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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 June 30, 2004 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _______ to
Commission File Number 1-7908
ADAMS RESOURCES & ENERGY, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 74-1753147
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act. YES [ ] NO [X]
A total of 4,217,596 shares of Common Stock were outstanding at August 10,
2004.
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended Three Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
REVENUES:
Marketing ............................... $ 929,675 $ 877,503 $ 480,977 $ 414,947
Transportation .......................... 22,150 18,425 12,084 9,415
Oil and gas ............................. 5,106 4,329 2,555 2,605
--------- --------- --------- ---------
956,931 900,257 495,616 426,967
--------- --------- --------- ---------
COSTS AND EXPENSES:
Marketing ............................... 925,192 869,524 479,415 411,386
Transportation .......................... 18,909 16,267 9,805 8,256
Oil and gas ............................. 2,948 1,596 1,378 1,084
General and administrative .............. 3,454 3,007 1,851 1,566
Depreciation, depletion and
amortization ............................ 2,890 2,634 1,472 1,342
--------- --------- --------- ---------
953,393 893,028 493,921 423,634
--------- --------- --------- ---------
Operating earnings ......................... 3,538 7,229 1,695 3,333
Other income (expense):
Interest income ......................... 27 270 11 115
Interest expense ........................ (61) (62) (21) (29)
--------- --------- --------- ---------
Earnings from continuing operations before
income taxes and cumulative effect of
accounting change ....................... 3,504 7,437 1,685 3,419
Income tax provision ....................... 1,195 2,859 567 1,334
--------- --------- --------- ---------
Earnings from continuing operations ........ 2,309 4,578 1,118 2,085
Loss from discontinued operation, net of tax
benefit of $130, $1,682, $0 and $424,
respectively ............................ (253) (2,708) - (655)
--------- --------- --------- ---------
Earnings before cumulative effect of
accounting change ....................... 2,056 1,870 1,118 1,430
Cumulative effect of accounting change,
net of tax of $57 ....................... - (92) - -
--------- --------- --------- ---------
Net earnings ............................... $ 2,056 $ 1,778 $ 1,118 $ 1,430
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
From continuing operations .............. $ .55 $ 1.08 $ .27 $ .49
From discontinued operation ............. (.06) (.64) - (.15)
Cumulative effect of accounting change .. - (.02) - -
--------- --------- --------- ---------
Basic and diluted net earnings
per common share ...................... $ .49 $ .42 $ .27 $ .34
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE ................. $ - $ - $ - $ -
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
- 2 -
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
June 30, December 31,
2004 2003
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 17,562 $ 28,342
Accounts receivable, net of allowance for doubtful
accounts of $1,862 and $1,935, respectively .... 148,670 135,306
Inventories ...................................... 10,253 6,874
Risk management receivables ...................... 4,100 3,809
Income tax receivable ............................ 1,685 1,310
Prepayments ...................................... 8,308 4,870
Current assets of discontinued operation ......... - 5,140
--------- ---------
Total current assets ............... 190,578 185,651
--------- ---------
Property and equipment ............................. 84,059 80,749
Less - accumulated depreciation, depletion
and amortization ............................ (59,116) (56,342)
--------- ---------
24,943 24,407
--------- ---------
Other assets ....................................... 182 203
--------- ---------
$ 215,703 $ 210,261
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 149,480 $ 145,047
Risk management payables ......................... 3,427 3,117
Accrued and other liabilities .................... 3,116 3,364
Current liabilities of discontinued operation .... - 1,137
--------- ---------
Total current liabilities .......... 156,023 152,665
Long-term debt ..................................... 11,475 11,475
Other liabilities:
Asset retirement obligations ..................... 743 706
Deferred taxes and other ......................... 3,174 3,183
--------- ---------
171,415 168,029
--------- ---------
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 ................................ 32,173 30,117
--------- ---------
Total shareholders' equity ......... 44,288 42,232
--------- ---------
$ 215,703 $ 210,261
========= =========
The accompanying notes are an integral part of these financial statements.
- 3 -
ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30,
--------------------
2004 2003
-------- --------
CASH PROVIDED BY OPERATIONS:
Earnings from continuing operations .................. $ 2,309 $ 4,578
Adjustments to reconcile net earnings to net
cash provided by operating activities -
Depreciation, depletion and amortization ........... 2,890 2,634
Gains on property sales ............................ (5) (98)
Impairment on non-producing oil and gas properties . 315 -
Other, net ......................................... 49 469
Changes in operating assets and liabilities -
Decrease (increase) in accounts receivable, net .... (13,364) (11,907)
Decrease (increase) in inventories ................. (3,379) (1,373)
Risk management activities ......................... 19 (929)
Decrease (increase) in tax receivable .............. (375) 190
Decrease (increase) in prepayments ................. (3,438) (4,135)
Increase (decrease) in accounts payable ............ 4,433 14,734
Increase (decrease) in accrued and other
liabilities.................................... (248) 185
-------- --------
Net cash provided by (used in) continuing operations ... (10,794) 4,348
Net cash provided by discontinued operation ............ 3,750 6,206
-------- --------
Net cash provided by (used in) operating activities .... (7,044) 10,554
-------- --------
INVESTING ACTIVITIES:
Property and equipment additions ..................... (3,741) (4,044)
Proceeds from property sales ......................... 5 118
-------- --------
Net cash used in investing activities .............. (3,736) (3,926)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under credit agreements ............. - -
-------- --------
Net cash used in financing activities .............. - -
-------- --------
Increase (decrease) in cash and cash equivalents ....... (10,780) 6,628
Cash at beginning of period ............................ 28,342 27,262
-------- --------
Cash at end of period .................................. $ 17,562 $ 33,890
======== ========
Supplemental disclosure of cash flow information:
Interest paid during the period .................... $ 61 $ 62
======== ========
Income taxes paid during the period ................ $ 1,490 $ 811
======== ========
The accompanying notes are an integral part of these financial statements.
- 4 -
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 June 30, 2004 and December 31, 2003 and its results of
operations for the six months and three months ended June 30, 2004 and 2003 and
its cash flows for the six months ended June 30, 2004 and 2003. 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. In addition, these statements include the Company's
share of oil and gas joint interests using pro-rata consolidation and its
interest in a 50% owned crude oil marketing joint venture using the equity
method of accounting. In July 2004, the Company settled all outstanding issues
with the joint venture partner and beginning in July 2004, will fully
consolidate the remaining balances of the joint venture. See Note (5) of Notes
to Unaudited Consolidated Financial Statements.
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 fund with maturity of 30 days or less. Included in
the cash balance at June 30, 2004 and December 31, 2003 is a deposit of $2
million to collateralize the Company's month-to-month crude oil letter of credit
facility.
- 5 -
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. Such products are valued at
cost determined on the first-in, first-out basis, while crude oil inventory is
valued at average cost. Materials and supplies are included in inventory at
specific cost, with a valuation allowance provided if needed. Components of
inventory are as follows (IN THOUSANDS):
June 30, December 31,
2004 2003
--------------- ----------------
Crude oil....................................... $ 7,482 $ 4,108
Petroleum products.............................. 2,097 2,192
Materials and supplies.......................... 674 574
-------------- ---------------
$ 10,253 $ 6,874
============== ===============
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. 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.
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.
- 6 -
Revenue Recognition
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
contracts. 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.
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 averaged 4,217,596 for the six-month and the three month periods
ended June 30, 2004 and 2003. There were no potentially dilutive securities
during 2004 and 2003.
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. In
the latter case, 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.
- 7 -
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 June 30, 2004 is $673,000,
all of which will be received in 2004 and 2005. 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
periods ended June 30, 2004 and 2003 (IN THOUSANDS):
2004 2003
------------- ----------
Net fair value on January 1,.............................................. $ 692 $ (70)
Activity during 2004
- Cash received from settled contracts ................................ (576) 316
- Net realized gain from prior years' contracts........................ 62 -
- Net realized (loss) from prior years' contracts ..................... - (163)
- Net unrealized (loss) from prior years' contracts.................... (30) -
- Net unrealized gain from prior years' contracts...................... - 322
- Net unrealized gain from current year contracts...................... 525 454
------------- ----------
Net fair value on June 30,............................................... $ 673 $ 859
============= ==========
New Accounting Pronouncements
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. The Company completed its assessment of
SFAS No. 143 and as of January 1, 2003, the Company estimated the present value
of its future Asset
- 8 -
Retirement Obligations ("ARO") is approximately $672,000. The cumulative effect
of adoption of SFAS No. 143 and the change in accounting principal resulted in a
charge to net income during the first quarter of 2003 of approximately $149,000
or $92,000 net of taxes.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations",
requiring the purchase method of accounting for business combinations initiated
after June 30, 2001, which eliminates the pooling-of-interests method. In July
2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets",
which discontinues the practice of amortizing goodwill and indefinite lived
intangible assets and initiates an annual review for impairment. Intangible
assets with a determinable useful life will continue to be amortized over that
period. The amortization provisions apply to goodwill and intangible assets
acquired after June 30, 2001. SFAS No. 141 and 142 clarify that more assets
should be distinguished and classified between tangible and intangible. The
Company did not change or reclassify contractual mineral rights included in oil
and gas properties on the balance sheet upon adoption of SFAS No. 142. The
Company believes the treatment of such mineral rights as tangible assets under
the successful efforts method of accounting for crude oil and natural gas
properties is appropriate. An issue has arisen regarding whether contractual
mineral rights should be classified as intangible rather than tangible assets.
If it is determined that reclassification is necessary, the Company's net
property, plant and equipment would be reduced by approximately $10.5 million
and $9.9 million and intangible assets would have increased by a like amount at
June 30, 2004 and December 31, 2003, respectively, representing unamortized cost
incurred since inception. The provisions of SFAS No. 141 and 142 impact only the
balance sheet and associated footnote disclosure, and reclassifications
necessary would not impact the Company's cash flows or results of operations.
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. Because of the losses sustained and the desire to reduce working
capital requirements, management decided to exit this region and type of
account. The New England operation had no fixed assets or capitalized costs
associated with intangibles. Therefore, an impairment assessment of long-lived
assets was not necessary. Further, all contracts associated with this operation
were initially recorded at fair value pursuant to SFAS No. 133. As a result, a
separate fair value analysis was not needed in connection with the decision to
discontinue New England business. As of March 31, 2004, the Company had
substantially 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):
- 9 -
Depreci-
ation,
Depletion Property
Segment and and
Operating Amorti- Equipment
Revenues Earnings zation Additions
----------- ----------- ----------- -----------
For the six months ended
June 30, 2004
Marketing ............. $ 929,675 $ 3,737 $ 746 $ 181
Transportation ........ 22,150 2,107 1,134 2,003
Oil and gas ........... 5,106 1,148 1,010 1,557
----------- ----------- ----------- -----------
$ 956,931 $ 6,992 $ 2,890 $ 3,741
=========== =========== =========== ===========
For the six months ended
June 30, 2003
Marketing ............. $ 877,503 $ 7,261 $ 718 $ 724
Transportation ........ 18,425 1,130 1,028 595
Oil and gas ........... 4,329 1,845 888 2,725
----------- ----------- ----------- -----------
$ 900,257 $ 10,236 $ 2,634 $ 4,044
=========== =========== =========== ===========
For the three months ended
June 30, 2004
Marketing ............. $ 480,977 $ 1,193 $ 369 $ 88
Transportation ........ 12,084 1,692 587 827
Oil and gas ........... 2,555 661 516 631
----------- ----------- ----------- -----------
$ 495,616 $ 3,546 $ 1,472 $ 1,546
=========== =========== =========== ===========
For the three months ended
June 30, 2003
Marketing ............. $ 414,947 $ 3,284 $ 277 $ 634
Transportation ........ 9,415 631 528 66
Oil and gas ........... 2,605 984 537 1,583
----------- ----------- ----------- -----------
$ 426,967 $ 4,899 $ 1,342 $ 2,283
=========== =========== =========== ===========
Identifiable assets by industry segment are as follows (IN THOUSANDS):
June 30, December 31,
2004 2003
----------- -----------
Marketing .................. $ 162,297 $ 144,722
Transportation ............. 16,878 14,564
Oil and gas ................ 13,944 13,817
Discontinued operations..... - 5,140
Other ...................... 22,584 32,018
----------- -----------
$ 215,703 $ 210,261
=========== ===========
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.
- 10 -
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 and cumulative effect of
accounting change, as follows (IN THOUSANDS):
Six months ended Three months ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Segment operating earnings ............... $ 6,992 $ 10,236 $ 3,546 $ 4,899
General and administrative ............... (3,454) (3,007) (1,851) (1,566)
-------- -------- -------- --------
Operating earnings .................. 3,538 7,229 1,695 3,333
Interest income .......................... 27 270 11 115
Interest expense ......................... (61) (62) (21) (29)
-------- -------- -------- --------
Earnings from continuing operations before
income taxes ........................ $ 3,504 $ 7,437 $ 1,685 $ 3,419
======== ======== ======== ========
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 net earnings of
the venture and accounted for its interest under the equity method of
accounting. The Company included its net investment in the venture in the
consolidated balance sheet and its equity in the venture's pretax earnings was
included in marketing segment revenues in the consolidated statement of
earnings. Other than ordinary trade credit under standard terms, the joint
venture had no third party or other obligations. The participants maintained
management of cash flow and all cash flow requirements.
Effective November 1, 2001, the joint venture participants agreed to
dissolve the venture pursuant to the terms of a joint venture dissolution
agreement. As part of the consideration for terminating the joint venture, the
Company was to receive a monthly per barrel fee to be paid by the former joint
venture co-participant for a period of sixty months on certain barrels purchased
by the participant in the offshore Gulf of Mexico region. While the co-venture
participant willingly paid this fee through January 31, 2002 activity, effective
with February 2002 business, the participant notified the Company of its intent
to withhold the fee until an audit of the previous joint venture activity was
completed. Subsequently, due primarily to credit constraints, the co-participant
substantially curtailed and ultimately ceased its purchase of crude oil in the
affected region.
The co-venture participant initially conducted an audit of the joint
venture in June 2002 and management was led to believe the audit produced no
adverse findings. However, in April 2003, the Company received a demand for
arbitration seeking monetary damages of $11.6 million 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. This settlement was completed by
the Company assuming 100 percent of any future obligations of the joint venture
plus a cash payment of $350,000 to the joint
- 11 -
venture claimant in exchange for an assignment of all accounts receivable from
the joint venture and relief from the Company's approximate $4.9 million cash
obligations otherwise due to the joint venture.
The Company continues to implement the final wind-down and settlement
of open trade account items. As of June 30, 2004, the joint venture's remaining
trade accounts due totaled approximately $4.5 million and trade accounts payable
totaled approximately $8.8 million. 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 President of the Company, is a
limited partner in certain family limited partnerships known as Sakco, Ltd.
("Sakco"), Kenada Oil & Gas, Ltd. ("Kenada") and Kasco, Ltd. ("Kasco"). From
time to time, Mr. Adams individually, the family limited partnerships and
Sakdril, Inc. ("Sakdril"), a wholly owned subsidiary of KSA Industries, Inc., (a
major stockholder of the Company, and controlled by Mr. Adams) participate as
working interest owners in certain oil and gas wells operated by the Company. In
addition, these entities may participate in non-Company operated wells where the
Company also holds an interest. Sakco, Kenada, Kasco, Sakdril and Mr. Adams
participated in each of the wells under 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 June 30, 2004, the Company owed a combined net total of
$509,000 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
$69,000 during the first half of 2004.
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 April 2003, Gulfmark Energy Marketing, Inc. a wholly owned
subsidiary of the
- 12 -
Company previously involved in a crude oil marketing joint venture, received a
demand for arbitration seeking monetary damages of $11.6 million and a re-audit
of the joint venture activity for the period of its existence from May 2000
through October 2001. The claim is further described in Note (5) to Notes to
Unaudited Consolidated Financial Statements. This matter was resolved in July
2004 by the Company assuming 100 percent of any future obligations of the joint
venture plus a cash payment of $350,000 to the joint venture claimant in
exchange for an assignment of all accounts receivable from the joint venture and
relief from the Company's cash obligations otherwise due to the joint venture.
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. Further, management believes it has adequate insurance coverage
against these claims. However, due to the recent filing of the suit for events
that occurred over 20 years ago, the Company's insurance carrier at the time has
not as yet acknowledged its obligation. 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 June 30, 2004 are as follows (IN
THOUSANDS):
2004 2005 2006 2007 Thereafter Total
--------- --------- --------- -------- ---------- ----------
Lease residual values.......... $ 281 $ 762 $ 150 $ - $ 661 $ 1,854
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.
- 13 -
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, none of 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 June 30, 2004, the amount of
parental guaranteed obligations are approximately as follows (IN THOUSANDS):
2004 2005 2006 2007 Thereafter Total
----------- ---------- ---------- ---------- ---------- -----------
Bank debt........................... $ - $ 1,434 $ 5,738 $ 4,303 $ - $ 11,475
Operating leases.................... 2,412 3,542 2,781 2,471 3,288 14,494
Lease residual values............... 281 762 150 - 661 1,854
Commodity purchases................. 17,101 - - - - 17,101
Letters of credit................... 23,003 - - - - 23,003
----------- ---------- ---------- ---------- ------------ ----------
$ 42,797 $ 5,738 $ 8,669 $ 6,774 $ 3,949 $ 67,927
=========== ========== ========== ========== ============ ==========
- 14 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- Marketing
Marketing division revenues, operating earnings and depreciation are
presented as follows (IN THOUSANDS):
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------------- -----------------------------
2004 2003 2004 2003
-------------- -------------- ------------- ------------
Revenues...................... $ 929,657 $ 877,503 $ 480,977 $ 414,947
Operating earnings ........... $ 3,737 $ 7,261 $ 1,193 $ 3,284
Depreciation.................. $ 746 $ 718 $ 369 $ 277
Supplemental volume and price information is as follows:
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------------- -----------------------------
2004 2003 2004 2003
-------------- -------------- ------------- ------------
Wellhead Purchases - Per day (1)
Crude oil - barrels................. 76,400 91,000 76,700 90,000
Natural gas - mmbtu's............... 303,000 319,000 309,000 331,000
Average Purchase Price
Crude oil - per barrel.............. $ 35.43 $ 30.21 $ 36.97 $ 27.84
Natural gas - per mmbtu............. $ 5.64 $ 5.82 $ 5.84 $ 5.38
- ------------------------
(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.
- 15 -
Marketing revenues increased by 6 percent and 16 percent, respectively,
for the comparative current six-month and three-month periods. For 2004, the
revenue increase resulted from crude oil prices increasing by an averaging of 17
percent over 2003 levels. Such price increases more than offset crude oil
wellhead purchase and resale volume declines.
Marketing division operating earnings were reduced by 48 percent and 64
percent, respectively, for the comparative six-month and three-month periods
ended June 30, 2004 due to three primary factors. First, during 2003, near month
crude oil prices remained very strong relative to future month prices as a
result of the Iraq war situation. This market condition served to widen the
Company's per unit margins yielding improved profitability. In contrast,
although world crude oil prices continued to escalate during 2004, domestic
supply remained plentiful, causing crude oil marketing margins to decline. As a
result, crude oil operating margins for the comparative first half of 2004 were
reduced by $1,010,000, in spite of the Company earning approximately $727,000
during 2004 by liquidating crude oil inventories into a relatively higher priced
marketplace. The second factor derives from the Company's wholesale gasoline and
diesel business, where losses were sustained when refined product supply costs
increased faster than the price to the Company's end market customers. This
event caused an $881,000 reduction in comparative first half 2004 operating
earnings. The third factor was due to the fact that in 2003, the Company had a
$760,000 addition to earnings from a reversal of certain previously recorded
accrual items. Such additions to earnings resulted from the final "true-up" of
the accounting for certain open items. This item did not recur in 2004. As of
June 30, 2004, the Company held 198,000 barrels of crude oil inventory at an
average cost of $37.73.
- Transportation
Transportation revenues, operating earnings and depreciation are as
follows (IN THOUSANDS):
Six Months Ended Three Months Ended
June 30, Increase June 30, Increase
------------------------ -------- -------------------------- --------
2004 2003 2004 2003
---------- ---------- ------------- ---------
Revenues.................... $ 22,150 $ 18,425 20% $ 12,084 $ 9,415 28%
Operating earnings.......... $ 2,107 $ 1,130 86% $ 1,692 $ 631 168%
Depreciation................ $ 1,134 $ 1,028 10% $ 587 $ 528 11%
Transportation revenues improved in the first half of 2004 when the
Company experienced increased demand from its petrochemical industry customer
base. The demand increase was most prevalent beginning in April 2004 and
continuing into this year's third quarter. Strong demand served to boost
operating earnings by 86 percent for the six-month period and by 168 percent for
the comparative second quarter of 2004. Generally, when revenues increase,
operating earnings increase at a faster rate due to a relatively large component
of fixed costs included in operating expenses. Significant fixed cost items
include the capital costs associated with equipment and facilities and the
personnel costs associated with terminal operations. Driver wages and fuel are
the primary variable costs fluctuating with revenues. An additional significant
transportation cost component is insurance, which contains both a fixed and a
variable cost aspect.
- 16 -
Demand for the Company's trucking service has remained strong and is
spurred by an improving United States 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
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):
Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
Revenues........................... $ 5,106 $ 4,329 $ 2,555 $ 2,605
Operating earnings................. $ 1,148 $ 1,845 $ 661 $ 984
Depreciation and depletion......... $ 1,010 $ 888 $ 516 $ 537
Production volumes and price information is as follows:
Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
Crude oil
Volume - barrels................. 35,200 28,700 18,200 17,700
Average price per barrel......... $ 35.72 $ 31.03 $ 37.33 $ 29.42
Natural gas
Volume - mcf..................... 670,000 638,000 322,000 343,000
Average price per mcf............ $ 5.74 $ 5.36 $ 5.79 $ 6.03
Oil and gas revenues improved by $777,000 or 18 percent for the current
six-month period as a direct result of increased crude oil and natural gas
production volumes stemming from recent successful drilling results together
with commodity price increases. Operating earnings were reduced, however,
because $1,481,000 of exploration expense was incurred in the first half of 2004
compared to $462,000 of exploration expenses occurring during the first half of
2003. Exploration expense in 2004 included a $315,000 impairment provision on
non-producing
- 17 -
properties plus $1,073,000 of geological and geophysical costs. For the
comparative second quarter of 2004, revenues were reduced slightly as a result
of reduced levels of natural gas production volumes. Depreciation and depletion
during 2004 varied with production volumes.
During the first half of 2004, the Company participated in the drilling
of fifteen wells with ten wells productive, one dry hole and four wells drilling
at the end of the second quarter. Of the four drilling wells, three subsequently
proved productive with one dry hole. The initial well on a large Calcasieu
Parish, Louisiana 3-D seismic survey was one of the successful wells drilled by
the Company during the second quarter of 2004. With this success, numerous
prospects have now been identified for drilling in the second half of 2004.
In Alabama, the Company and its joint interest partners recently
completed a large 3-D seismic survey. The data from this survey is being
processed and will be evaluated before year-end 2004. In Wharton and Colorado
Counties, Texas the Company joined with partners in the purchase of over 200
square miles of 3-D seismic data. This data was purchased in the first quarter
of 2004 and is being reprocessed using the latest techniques in an attempt to
expand previous successes on similar looking formations existing in nearby Fort
Bend County, Texas. Two prospects have been identified and are ready to drill.
The first prospect is waiting on a rig to arrive in August 2004. Several other
leads are expected to evolve into drillable prospects before year-end.
In the Central UK sector of the North Sea, the Company and its joint
interest partners continue to evaluate and reprocess purchased seismic data on
their interest in Block 21-1b. The reprocessing is currently scheduled for
completion by the end of the third quarter and a prospect package is expected by
year-end. At that time a new partner will be sought to join on a promoted basis
to fund the drilling of the first well.
- 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 substantially completed its
exit from this business.
- Outlook
The Company's transportation segment continues to experience strong
demand and improved profitability. Coupled with anticipated continued strength
for the oil and gas segment, the outlook for 2004 earnings remains favorable.
Liquidity and Capital Resources
During the first six months of 2004, net cash used in continuing
operations totaled $10,794,000 versus $4,348,000 of net cash provided by
continuing operations during the first six months of 2003. This relative large
usage of available cash flow reflected an atypical situation resulting from
price increases and timing of insurance and other purchases as well as estimated
federal tax payments. A continuation of this trend is not anticipated during for
the remainder of 2004.
- 18 -
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 the
non-cash provision for depreciation, depletion and amortization. A summary of
this relationship follows (IN THOUSANDS):
Six Months Ended
June 30,
-------------------------
2004 2003
--------- ---------
Depreciation, depletion and amortization...................... $ 2,890 $ 2,634
Property and equipment additions.............................. (3,741) (4,044)
--------- ---------
Other (sources) of cash....................................... $ (851) $ (1,410)
========= =========
The Company's capital expenditures for the first half of 2004 totaled
$3,741,000, including $181,000 for marketing equipment, $2,003,000 in
transportation operations and $1,557,000 in oil and gas drilling activities.
Presently, management intends to restrict investment decisions to available cash
flow. Significant, if any, additions to debt are not anticipated.
For the remainder of 2004, the Company anticipates spending
approximately $2.8 million on oil and gas exploration projects and approximately
$625,000 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 1/4 of 1 percent. The working capital loan provides for borrowings up to
$7,500,000 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 June 30, 2004 was established at $7,500,000. The oil and gas
production loan provides for flexible borrowings subject to a borrowing base
established semi-annually by the bank. The borrowing base was established at
$5,000,000 as of June 30, 2004. The line of credit loans are scheduled to expire
on October 29, 2005, with the then present balance outstanding converting to a
term loan payable in 8 equal quarterly installments. As of June 30, 2004, 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 $34,665,000. 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.
- 19 -
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 June 30, 2004, the Company had $4.5 million of eligible borrowing
capacity under this facility. No working capital advances were outstanding as of
June 30, 2004. Letters of credit outstanding under this facility totaled
approximately $18.1 million as of June 30, 2004. 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 June 30, 2004. Letters of
credit outstanding under this facility totaled approximately $4.9 million as of
June 30, 2004. 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
- Fair Value Accounting
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 vs planned production or usage volumes falls
in a subsequent period.
- 20 -
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.
- Trade Accounts
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.
- 21 -
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.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk, including adverse changes in
interest rates and commodity prices.
- Interest Rate Risk
Total long-term debt at June 30, 2004 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 June 30,
2004. 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
six-month period ended June 30, 2004.
- Commodity Price Risk
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
- 22 -
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 June 30, 2004 and December 31,
2003 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
$673,000, all of which will be received during the remainder of 2004 and 2005.
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
six-months ended June 30, 2004 and 2003 (IN THOUSANDS):
2004 2003
-------- ---------
Net fair value on January 1,........................................... $ 692 $ (70)
Activity during 2004
- Cash received from settled contracts............................ (576) 316
- Net realized gain from prior years' contracts................... 62 -
- Net realized (loss) from prior years' contracts................. - (163)
- Net unrealized (loss) from prior years' contracts............... (30) -
- Net unrealized gain from current year contracts ................ - 322
- Net unrealized gain from current year contracts................. 525 454
-------- ---------
Net fair value on June 30, ............................................ $ 673 $ 859
======== =========
Historically, prices received for oil and gas production have been
volatile and unpredictable. Price volatility is expected to continue. From
January 1, 2004 through June 30, 2004, natural gas price realizations ranged
from a monthly low of $3.58 per mmbtu to a monthly high of $13.74 per mmbtu. Oil
prices ranged from a low of $34.30 per barrel to a high of $40.87 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 $1,259,000 for the six-month period ended
June 30, 2004.
Forward-Looking Statements -- Safe Harbor Provisions
This report for the period ended June 30, 2004 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
- 23 -
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, among others (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, 2003.
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. Within the three-month period prior to
the filing of this 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. Since the Evaluation Date,
there have not been any significant changes in our internal controls or
procedures or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
- 24 -
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. Further, management believes it has adequate insurance coverage
against these claims. However, due to the recent filing of the suit for events
that occurred over 20 years ago, the Company's insurance carrier at the time has
not as yet acknowledged its obligation. 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. - The annual meeting of Stockholders was held on May 14, 2004. At such
meeting, the stockholders voted to elect the board of nine Directors as
presented in the Company's Proxy Statement filed on Schedule 14A on May 14,
2004. Results by nominee were:
Authority
Voted For Against Abstain
--------- ------- -------
K. S. Adams, Jr. 4,029,051 44,035 144,510
E. C. Reinauer, Jr. 4,029,301 44,035 144,260
Edward Wieck 4,029,301 43,785 144,510
E. Jack Webster, Jr. 4,029,301 43,785 144,510
Richard B. Abshire 4,029,051 43,785 144,510
John A. Barrett 4,017,997 55,089 144,510
Vincent H. Buckley 4,029,301 43,785 144,510
William B. Wiener III 4,029,301 43,785 144,510
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Item 5. - None
Item 6. Exhibits and Reports on Form 8-K
a. 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
b. Reports on Form 8-K
A report on Form 8-K dated May 12, 2004 was filed on May 14, 2004 to
announce earnings for the first quarter reporting period ended March 31,
2004.
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADAMS RESOURCES & ENERGY, INC.
(Registrant)
Date: August 11, 2004
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
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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
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