Purchase Price |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Crude
oil - per barrel |
|
$ |
47.61 |
|
$ |
33.88 |
|
| |
|
|
|
|
|
|
|
|
Natural
gas - per mmbtu |
|
$ |
6.13 |
|
$ |
5.43 |
|
_____________________________
(1)
Reflects the volume purchased from third parties at the wellhead
level.
Commodity
purchases and sales associated with the Company’s natural gas marketing
activities qualify as derivative instruments under Statement of Financial
Accounting Standards No. 133. Therefore, natural gas purchases and sales are
recorded on a net revenue basis in the accompanying financial statements. In
contrast, substantially all purchases and sales of crude oil qualify, and have
been designated as, normal purchases and sales. Therefore, crude oil purchases
and sales are recorded on a gross revenue basis in the accompanying financial
statements. As a result, variations in gross revenues are primarily a function
of crude oil volumes and prices while operating earnings fluctuate with both
crude oil and natural gas margins and volumes.
Marketing
revenues increased by $63,622,000 to $512,320,000 for the comparative first
quarter of 2005. This increase was directly attributable to crude oil price
increases partially offset by a reduced volume of activity. While marketing
revenues were increasing by 14 percent, marketing operating earnings increased
by $1,307,000 or 51 percent to $3,851,000 for the first three months of 2005.
The operating earnings increase primarily resulted from the Company liquidating
relative lower priced crude oil inventory into a higher priced market. This
action produced a $2,463,000 gain for the Company as average crude oil prices
rose from the $43 per barrel range in December 2004 to the $54 per barrel range
in March 2005. A similar, but less dramatic, pricing situation occurred during
the first quarter of 2004 and the Company gained $548,000 from inventory
liquidations.
Crude
price fell back somewhat in April 2005 to the $52 per barrel range,
necessitating a $319,000 “lower of cost or market” inventory valuation
write-down as of March 31, 2005. In sum however, the Company benefited from a
net $2,144,000 gain during the current quarter due to crude oil prices
increases. In addition, during the first quarter of 2005, the Company collected
and recognized as income $860,000 of cash on previous disputed and fully
reserved items. Such items did not occur during the first quarter of 2004.
In spite
of an increasing world price for crude oil, the domestic crude oil market as it
affects the wholesale marketplace experienced a weakened condition. Typically,
when crude oil prices are rising, the margin between crude oil acquisition costs
and sales realization improves. This spread or margin is where the Company
attempts to make its profits. However, during the first quarter of 2005, as the
world price for crude oil rose, domestic supply remained relatively plentiful.
The combination of rising prices and plentiful supply caused the margin between
the Company’s crude oil acquisition costs and end market sales realization to
narrow and in some instances gross margins turned negative. As a result, the
gains realized on inventory liquidation were partially offset by adverse
margins. By comparison, absent the above described gains, marketing division
operating earnings were only $847,000 during the first quarter of 2005 compared
to $1,996,000 for the first quarter of 2004. The weak margin situation continued
into the second quarter of 2005. The Company is presently exercising its options
to terminate and re-price its crude oil supply contracts. The goal is to restore
normal operating margins by the third quarter of 2005.
Transportation
revenues, operating earnings and depreciation are as follows (in
thousands):
| |
|
Three
Months Ended |
|
|
|
| |
|
March
31, |
|
Increase |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Percent
|
|
|
Revenues |
|
$ |
13,049 |
|
$ |
10,066 |
|
|
30 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings |
|
$ |
1,169 |
|
$ |
415 |
|
|
182 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
585 |
|
$ |
547 |
|
|
- |
|
Beginning
in April 2004, the Company experienced increased demand for its petrochemical
trucking services. This demand surge continued during the remainder of 2004 and
has generally remained strong during 2005. The demand increase boosted
comparative first quarter 2005 revenues by 30 percent to $13,049,000. Increased
revenues improved operating earnings by 182 percent to $1,169,000. As revenues
increase, operating earnings generally increase at a faster rate when measured
as a percentage. This is because the fixed costs for equipment and terminal
expenses do not increase as revenues grow. Thus operating margin improved
significantly with the greater level of business.
Demand
for the Company’s trucking service has remained strong and is spurred by an
improving United States and world economy. Other important factors include
reduced levels of competition as the industry experienced a general “shake-out”
in recent years coupled with service delays by the railroad industry.
Additionally, a comparatively weaker dollar exchange rate has served to
stimulate export demand for chemicals. The strong demand picture and reduced
competition has afforded the opportunity to increase rates. Presently, the
Company’s transportation business is running at or near full capacity.
Oil and
gas division revenues and operating earnings are primarily a function of crude
oil and natural gas prices and volumes. Comparative amounts for revenues,
operating earnings and depreciation and depletion are as follows (in
thousands):
| |
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,439 |
|
$ |
2,551 |
|
| |
|
|
|
|
|
|
|
|
Operating
earnings |
|
$ |
1,515 |
|
$ |
487 |
|
| |
|
|
|
|
|
|
|
|
Depreciation
and depletion |
|
$ |
484 |
|
$ |
494 |
|
While oil
and gas revenues were consistent between the comparative periods at
approximately $2.5 million, operating earnings improved by $1,028,000 for the
first quarter of 2005. This was due in part to a $601,000 gain realized upon the
sale of certain oil and gas properties when the Company sold its interest in
twelve onshore wells located in Calcasieu Parish, Louisiana. This sale was
completed due to attractive pricing and to eliminate the liability for plugging
and abandonment costs on twenty-five currently non-producing wells on the
property. The Company held a less than three percent working interest in each of
such wells. The Company retained its interest in certain other Calcasieu Parish
producing properties. Results for the first quarter 2005 also benefited in
comparison to 2004 because $940,000 of exploration expense was incurred in the
prior year first quarter. Exploration expense in the first quarter of 2005
totaled $369,000 including a $103,000 impairment provision on non-producing
properties.
Aside
from the items discussed above, the overall comparison of current period oil and
gas operating margin was not generally affected by variations in prices and
volume, as commodity price increases were offset by product volume declines.
Production volumes and price information is as follows:
|
|
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Crude
oil |
|
|
|
|
|
|
|
|
Volume
- barrels |
|
|
13,800 |
|
|
17,000 |
|
|
Average
price per barrel |
|
$ |
46.88 |
|
$ |
33.99 |
|
|
Natural
gas |
|
|
|
|
|
|
|
|
Volume
- mcf |
|
|
270,000 |
|
|
348,100 |
|
|
Average
price per mcf |
|
$ |
6.64 |
|
$ |
5.69 |
|
During
the first quarter of 2005, the Company participated in the drilling of eight
wells. Four of the wells were successful with three dry holes and one well
remaining in progress at quarter-end. Such well was subsequently determined to
be productive. In addition, six wells that were in process at year-end 2004 were
successfully brought on production in the first quarter of 2005. Participation
in the drilling of approximately twenty wells is planned for the remainder of
2005 on our prospect acreage in Alabama, Louisiana and Texas.
In the
Southern and Central UK North Sea, the Company and its joint interest partners
continue to evaluate and reprocess purchased seismic data. The reprocessing on
the Central North Sea Block is complete and a prospect package will be presented
to prospective partners during this year’s second quarter. The license for the
Southern North Sea Block was awarded in February and seismic interpretation work
has just begun. A prospect package should be complete by early 2006. Both
acreage positions are “Promote Blocks” that do not require a commitment to drill
a well. The Company plans to seek a partner to drill the initial wells on a
promoted basis. The Company holds a 25 percent interest in the Central sector
block and a 40 percent interest in the Southern sector block.
- General
and administrative and income tax
General
and administrative expenses increased in 2005 as a result of increased employee
salary costs. The provision for income taxes is based on Federal and State tax
rates and variations are consistent with taxable income in the respective
accounting periods.
| |
- |
Discontinued
operations |
During
2003, management decided to withdraw from its New England region retail natural
gas marketing business. Because of the losses sustained and the desire to reduce
working capital requirements, management decided to exit this region and type of
account. An orderly withdrawal from the region was instituted in 2003 and as of
March 31, 2004, the Company had completed its exit from this business.
Within
the marketing operation, the adverse margin conditions occurring in the first
quarter of 2005 continued into the second quarter. In addition, crude oil prices
have remained flat to a slight decline. Therefore, a repeat of inventory
liquidation gains are not expected during the second quarter. While marketing
earnings look to be suppressed for the second quarter of 2005, more normal
margin conditions should return by the third quarter.
Results
for transportation appear to be holding steady for the remainder of the year.
For the oil and gas segment, the gain from sale of properties is not likely to
recur as no further sales of properties are planned. Otherwise, the level of
earnings generated by ongoing oil and gas production levels should remain stable
for the remainder of 2005.
Liquidity
and Capital Resources
During
the first three months of 2005, net cash provided by operating activities
totaled $5,859,000 versus $3,011,000 of net cash provided by operations during
the first three months of 2004. Management
generally balances the cash flow requirements of the Company’s investment
activity with available cash generated from operations. Over time, cash utilized
for property and equipment additions, tracks with earnings from continuing
operations plus the non-cash provision for depreciation, depletion and
amortization. A summary of this relationship follows (in
thousands):
| |
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Earnings
from continuing operations |
|
$ |
2,851 |
|
$ |
1,191 |
|
|
Depreciation,
depletion and amortization |
|
|
1,458 |
|
|
1,418 |
|
|
Property
and equipment additions |
|
|
(3,490 |
) |
|
(2,195 |
) |
| |
|
|
|
|
|
|
|
|
Cash
available for other uses |
|
$ |
819 |
|
$ |
414 |
|
Capital
expenditures for the first three months of 2005 included $67,000 for marketing
equipment additions, $1,845,000 for tractor and trailer purchases within the
transportation operation and $1,578,000 expended on oil and gas exploration and
production activities. For the remainder of 2005, the Company anticipates
spending approximately $7 million on oil and gas exploration projects and
approximately $350,000 on tractor and trailer equipment additions as present
lease financing arrangements mature.
Banking
Relationships
The
Company’s primary bank loan agreement, with Bank of America, provides for two
separate lines of credit with interest at the bank’s prime rate minus ¼ of 1
percent. The working capital loan provides for borrowings up to $10,000,000
based on 80 percent of eligible accounts receivable and 50 percent of eligible
inventories. Available capacity under the line is calculated monthly and as of
March 31, 2005 was established at $10,000,000. The oil and gas production loan
provides for flexible borrowings subject to a borrowing base established
semi-annually by the bank. The borrowing base is established at $10,000,000 as
of March 31, 2005. The line of credit loans are scheduled to expire on October
31, 2006, with the then present balance outstanding converting to a term loan
payable in eight equal quarterly installments. As of March 31, 2005, bank debt
outstanding under the Company’s two revolving credit facilities totaled
$11,475,000.
The Bank
of America revolving loan agreement, among other things, places certain
restrictions with respect to additional borrowings and the purchase or sale of
assets, as well as requiring the Company to comply with certain financial
covenants, including maintaining a 1.0 to 1.0 ratio of consolidated current
assets to consolidated current liabilities, maintaining a 3.0 to 1.0 ratio of
pre-tax net income to interest expense, and consolidated net worth in excess of
$39,364,000. Should the Company’s net worth fall below this threshold, the
Company may be restricted from payment of additional cash dividends on the
Company’s common stock.
The
Company’s Gulfmark Energy, Inc. subsidiary maintains a separate banking
relationship with BNP Paribas in order to support its crude oil purchasing
activities. In addition to providing up to $40 million in letters of credit, the
facility also finances up to $6 million of crude oil inventory and certain
accounts receivable associated with crude oil sales. Such financing is provided
on a demand note basis with interest at the bank’s prime rate plus 1 percent. As
of March 31, 2005, the Company had $6 million of eligible borrowing capacity
under this facility. No working capital advances were outstanding as of March
31, 2005. Letters of credit outstanding under this facility totaled
approximately $19.7 million as of March 31, 2005. BNP Paribas has the right to
discontinue the issuance of letters of credit under this facility without prior
notification to the Company.
The
Company’s Adams Resources Marketing subsidiary also maintains a separate banking
relationship with BNP Paribas in order to support its natural gas purchasing
activities. In addition to providing up to $25 million in letters of credit, the
facility finances up to $4 million of general working capital needs on a demand
note basis. Such financing is provided on a demand note basis with interest at
the bank’s prime rate plus 1 percent. No working capital advances were
outstanding under this facility as of March 31, 2005. Letters of credit
outstanding under this facility totaled approximately $5.9 million as of March
31, 2005. Under this facility, BNP Paribas has the right to discontinue the
issuance of letters of credit without prior notification to the
Company.
Critical
Accounting Policies and Use of Estimates
As an
integral part of its marketing operation, the Company enters into certain
forward commodity contracts that are required to be recorded at fair value in
accordance with Statement of Financial Accounting Standards No. 133, “Accounting
for Derivative Instruments and Hedging Activities” and related accounting
pronouncements. Management believes this required accounting, known as
mark-to-market accounting, creates variations in reported earnings and the
reported earnings trend. Under mark-to-market accounting, significant levels of
earnings are recognized in the period of contract initiation rather than the
period when the service is provided and title passes from supplier to customer.
As it affects the Company’s operation, management believes mark-to-market
accounting impacts reported earnings and the presentation of financial condition
in three important ways.
| 1. |
Gross
margins, derived from certain aspects of the Company’s ongoing business,
are front-ended into the period in which contracts are executed.
Meanwhile, personnel and other costs associated with servicing accounts as
well as substantially all risks associated with the execution of contracts
are expensed as incurred during the period of physical product flow and
title passage. |
| 2. |
Mark-to-market
earnings are calculated based on stated contract volumes. A significant
risk associated with the Company’s business is the conversion of stated
contract or planned volumes into actual physical commodity movement
volumes without a loss of margin. Again the planned profit from such
commodity contracts is bunched and front-ended into one period while the
risk of loss associated with the difference between actual versus planned
production or usage volumes falls in a subsequent
period. |
| 3. |
Cash
flows, by their nature, match physical movements and passage of title.
Mark-to-market accounting, on the other hand, creates a mismatch between
reported earnings and cash flows. This complicates and confuses the
picture of stated financial conditions and
liquidity. |
The
Company attempts to mitigate the identified risks by only entering into
contracts where current market quotes in actively traded, liquid markets are
available to determine the fair value of contracts. In addition, substantially
all of the Company’s forward contracts are less than 18 months in duration.
However, the reader is cautioned to develop a full understanding of how fair
value or mark-to-market accounting creates differing reported results relative
to those otherwise presented under conventional accrual accounting.
Accounts
receivable and accounts payable typically represent the single most significant
assets and liabilities of the Company. Particularly within the Company’s energy
marketing and oil and gas exploration and production operations, there is a high
degree of interdependence with and reliance upon third parties, (including
transaction counterparties) to provide adequate information for the proper
recording of amounts receivable or payable. Substantially all such third parties
are larger firms providing the Company with the source documents for recording
trade activity. It is commonplace for these entities to retroactively adjust or
correct such documents. This typically requires the Company to either absorb,
benefit from, or pass along such corrections to another third
party.
Due to
(a) the volume of transactions, (b) the complexity of transactions and (c) the
high degree of interdependence with third parties, this is a difficult area to
control and manage. The Company manages this process by participating in a
monthly settlement process with each of its counterparties. Ongoing account
balances are monitored monthly and the Company attempts to gain the cooperation
of such counterparties to reconcile outstanding balances. The Company also
places great emphasis on collecting cash balances due and paying only bonafide
properly supported claims. In addition, the Company maintains and monitors its
bad debt allowance. A degree of risk remains, however, simply due to the customs
and practices of the industry.
- Oil
and Gas Reserve Estimate
The value
of capitalized costs of oil and gas exploration and production related assets
are dependent on underlying oil and gas reserve estimates. Reserve estimates are
based on many subjective factors. The accuracy of reserve estimates depends on
the quantity and quality of geological data, production performance data and
reservoir engineering data, changed prices, as well as the skill and judgment of
petroleum engineers in interpreting such data. The process of estimating
reserves requires frequent revision of estimates (usually on an annual basis) as
additional information becomes available. Estimated future oil and gas revenue
calculations are also based on estimates by petroleum engineers as to the timing
of oil and gas production, and there is no assurance that the actual timing of
production will conform to or approximate such estimates. Also, certain
assumptions must be made with respect to pricing. The Company’s estimates assume
prices will remain constant from the date of the engineer’s estimates, except
for changes reflected under natural gas sales contracts. There can be no
assurance that actual future prices will not vary as industry conditions,
governmental regulation and other factors impact the market price for oil and
gas.
The
Company follows the successful efforts method of accounting, so only costs
(including development dry hole costs) associated with producing oil and gas
wells are capitalized. Estimated oil and gas reserve quantities are the basis
for the rate of amortization under the Company units of production method for
depreciating, depleting and amortizing of oil and gas properties. Estimated oil
and gas reserve values also provide the standard for the Company’s periodic
review of oil and gas properties for impairment.
- Contingencies
From time
to time as incident to its operations, the Company becomes involved in various
accidents, lawsuits and/or disputes. Primarily as an operator of an extensive
trucking fleet, the Company is a party to motor vehicle accidents, worker
compensation claims or other items of general liability as would be typical for
the industry. In addition, the Company has extensive operations that must comply
with a wide variety of tax laws, environmental laws and labor laws, among
others. Should an incident occur, management would evaluate the claim based on
its nature, the facts and circumstances and the applicability of insurance
coverage. To the extent management believes that such event may impact the
financial condition of the Company, management will estimate the monetary value
of the claim and make appropriate accruals or disclosure as provided in the
guidelines of Statement of Financial Accounting Standards No. 5.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
The
Company is exposed to market risk, including adverse changes in interest rates
and commodity prices.
Total
long-term debt at March 31, 2005 included $11,475,000 of floating rate debt. As
a result, the Company’s annual interest costs fluctuate based on interest rate
changes. Because the interest rate on the Company’s long-term debt is a floating
rate, the fair value approximates carrying value as of March 31, 2005. A
hypothetical 10 percent adverse change in the floating rate would not have had a
material effect on the Company’s results of operations for the three-month
period ended March 31, 2005.
The
Company’s major market risk exposure is in the pricing applicable to its
marketing and production of crude oil and natural gas. Realized pricing is
primarily driven by the prevailing spot prices applicable to oil and gas.
Commodity price risk in the Company’s marketing operations represents the
potential loss that may result from a change in the market value of an asset or
a commitment. From time to time, the Company enters into forward contracts to
minimize or hedge the impact of market fluctuations on its purchases of crude
oil and natural gas. The Company may also enter into price support contracts
with certain customers to secure a floor price on the purchase of certain
supply. In each instance, the Company locks in a separate matching price support
contract with a third party in order to minimize the risk of these financial
instruments. Substantially all forward contracts fall within a 6-month to 1-year
term with no contracts extending longer than three years in duration. The
Company monitors all commitments, positions and endeavors to maintain a balanced
portfolio.
Certain
forward contracts are recorded at fair value, depending on management’s
assessments of numerous accounting standards and positions that comply with
generally accepted accounting principles. The undiscounted fair value of such
contracts is reflected on the Company’s balance sheet as risk management assets
and liabilities. The revaluation of such contracts is recognized on a net basis
in the Company’s results of operations. Current market price quotes from
actively traded liquid markets are used in all cases to determine the contracts’
undiscounted fair value. Regarding net risk management assets, 100 percent of
presented values as of March 31, 2005 and 2004 were based on readily available
market quotations. Risk management assets and liabilities are classified as
short-term or long-term depending on contract terms. The estimated future net
cash inflow based on year-end market prices is $650,000, all of which will be
received during the remainder of 2005 and 2006. The estimated future cash inflow
approximates the net fair value recorded in the Company’s risk management assets
and liabilities.
The
following table illustrates the factors that impacted the change in the net
value of the Company’s risk management assets and liabilities for the three
months ended March 31, 2005 and 2004 (in
thousands):
| |
|
|
2005 |
|
|
2004 |
|
|
Net
fair value on January 1, |
|
$ |
630 |
|
$ |
692 |
|
|
Activity
during the period |
|
|
|
|
|
|
|
|
-
Cash received from settled contracts |
|
|
(520 |
) |
|
(335 |
) |
|
-
Net realized gain from prior years’ contracts |
|
|
115 |
|
|
31 |
|
|
-
Net unrealized (loss) from prior years’ contracts |
|
|
- |
|
|
(27 |
) |
|
-
Net unrealized gain from prior years’ contracts |
|
|
63 |
|
|
- |
|
|
-
Net unrealized gain from current year contracts |
|
|
362 |
|
|
494 |
|
|
Net
fair value on March 31, |
|
$ |
650 |
|
$ |
855 |
|
Historically,
prices received for oil and gas production have been volatile and unpredictable.
Price volatility is expected to continue. From January 1, 2005 through March 31,
2005 natural gas price realizations ranged from a monthly low of $5.38 per mmbtu
to a monthly high of $7.98 per mmbtu. Oil prices ranged from a low of $46.45 per
barrel to a high of $54.13 per barrel during the same period. A hypothetical 10
percent adverse change in average natural gas and crude oil prices, assuming no
changes in volume levels, would have reduced earnings by approximately
$1,414,000 for the three-month period ended March 31, 2005.
Forward-Looking
Statements—Safe Harbor Provisions
This
report for the period ended March 31, 2005 contains certain forward-looking
statements intended to be covered by the safe harbors provided under Federal
securities law and regulation. To the extent such statements are not recitations
of historical fact, forward-looking statements involve risks and uncertainties.
In particular, statements under the captions (a) Management’s Discussion and
Analysis of Financial Condition and Results of Operations, (b) Liquidity and
Capital Resources, (c) Critical Accounting Policies and Use of Estimates, (d)
Quantitative and Qualitative Disclosures about Market Risk, among others,
contain forward-looking statements. Where the Company expresses an expectation
or belief to future results or events, such expression is made in good faith and
believed to have a reasonable basis in fact. However, there can be no assurance
that such expectation or belief will actually result or be
achieved.
A number
of factors could cause actual results or events to differ materially from those
anticipated. Such factors include, among others, (a) general economic
conditions, (b) fluctuations in hydrocarbon prices and margins, (c) variations
between crude oil and natural gas contract volumes and actual delivery volumes,
(d) unanticipated environmental liabilities or regulatory changes, (e)
counterparty credit default, (f) inability to obtain bank and/or trade credit
support, (g) availability and cost of insurance, (h) changes in tax laws, and
(i) the availability of capital, (j) changes in regulations, (k) results of
current items of litigation, (l) uninsured items of litigation or losses, (m)
uncertainty in reserve estimates and cash flows, (n) ability to replace oil and
gas reserves, (o) security issues related to drivers and terminal facilities (p)
commodity price volatility and (q) successful completion of drilling activity.
For more information, see the discussion under Forward-Looking Statements in the
annual report or Form 10-K for the year ended December 31, 2004.
Item 4.
Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports under the Securities
Exchange Act of 1934, as amended (“Exchange Act”) are communicated, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. As of the end of the period covered by this quarterly report (the
“Evaluation Date”), an evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934). Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective. During the Company’s first fiscal quarter, there have
not been any changes in our internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II. OTHER INFORMATION
Item 1.
In March
2004, a suit styled Le
Petit Chateau De Luxe, et. al. vs Great Southern Oil & Gas
Co., et. al. was
filed in the Civil District Court for Orleans Parish, Louisiana against the
Company and its subsidiary, Adams Resources Exploration Corporation, among other
defendants. The suit alleges that certain property in Acadia Parish, Louisiana
was environmentally contaminated by oil and gas exploration and production
activities during the 1970s and 1980s. An alleged amount of damage has not been
specified. Management believes the Company has consistently conducted its oil
and gas exploration and production activities in accordance with all
environmental rules and regulations in effect at the time of operation.
Management notified its insurance carrier about this claim, and thus far the
insurance carrier has declined to offer coverage. The Company is litigating this
matter with its insurance carrier. In any event, management does not believe the
outcome of this matter will have a material adverse effect on the Company’s
financial position or results of operations.
From time
to time as incident to its operations, the Company becomes involved in various
lawsuits and/or disputes. Primarily as an operator of an extensive trucking
fleet, the Company is a party to motor vehicle accidents, worker compensation
claims or other items of general liability as would be typical for the industry.
Except as disclosed herein, management of the Company is presently unaware of
any claims against the Company 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 the Company’s financial
position or results of operations.
Item 2. -
None
Item 3. -
None
Item 4. -
None
Item 5. -
None
Item
6. Exhibits
|
31.1 |
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
|
|
31.2 |
Certification
of Chief Financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
|
|
32.1 |
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
of 2002 |
| |
|
|
32.2 |
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
| |
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
| |
ADAMS
RESOURCES & ENERGY, INC |
| |
(Registrant) |
| |
|
| |
|
| |
|
|
Date:
May 12, 2005 |
By
/s/K.
S. Adams, Jr. |
| |
K.
S. Adams, Jr. |
| |
Chief
Executive Officer |
| |
|
| |
|
| |
By
/s/Frank
T. Webster |
| |
Frank
T. Webster |
| |
President
& Chief Operating Officer |
| |
|
| |
|
| |
By
/s/Richard
B. Abshire |
| |
Richard
B. Abshire |
| |
Chief
Financial Officer |
EXHIBIT
INDEX
|
Exhibit |
|
|
Number |
Description |
| |
|
|
31.1 |
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
|
|
31.2 |
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
|
|
32.1 |
Certificate
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
| |
|
|
32.2 |
Certificate
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |