The following information should be read in conjunction with our Consolidated Financial Statements and accompanying notes included under Part II, Item 8 of this annual report. Our financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in theU.S.
Overview of Business
Adams Resources & Energy, Inc. and its subsidiaries are primarily engaged in crude oil marketing, truck and pipeline transportation, terminalling and storage in various crude oil and natural gas basins in the lower 48 states of theU.S. We also conduct tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk primarily in the lower 48 states of theU.S. with deliveries intoCanada andMexico , and with nineteen terminals across theU.S. In addition, we recycle and repurpose off-specification fuels, lubricants, crude oil and other chemicals from producers in theU.S. We operate and report in four business segments: (i) crude oil marketing, transportation and storage; (ii) tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk; (iii) pipeline transportation, terminalling and storage of crude oil; and (iv) beginning in the third quarter of 2022, interstate bulk transportation logistics of crude oil, condensate, fuels, oils and other petroleum products and recycling and repurposing of off-specification fuels, lubricants, crude oil and other chemicals, which includes the businesses we acquired inAugust 2022 (see Note 6 in the Notes to Consolidated Financial Statements for further information regarding the acquisition). See Note 9 in the Notes to Consolidated Financial Statements for further information regarding our business segments. Results of Operations Crude Oil Marketing
Our crude oil marketing segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31, 2022 2021 Change (1) 2020 Change (1) Revenues$ 3,232,193 $ 1,930,042 67.5 %$ 950,426 103.1 % Operating earnings (2) 15,874 25,243 (37.1 %) 2,974 748.8 % Depreciation and amortization 7,724 6,673 15.8 % 7,421 (10.1 %) Driver compensation 19,598 17,717 10.6 % 18,549 (4.5 %) Insurance 7,954 6,193 28.4 % 6,109 1.4 % Fuel 12,518 8,064 55.2 % 5,967 35.1 % ____________________ (1)Represents the percentage increase (decrease) from the prior year. (2)Operating earnings included net inventory valuation losses of$2.0 million , net inventory liquidation gains of$10.3 million and net inventory valuation losses of$15.0 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. 29
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Volume and price information were as follows for the periods indicated:
Year EndedDecember 31, 2022 2021
2020
Field level purchase volumes - per day (1) Crude oil - barrels 94,873 89,061 91,957 Average purchase price Crude oil - per barrel$ 92.63 $ 65.48 $ 36.90 ____________________
(1)Reflects the volume purchased from third parties at the field level of operations.
2022 compared to 2021. Crude oil marketing revenues increased by$1,302.2 million during the year endedDecember 31, 2022 as compared to 2021, primarily as a result of an increase in the market price of crude oil, which increased revenues by approximately$1,104.2 million , and also as a result of higher crude oil volumes, which increased revenues by approximately$198.0 million . The average crude oil price was$65.48 for 2021, which increased to$92.63 for 2022. Revenues from our volumes are mostly based upon the market price in our market areas, primarily in theGulf Coast . The market price of crude oil increased during 2022 as compared to 2021 primarily as a result of a return of global crude oil demand following the pandemic, which combined with a perceived shortage of global crude oil production. In addition, the invasion ofUkraine byRussia also contributed to an increase in the market price of crude oil in the first half of 2022. In the second half of 2022, weakness in the Chinese economy and concern over economic recession caused crude oil prices to fall, while still remaining historically high. Our crude oil marketing operating earnings for the year endedDecember 31, 2022 decreased by$9.4 million as compared to 2021, primarily as a result of inventory valuation losses of$2.0 million in 2022 as compared to inventory liquidation gains of$10.3 million in 2021 (as shown in the table below), and higher operating expenses in 2022 as compared to 2021, partially offset by an increase in the average market price of crude oil and an increase in crude oil volumes in 2022. Driver compensation increased by$1.9 million during the year endedDecember 31, 2022 as compared to 2021, primarily as a result of higher volumes transported in 2022 and an increase in driver pay as compared to 2021, partially offset by a lower overall driver count in 2022. Insurance costs increased by$1.8 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to an increase in insurance premiums, partially offset by a lower overall driver count in 2022. Fuel costs increased by$4.5 million during the year endedDecember 31, 2022 as compared to 2021, consistent with higher fuel prices in 2022, as compared to 2021. Depreciation and amortization expense increased by$1.1 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to the timing of purchases and retirements of tractors and other field equipment during 2021 and 2022. 2021 compared to 2020. Crude oil marketing revenues increased by$979.6 million during the year endedDecember 31, 2021 as compared to 2020, primarily as a result of an increase in the market price of crude oil, which increased revenues by approximately$1,053.3 million , partially offset by lower crude oil volumes, which decreased revenues by approximately$73.7 million . The average crude oil price was$36.90 for 2020, which increased to$65.48 for 2021. The market price of crude oil increased during 2021 as compared to 2020 primarily as a result of increased competition for supply from shippers and marketers to fill obligations to pipelines with the lower crude oil production available. 30
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Our crude oil marketing operating earnings for the year endedDecember 31, 2021 increased by$22.3 million as compared to 2020, primarily as a result of inventory liquidation gains of$10.3 million in 2021 as compared to inventory valuation losses of$15.0 million in 2020 (as shown in the table below), and an increase in the average market price of crude oil, partially offset by decreases in crude oil volumes in 2021. Driver compensation decreased by$0.8 million during the year endedDecember 31, 2021 as compared to 2020, primarily as a result of a decrease in the number of drivers employed by us as well as lower volumes transported in 2021 as compared to 2020. Insurance costs increased by$0.1 million during the year endedDecember 31, 2021 as compared to 2020, primarily due to favorable adjustments to reserves in 2020 for insurance claims resulting from our favorable safety record over the policy period, partially offset by a lower driver count and lower miles driven in 2021. Fuel costs increased by$2.1 million during the year endedDecember 31, 2021 as compared to 2020, primarily due to higher fuel prices in 2021. Depreciation and amortization expense decreased by$0.7 million during the year endedDecember 31, 2021 as compared to 2020, primarily due to the timing of purchases and retirements of tractors and other field equipment during 2020 and 2021. Field Level Operating Earnings (Non-GAAP Financial Measure). Inventory valuations and forward commodity contract (derivatives or mark-to-market) valuations are two significant factors affecting comparative crude oil marketing segment operating earnings. As a purchaser and shipper of crude oil, we hold inventory in storage tanks and third-party pipelines. Generally, during periods of increasing crude oil prices, we recognize inventory liquidation gains while during periods of falling prices, we recognize inventory liquidation and valuation losses. Crude oil marketing operating earnings can be affected by the valuations of our forward month commodity contracts (derivative instruments). These non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. We generally enter into these derivative contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level). The valuation of derivative instruments at period end requires the recognition of non-cash "mark-to-market" gains and losses. The impact of inventory liquidations and derivative valuations on our crude oil marketing segment operating earnings is summarized in the following reconciliation of our non-GAAP financial measure for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 As reported segment operating earnings (1)$ 15,874 $ 25,243 $ 2,974 Add (subtract): Inventory liquidation gains - (10,344)
-
Inventory valuation losses 2,008 -
14,967
Derivative valuation (gains) losses (353) (14)
(9)
Field level operating earnings (2)$ 17,529 $ 14,885 $
17,932
____________________
(1)Segment operating earnings included net inventory valuation losses of$2.0 million , net inventory liquidation gains of$10.3 million and net inventory valuation losses of$15.0 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. (2)The use of field level operating earnings is unique to us, not a substitute for a GAAP measure and may not be comparable to any similar measures developed by industry participants. We utilize this data to evaluate the profitability of our operations. 31
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Field level operating earnings and field level purchase volumes depict our day-to-day operation of acquiring crude oil at the wellhead, transporting the product and delivering the product to market sales points. Field level operating earnings increased during the year endedDecember 31, 2022 as compared to 2021, primarily due to an increase in the average market price of crude oil and an increase in crude oil volumes in 2022, which increased revenues, partially offset by higher operating costs in 2022. Field level operating earnings decreased during the year endedDecember 31, 2021 as compared to 2020, primarily due to higher fuel and insurance costs and lower crude oil volumes, partially offset by an increase in the market price of crude oil in 2021.
We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels and price per barrel):
December 31, 2022 2021 2020 Average Average Average Barrels Price Barrels Price Barrels Price Crude oil inventory 328,562$ 78.39 259,489$ 71.86 421,759$ 45.83
Historically, prices received for crude oil have been volatile and unpredictable with price volatility expected to continue. See "Item 1A. Risk Factors."
Transportation
Our transportation segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31, 2022 2021 Change (1) 2020 Change (1) Revenues$ 112,376 $ 94,498 18.9 %$ 71,724 31.8 % Operating earnings$ 10,891 $ 7,104 53.3 %$ 1,873 279.3 % Depreciation and amortization$ 11,512 $ 12,099 (4.9 %)$ 10,963 10.4 % Driver commissions$ 15,193 $ 14,948 1.6 %$ 12,575 18.9 % Insurance$ 8,760 $ 8,368 4.7 %$ 6,462 29.5 % Fuel$ 12,574 $ 8,201 53.3 %$ 5,065 61.9 % Maintenance expense$ 5,282 $ 3,932 34.3 %$ 3,949 (0.4 %) Mileage (000s) 26,510 27,902 (5.0 %) 24,239 15.1 % ____________________
(1)Represents the percentage increase (decrease) from the prior year.
Our revenue rate structure includes a component for fuel costs in which fuel cost fluctuations are largely passed through to the customer over time. Revenues, net of fuel costs, were as follows for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 Total transportation revenue$ 112,376 $ 94,498 $ 71,724 Diesel fuel cost (12,574) (8,201) (5,065)
Revenues, net of fuel costs (1)
____________________
(1)Revenues, net of fuel costs, is a non-GAAP financial measure and is utilized for internal analysis of the results of our transportation segment.
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2022 compared to 2021. Transportation revenues increased by$17.9 million during the year endedDecember 31, 2022 as compared to 2021. Transportation revenues, net of fuel costs, increased by$13.5 million during the year endedDecember 31, 2022 as compared to 2021. These increases in transportation revenues were primarily due to increased transportation rates during 2022 through continued negotiations with customers. In addition, as a result of customer demand, we opened four new terminals during the second half of 2021. These terminals, located inCharleston, West Virginia ,West Memphis, Arkansas ,Joliet, Illinois , andAugusta, Georgia , increased revenues by approximately$8.1 million during 2022. These increases also reflect the effect of a severe winter storm inFebruary 2021 and the resulting power outages affectingTexas , which resulted in a significant decline in transportation services for over a week and a temporary loss of revenues in 2021. In addition, ourLouisiana operations were impacted by Hurricane Ida inAugust 2021 , resulting in a loss of days worked by drivers in the area, thus decreasing revenues. The impact of the storm affected ourLouisiana locations throughmid-September 2021 . Our transportation operating earnings increased by$3.8 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to higher revenues as a result of increased transportation rates and revenues from new terminals, partially offset by higher fuel costs, maintenance costs, driver commissions and insurance costs. Driver commissions increased by$0.2 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to an increase in driver pay in mid-2022 and an increase in the number of drivers, partially offset by lower mileage during 2022. In addition, driver commissions were impacted by Hurricane Ida inAugust 2021 , which affected ourLouisiana operations, resulting in a loss of days worked by drivers in the area, thus decreasing driver commissions. The impact of the storm affected ourLouisiana locations throughmid-September 2021 . Fuel costs increased by$4.4 million during the year endedDecember 31, 2022 as compared to 2021, primarily as a result of an increase in the price of fuel during 2022. Insurance costs increased$0.4 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to an increase in insurance premiums in 2022. Maintenance expense increased by$1.4 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to repairs and maintenance to older tractors and trailers in our fleet and escalating prices in parts, repairs and maintenance. Depreciation and amortization expense decreased by$0.6 million during the year endedDecember 31, 2022 as compared to 2021, primarily as a result of the timing of purchases and leases of new tractors and trailers in 2021 and 2022. 2021 compared to 2020. Transportation revenues increased by$22.8 million during the year endedDecember 31, 2021 as compared to 2020. Transportation revenues, net of fuel costs, increased by$19.6 million during the year endedDecember 31, 2021 as compared to 2020. These increases were primarily due to the purchase of transportation assets ofCTL Transportation, LLC ("CTL") (see Note 6 in the Notes to Consolidated Financial Statements), an increase in business activities as a result of continued market recovery after COVID-19 lockdowns, higher transportation rates and additional revenues associated with our new terminals. During 2021, we opened four new terminals, which increased revenues by$2.4 million . Our 2020 revenues were also lower due to fewer miles traveled as a result of decreases in certain business activities of our customers as a results of the COVID-19 outbreak. These factors more than offset the effect of the severe winter storm inFebruary 2021 and Hurricane Ida inAugust 2021 described above. Our transportation operating earnings increased by$5.2 million during the year endedDecember 31, 2021 as compared to 2020, primarily due to increased transportation rates as well as higher revenues as a result of the CTL acquisition, partially offset by higher depreciation and amortization expense related to the timing of new assets placed into service and higher insurance, driver commissions and fuel costs. 33
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Driver commissions increased by$2.4 million during the year endedDecember 31, 2021 as compared to 2020, primarily due to a higher driver count, increased miles driven in 2021 and an increase in driver pay mid-2021, partially offset by the impact of Hurricane Ida inAugust 2021 , which affected ourLouisiana operations, resulting in a loss of days worked by drivers in the area, thus decreasing driver commissions. The impact of the storm affected ourLouisiana locations through mid-September. Fuel costs increased by$3.1 million during the year endedDecember 31, 2021 as compared to 2020, primarily as a result of the CTL acquisition, which increased the number of miles traveled during 2021, and an increase in the price of fuel. Insurance costs increased by$1.9 million during the year endedDecember 31, 2021 as compared to 2020, primarily due to the CTL acquisition which resulted in a higher driver count, increased miles driven in 2021 and higher insurance premiums. Depreciation and amortization expense increased by$1.1 million during the year endedDecember 31, 2021 as compared to 2020, primarily as a result of the CTL acquisition inJune 2020 and the purchase and lease of new tractors and trailers in 2020 and 2021. Equipment additions and retirements for the transportation fleet were as follows for the periods indicated: Year Ended December 31, 2022 2021 2020 New tractors purchased (1) 3 units 28 units 12 units New tractors leased 10 units - 33 units Tractors retired 4 units 79 units 49 units New trailers purchased (1) 1 unit 67 units 10 units New trailers leased 13 units - 40 units Trailers retired 85 units 33 units 30 units ________________
(1)2020 amounts do not include 163 tractors and 328 trailers purchased in
connection with the CTL asset acquisition in
The sales of retired equipment in our transportation segment produced gains of approximately$0.8 million ,$0.4 million and$0.2 million during the years endedDecember 31, 2022 , 2021 and 2020, respectively. Our customers are primarily in the domestic petrochemical industry. Customer demand is affected by low natural gas prices (a basic feedstock cost for the petrochemical industry) and high export demand for petrochemicals. 34
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Table of Contents Pipeline and Storage
Our pipeline and storage segment revenues, operating losses and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31, 2022 2021 Change (1) 2020 (2) Segment revenues (3)$ 3,804 $ 4,524 (15.9 %)$ 272 Less: Intersegment revenues (3) (3,804) (3,860) (1.5 %) - Revenues $ -$ 664 (100.0 %)$ 272 Operating losses (3,579) (2,487) 43.9 % (310) Depreciation and amortization 1,077 1,025 5.1 % 189 Insurance 772 726 6.3 % 138 ____________________ (1)Represents the percentage increase (decrease) from the 2021 to 2022. (2)Represents the period from acquisition,October 22, 2020 throughDecember 31, 2020 . (3)Segment revenues include intersegment revenues from our crude oil marketing segment, which are eliminated in consolidation in our consolidated statements of operations. Volume information was as follows for the periods indicated (in barrels per day): Year Ended December 31, 2022 2021 2020 Pipeline throughput (1) 11,084 7,670 1,395 Terminalling (1) 11,296 8,132 2,581 ____________________
(1)2020 amounts represent the period from acquisition,
InOctober 2020 , we purchased the VEX Pipeline System, and segment revenues were earned from a third-party shipper under a contract that had been in place at the time of the acquisition. The third-party contract ended in 2021. Throughout 2021 and 2022, segment revenues were also earned from GulfMark, an affiliated shipper. All pipeline and storage segment revenues earned from GulfMark are eliminated in consolidation. Segment revenues from GulfMark during the year endedDecember 31, 2022 were relatively consistent with 2021. We are currently constructing a new pipeline connection between the VEX Pipeline System and the Max Midstream pipeline system, and we expect to complete construction and place the assets into commercial service during the second quarter of 2023. In addition, we are exploring new connections with several other pipeline systems, for new crude oil supply opportunities both upstream and downstream of the pipeline, to enhance the crude oil supply and take-away capability of the system. Our pipeline and storage operating losses increased by$1.1 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to the third-party revenue contract ending, which resulted in lower revenues of$0.7 million , and increases in operating salaries and wages and related personnel costs, materials and supplies, outside service costs and insurance costs in 2022. 35
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Table of Contents Logistics and Repurposing
Our logistics and repurposing segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):
Year Ended December 31, 2022 (1) Revenues $ 22,348 Operating earnings 303 Depreciation and amortization 2,394 Driver commissions 3,767 Insurance 776 Fuel 1,796 ____________________
(1)Represents the period from acquisition,
OnAugust 12, 2022 , we acquired all of the equity interests of Firebird andPhoenix . Firebird is an interstate bulk motor carrier of crude oil, condensate, fuels, oils and ?other petroleum products. Firebird has six terminal locations throughoutTexas and owns 123 tractors and 216 trailers largely in the EagleFord basin.Phoenix ?recycles and repurposes off-specification fuels, lubricants, crude oil and other chemicals from ?producers in theU.S.
General and Administrative Expense
General and administrative expenses increased by$4.0 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to higher salaries and wages and related personnel costs, audit fees, legal fees, outside service costs and insurance costs. 2022 also includes approximately$0.6 million of costs related to the repurchase of our common shares from an affiliate (see Note 10 in the Notes to Consolidated Financial Statements for further information) and approximately$0.5 million of acquisition related costs for the purchase of Firebird andPhoenix (see Note 6 in the Notes to Consolidated Financial Statements for further information). General and administrative expenses increased by$3.4 million during the year endedDecember 31, 2021 as compared to 2020, primarily due to higher salaries and wages and related personnel costs, insurance costs and outside service costs, partially offset by lower legal fees and director fees.
Interest Expense
Interest expense increased by$0.5 million during the year endedDecember 31, 2022 as compared to 2021, primarily due to the write off of debt issuance costs of$0.4 million related to the Wells Fargo credit agreement that we terminated inOctober 2022 , and an increase of$0.3 million related to the outstanding Term Loan of$24.4 million under our credit agreement with Cadence Bank (see Note 12 in the Notes to Consolidated Financial Statements for further information.
Income Taxes
Provision for (benefit from) income taxes is based upon federal and state tax rates, and variations in amounts are consistent with taxable income (loss) in the respective accounting periods.
On
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The NOL carryback provision in the CARES Act resulted in a cash benefit to us for the fiscal years 2018, 2019 and 2020. We carried back our NOL for the fiscal year 2018 to 2013 and received a cash refund of approximately$2.7 million inJune 2020 . We carried back our NOL for the fiscal year 2019 to 2014 and received a cash refund of approximately$3.7 million inApril 2021 . We carried back our NOL for the fiscal year 2020 to 2015 and 2016 and received a cash refund of approximately$6.9 million inJune 2022 . We account for interest and penalties related to uncertain tax positions as part of our provision for federal and state income taxes. AtDecember 31, 2022 and 2021, we have not recorded any uncertain tax benefits. For the year endedDecember 31, 2022 our effective tax rate was 35 percent, which is higher than our statutory tax rate primarily due to non-deductible expenses, the mix of earnings in states with higher tax rates and less earnings before income taxes as compared to prior years. For the year endedDecember 31, 2021 , our effective tax rate was 24 percent, and for the year endedDecember 31, 2022 , our effective tax rate was 118 percent. Excluding the adjustment related to the carryback of the 2018, 2019 and 2020 net operating losses, the effective income tax rate for the year endedDecember 31, 2020 was 22 percent. AtDecember 31, 2022 and 2021, we had deferred tax liabilities of approximately$15.4 million and$11.3 million , respectively. We recorded net tax liabilities of approximately$6.2 million related to the tax effect of our estimated fair value allocations related to the purchase of Firebird andPhoenix (Note 6 in the Notes to Consolidated Financial Statements for further information).
See Note 14 in the Notes to Consolidated Financial Statements for further information.
Inflation Reduction Act of 2022
OnAugust 16, 2022 , the IR Act was signed into federal law. The IR Act provides for, among other things, a new corporate alternative minimum tax of 15 percent on book income of certain large corporations effective in 2024, a 1 percent excise tax on net stock repurchases afterDecember 31, 2022 and several tax incentives to promote clean energy. We are still evaluating the impact the IR Act related tax incentives may have on our consolidated financial statements.
Liquidity and Capital Resources
General
Our primary sources of liquidity are (i) our cash balance, (ii) cash flow from operating activities, (iii) borrowings under our credit agreement and (iv) funds received from the sale of equity securities. Our primary cash requirements include, but are not limited to, (i) ordinary course of business uses, such as the payment of amounts related to the purchase of crude oil, and other expenses, (ii) discretionary capital spending for investments in our business and (iii) dividends to our shareholders. We believe we will have sufficient liquidity through our current cash balances, availability under our credit agreement, expected cash generated from future operations, and the ease of financing tractor and trailer additions through leasing arrangements (should the need arise) to meet our short-term and long-term liquidity needs for the reasonably foreseeable future. Our cash balance and cash flow from operating activities is dependent on the success of future operations. If our cash inflow subsides or turns negative, we will evaluate our investment plan accordingly and remain flexible. 37
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We maintain cash balances in order to meet the timing of day-to-day cash needs. Cash and cash equivalents (excluding restricted cash) and working capital, the excess of current assets over current liabilities, were as follows at the dates indicated (in thousands): December 31, 2022 2021 2020 Cash and cash equivalents$ 20,532 $ 97,825 $ 39,293 Working capital 19,083 87,199 72,965 Our cash balance atDecember 31, 2022 decreased by 79.0 percent fromDecember 31, 2021 , due in part to the use of$44.9 million of cash on hand to fund a portion of the repurchase of common shares from the KSA Sellers inOctober 2022 (see Note 10 in the Notes to Consolidated Financial Statements for further information) and the use of$35.4 million of cash on hand to fund a portion of the acquisition of Firebird andPhoenix inAugust 2022 (Note 6 in the Notes to Consolidated Financial Statements for further information), as discussed further below. OnOctober 27, 2022 , we entered into a Credit Agreement with Cadence Bank. The Credit Agreement replaced our prior credit agreement with Wells Fargo. The Credit Agreement provides for (a) a revolving credit facility that allows for borrowings up to$60.0 million in aggregate principal amount from time to time, and (b) a term loan in aggregate principal amount of$25.0 million . We may also obtain letters of credit under the revolving credit facility up to a maximum amount of$30.0 million , which reduces availability under the revolving facility by a like amount. Borrowings under the revolving credit facility may be, at our option, base rate loans (defined by reference to the higher of the prime rate, the federal funds rate or an adjusted term SOFR for a one month tenor plus one percent) or SOFR loans, in each case plus an applicable margin, the amount of which is determined by reference to our consolidated total leverage ratio, and is between 1 percent and 2 percent for base rate loans and between 2 percent and 3 percent for SOFR loans. The term loan amortizes on a 10-year schedule with quarterly payments beginningDecember 31, 2022 , and maturesOctober 27, 2027 . Proceeds of the term loan were used, together with additional cash on hand, to fund the repurchase of shares from the KSA Sellers. The term loan bears interest at the SOFR loan rate plus the applicable margin for SOFR loans. We are required to maintain compliance with certain financial covenants under the Credit Agreement, including a consolidated leverage ratio, an asset coverage ratio and a consolidated fixed charge coverage ratio. We were in compliance with these covenants as ofDecember 31, 2022 . AtDecember 31, 2022 , we had$24.4 million outstanding under the Credit Agreement, representing the remaining principal balance of the term loan, with a weighted average interest rate of 6.29 percent. We also had$8.4 million of letters of credit issued under the Credit Agreement at a fee of 2.00 percent per annum. No amounts were outstanding under the revolving credit facility. See Note 12 in the Notes to Consolidated Financial Statements for further information. OnDecember 23, 2020 , we entered into an At Market Issuance Sales Agreement ("ATM Agreement") withB. Riley Securities, Inc. , as agent (the "Agent"). Pursuant to the ATM Agreement, we may offer to sell shares of our common stock through or to the Agent for cash from time to time. We filed a registration statement initially registering an aggregate of$20.0 million of shares of common stock for sale under the ATM Agreement. The total number of shares of common stock to be sold, if any, and the price the shares will be sold at will be determined by us periodically in connection with any such sales, though the total amount sold may not exceed the limitations stated in the registration statement. During the year endedDecember 31, 2022 , we received net proceeds of approximately$1.7 million (net of offering costs of$0.1 million ) from the sale of 46,524 of our common shares at an average price per share of approximately$40.20 under this agreement. AtDecember 31, 2022 , approximately$15.1 million of the original$20.0 million capacity of the ATM Agreement remained unsold. 38
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We utilize cash from operations to make discretionary investments in our four business segments. With the exception of operating and finance lease commitments primarily associated with storage tank terminal arrangements, leased office space, tractors, trailers and other equipment, our future commitments and planned investments can be readily curtailed if operating cash flows decrease. See below for information regarding our operating and finance lease obligations. We have no off-balance sheet arrangements that have or are reasonably expected to have a material current or future effect on our financial position, results of operations or cash flows. The most significant item affecting future increases or decreases in liquidity is earnings from operations, and these earnings are dependent on the success of future operations. See "Part I, Item 1A. Risk Factors."
Cash Flows from Operating, Investing and Financing Activities
Our consolidated cash flows from operating, investing and financing activities were as follows for the periods indicated (in thousands):
Year Ended December 31, 2022 2021 2020 Cash provided by (used in): Operating activities$ 13,777 $ 81,026 $ (43,999) Investing activities (36,003) (10,096) (19,663) Financing activities (54,024) (15,678) (6,528) Operating activities. Net cash flows provided by operating activities was$13.8 million for the year endedDecember 31, 2022 as compared to$81.0 million for the year endedDecember 31, 2021 . The decrease in net cash flows from operating activities of$67.2 million was primarily due to lower earnings of$8.4 million in 2022 and changes in our working capital accounts. Early payments received from customers decreased by approximately$7.6 million in 2022, and early payments made to suppliers increased by approximately$8.3 million in 2022. In addition, crude oil inventory increased by$8.0 million atDecember 31, 2022 , primarily due to an increase in the price of our crude oil inventory, which increased from$71.86 per barrel atDecember 31, 2021 to$78.39 per barrel atDecember 31, 2022 , and an increase of 26.6 percent in the number of barrels held in inventory. Net cash flows provided by operating activities was$81.0 million for the year endedDecember 31, 2021 as compared to net cash flows used in operating activities of$44.0 million for the year endedDecember 31, 2020 . The increase in net cash flows from operating activities of$125.0 million was primarily due to higher earnings in 2021 and changes in our working capital accounts. Early payments received from customers increased by approximately$51.9 million in 2021, while early payments made to suppliers increased by approximately$5.7 million in 2021. At various times each month, we may make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within our crude oil marketing operations. Crude oil supply prepayments are recouped and advanced from month to month as the suppliers deliver product to us. In addition, in order to secure crude oil supply, we may also "early pay" our suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. These "early payments" reduce cash and accounts payable as of the balance sheet date. We also require certain customers to make similar early payments or to post cash collateral with us in order to support their purchases from us. Early payments and cash collateral received from customers increases cash and reduces accounts receivable as of the balance sheet date. 39
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Early payments received from customers and prepayments made to suppliers were as follows at the dates indicated (in thousands):
December 31, 2022 2021 2020 Early payments received$ 45,265 $ 52,841 $ 939 Prepayments to suppliers - - 1,085 Early payments to suppliers 14,055 5,732 - We rely heavily on our ability to obtain open-line trade credit from our suppliers especially with respect to our crude oil marketing operations. The timing of payments and receipts of these early pays received and paid can have a significant impact on our cash balance. Investing activities. Net cash used in investing activities for the year endedDecember 31, 2022 increased by$25.9 million when compared to 2021. This increase in net cash flows used in investing activities was primarily due to a payment of$33.1 million for the acquisition of Firebird andPhoenix inAugust 2022 (see Note 6 in the Notes to Consolidated Financial Statements for further information), partially offset by a decrease of$4.9 million in capital spending for property and equipment (see "Capital Spending" below), an increase of$0.8 million in cash proceeds from sales of assets and an increase of$1.5 million in insurance and state collateral refunds in 2022. Net cash used in investing activities for the year endedDecember 31, 2021 decreased by$9.6 million when compared to 2020. This decrease in net cash flows used in investing activities was primarily due a decrease of$20.2 million in cash paid for asset acquisitions ($10.0 million was paid inOctober 2020 for the purchase the VEX Pipeline System and$9.2 million was paid inJune 2020 for the purchase of the CTL transportation assets (see Note 6 in the Notes to Consolidated Financial Statements for further information)). This decrease in net cash flows used in investing activities was partially offset by an increase of$7.4 million in capital spending for property and equipment (see "Capital Spending" below), a decrease of$2.2 million in cash proceeds from sales of assets and a decrease of$1.0 million in insurance and state collateral refunds in 2021.
Financing activities. Net cash used in financing activities for the year ended
•a cash payment inOctober 2022 of$69.9 million for the repurchase of an aggregate of 1,942,433 shares of our common stock from KSA and affiliates (see Note 10 in the Notes to Consolidated Financial Statements for further information), •an increase in 2022 of$0.4 million in principal repayments made for finance lease obligations (see "Material Cash Requirements" below for information regarding our finance lease obligations), •a decrease in 2022 of$1.1 million in net proceeds from the sale of common shares under the ATM program. During the year endedDecember 31, 2022 , we received net proceeds of approximately$1.7 million from the sale of 46,524 of our common shares, while during the year endedDecember 31, 2021 , we received net proceeds of approximately$2.8 million from the sale of 97,623 of our common shares. •an increase in 2022 in net borrowings under our credit agreements withWells Fargo and Cadence Bank. During 2022, we borrowed and repaid$92.0 million under the credit agreements, primarily for working capital purposes. We also borrowed$25.0 million under the Term Loan with Cadence Bank to partially fund the repurchase of the shares from KSA and affiliates, and made a principal repayment of$0.6 million inDecember 2022 on the Term Loan. During the year endedDecember 31, 2021 , we borrowed$8.0 million under the credit agreement primarily to repay the$10.0 million outstanding payable related to the purchase of the VEX pipeline system inOctober 2020 , and repaid the$8.0 million during 2021. •a cash outflow in 2022 of$1.7 million for debt issuance costs related to the credit agreement with Cadence Bank, 40
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•a cash outflow in 2022 as a result of the payment of the$10.0 million outstanding payable related to the purchase of the VEX Pipeline System inOctober 2020 , •a decrease in 2022 in cash dividends paid on our common shares. During both of the years endedDecember 31, 2022 and 2021, we paid aggregate cash dividends of$0.96 per common share, or totals of$3.8 million and$4.1 million , respectively. OnOctober 31, 2022 , the number of common shares outstanding decreased by 1.9 million as a result of the repurchase of the shares from KSA and affiliates. Net cash used in financing activities for the year endedDecember 31, 2021 increased by$9.2 million when compared to 2020. This increase in net cash used in financing activities was primarily due to the payment of the$10.0 million outstanding payable related to the purchase of the VEX Pipeline System inOctober 2020 and an increase of$2.0 million in principal repayments made for finance lease obligations. During 2021, we borrowed and repaid$8.0 million under our credit agreement with Wells Fargo, the borrowing of which was used to repay the amount due for the remaining purchase price of the VEX Pipeline System. During both of the years endedDecember 31, 2021 and 2020, we paid aggregate cash dividends of$0.96 per common share, or totals of$4.1 million and$4.1 million , respectively. During the year endedDecember 31, 2021 , we received net proceeds of approximately$2.8 million from the sale of 97,623 of our common share under the ATM Agreement.
Capital Spending
We use cash from operations and existing cash balances to make discretionary investments in our businesses. Capital spending was as follows for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 Crude oil marketing (1)$ 4,534 $ 3,245 $ 3,130 Transportation (2) 1,608 7,960 1,355 Pipeline and storage (3) 1,050 1,169 - Logistics and repurposing (4) 282 - - Other (5) 17 8 523 Capital spending$ 7,491 $ 12,382 $ 5,008 _______________ (1)Amounts for the years endedDecember 31, 2022 , 2021 and 2020, do not include approximately$5.1 million ,$2.1 million and$3.6 million , respectively, of tractors and other equipment acquired under finance leases. (2)Amounts for the years endedDecember 31, 2022 and 2020, do not include approximately$2.8 million and$7.3 million , respectively, of tractors and trailers acquired under finance leases. Amount for the year endedDecember 31, 2020 does not include approximately$9.2 million of capital spending related to the acquisition of CTL. (3)Amount for the year endedDecember 31, 2020 does not include approximately$10.0 million of capital spending related to the acquisition of the VEX Pipeline System. (4)Amount for the year endedDecember 31, 2022 does not include approximately$33.1 million of capital spending related to the acquisition of Firebird andPhoenix . (5)Amounts relate to the purchase of software and equipment and leasehold improvements at our corporate headquarters, which are not attributed or allocated to any of our reporting segments. As a result of the uncertainty relating to the economic environment resulting from the COVID-19 pandemic, we significantly reduced our capital spending in 2022, 2021 and 2020 and, as a result, entered into finance lease agreements for the use of tractors and trailers. See "Material Cash Requirements" below for information regarding our finance lease obligations. 41
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Crude oil marketing. Capital expenditures during 2022 were for the purchase of 20 tractors, 10 trailers and other field equipment. Capital expenditures during 2021 were for the purchase of 16 tractors, 2 trailers and other field equipment, and during 2020, were primarily for the purchase of 16 tractors and other field equipment. Transportation. Capital expenditures during 2022 were for the purchase of three tractors, one trailer and other field equipment. Capital expenditures during 2021 were for the purchase of 28 tractors, 67 trailers and computer software and equipment, and during 2020, were for the purchase of 12 tractors, 10 trailers, other field equipment and computer software and equipment. As a result of the uncertainty relating to the economic environment resulting from the COVID-19 pandemic in 2020, we significantly reduced our capital spending in 2020 and, as a result, entered into finance lease agreements for the use of 33 tractors and 40 trailers during 2020. Pipeline and storage. Capital expenditures during 2022 were for the purchase of land and easements in connection with a planned pipeline connection, and during 2021, were for the purchase of computer equipment and field equipment.
Logistics and repurposing. Capital expenditures for 2022 were for the purchase of field equipment.
Material Cash Requirements
The following table summarizes our contractual obligations with material cash
requirements at
Payments due by period Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years Credit Agreement (1)$ 29,965 $ 3,954
17,812 4,870 8,281 4,661 - Operating lease obligations (3) 8,223 2,958 3,579 1,449 237 Purchase obligations: Crude oil marketing - crude oil (4) 213,864 213,864 - - - Tractors and trailers (5) 18,570 18,570 - - -
Total contractual obligations
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(1)Represents scheduled future maturities for amounts due under the Term Loan under our Credit Agreement plus estimated cash payments for interest. Interest payments are based upon the principal amount of the amount outstanding and the applicable interest rate atDecember 31, 2022 . See Note 12 in the Notes to Consolidated Financial Statements for further information about our Credit Agreement. (2)Amounts represent our principal contractual commitments, including interest, outstanding under finance leases for tractors, trailers, tank storage and throughput arrangements and other equipment. (3)Amounts represent rental obligations under non-cancelable operating leases and terminal arrangements with terms in excess of one year. (4)Amount represents commitments to purchase certain quantities of crude oil substantially inJanuary 2023 in connection with our crude oil marketing activities. These commodity purchase obligations are the basis for commodity sales, which generate the cash flow necessary to meet these purchase obligations. (5)Amount represents commitments to purchase 60 new tractors and 31 new trailers in our transportation business, 15 new tractors and two new trailers in our crude oil marketing business, and 17 new tractors and two new trailers in our logistics and repurposing segment. We maintain certain lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis. In addition, we enter into office space and certain lease and terminal access contracts in order to provide tank storage and dock access for our crude oil marketing business. These storage and access contracts require certain minimum monthly payments for the term of the contracts. 42
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Rental expense was as follows for the periods indicated (in thousands):
Year Ended December 31, 2022 2021 2020 Rental expense$ 23,176 $ 21,604 $ 16,585 Insurance Our primary insurance needs are workers' compensation, automobile and umbrella liability coverage for our trucking fleet and medical insurance for our employees. See Note 18 in the Notes to Consolidated Financial Statements for further information. Insurance costs were as follows for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 Insurance costs$ 18,777 $ 15,610 $ 13,283 Related Party Transactions For information regarding our related party transactions, see Note 10 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Recent Accounting Developments
For information regarding recent accounting developments, see Note 2 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Outlook One of our primary opportunities for 2023 will be to expand our relationships with existing customers by providing additional services to them through our recently acquired new lines of business. We also plan to expand on our other businesses by capitalizing on integration opportunities we can offer our customers. In addition, we will continue to focus on expanding our core businesses while delivering value to our shareholders. We will work to achieve positive results in markets with strong competition and margin pressures throughout all segments of our business.
Our major objectives for 2023 are as follows:
•Crude oil marketing - We plan to focus on increasing margins to maximize cash flow and capturing midstream opportunities in an inflationary market. We will utilize a new fleet dispatch and maintenance software system to help drive more efficiency in our fleet operations and lower our operating costs, which we believe will help drive increased profitability. In addition, we will look for opportunities to increase our trucking fleet to add to our overall ability to gather and distribute crude oil. •Transportation - We plan to continue to increase truck utilization, upgrade our fleet quality and enhance driver retention and recruitment. We also plan to continue to capitalize on our recent acquisitions and organic expansions to improve quality of revenue through improved efficiencies. We will continue to look for ways to expand our terminal footprint to put us in a position to better compete for new business. 43
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•Pipeline and storage - We will focus on opportunities to increase our pipeline and storage utilization, by identifying opportunities with our existing and new customers to increase volumes. In addition, we will look to capitalize on our new pipeline connection, scheduled to come on-line in the second quarter of 2023, as well as continuing to look for new connections for the pipeline system both upstream and downstream of the pipeline, to increase the crude oil supply and take-away capability of the system. •Logistics and repurposing - We will focus on maintaining the relationships that these entities have developed over their years of operations and look to expand the customer base by offering these new services to our other divisions customers. We believe by integrating this business with certain aspects of our other businesses, we can bring additional overall value to both our customers and to our shareholders.
•Strategic business development - We will deploy a disciplined investment approach to growth in our four segments and funding new growth opportunities that are adjacent and complimentary to existing operating activities.
Critical Accounting Policies and Estimates
In our financial reporting processes, we employ methods, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our financial statements. These methods, estimates and assumptions also affect the reported amounts of revenues and expenses for each reporting period. Investors should be aware that actual results could differ from these estimates if the underlying assumptions prove to be incorrect. The following sections discuss the use of estimates within our critical accounting policies and estimates.
We allocate the purchase price of acquired businesses to their identifiable tangible assets and liabilities, such as accounts receivable, inventory, property, plant and equipment, accounts payable and accrued liabilities. We also allocate a portion of the purchase price to identifiable intangible assets, such as non-compete agreements, trade names and customer relationships. Allocations are based on estimated fair values of assets and liabilities. Deferred taxes are recorded for any differences between the assigned values and tax bases of assets and liabilities. Estimated deferred taxes are based on available information concerning the tax bases of assets acquired and liabilities assumed and loss carryforwards at the acquisition date, although such estimates may change in the future as additional information becomes known. We use all available information to estimate fair values including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. Certain estimates and judgments are required in the application of the fair value techniques, including estimates of future cash flows and the selection of a discount rate, as well as the use of "Level 3" measurements as defined inFinancial Accounting Standards Board ("FASB") Accounting Standards Codification 820, Fair Value Measurements and Disclosure. Any remaining excess of cost over allocated fair values is recorded as goodwill. We typically engage third-party valuation experts to assist in determining the fair values for both the identifiable tangible and intangible assets. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact our results of operations. AtDecember 31, 2022 , our goodwill balance was approximately$6.4 million . AtDecember 31, 2022 and 2021, the carrying values of our intangible assets were$9.7 million and$3.3 million , respectively. See Note 6 and Note 8 in the Notes to Consolidated Financial Statements for further information. 44
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Table of Contents Fair Value Accounting We enter into certain forward commodity contracts that are required to be recorded at fair value, and these contracts are recorded as either an asset or liability measured at its fair value. Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and we elect, cash flow hedge accounting. We had no contracts designated for hedge accounting during the years endedDecember 31, 2022 , 2021 and 2020. We utilize a market approach to valuing our commodity contracts. On a contract by contract, forward month by forward month basis, we obtain observable market data for valuing our contracts that typically have durations of less than 18 months. AtDecember 31, 2022 , all of our market value measurements were based on inputs based on observable market data (Level 2 inputs). See discussion under "Fair Value Measurements" in Note 2 and Note 13 in the Notes to Consolidated Financial Statements. Our fair value contracts give rise to market risk, which represents the potential loss that may result from a change in the market value of a particular commitment. We monitor and manage our exposure to market risk to ensure compliance with our risk management policies. These risk management policies are regularly assessed to ensure their appropriateness given our objectives, strategies and current market conditions.
Liability and Contingency Accruals, including those related to Insurance Liabilities
We establish a liability under the automobile and workers' compensation insurance policies for expected claims incurred but not reported on a monthly basis. We retain a third-party consulting actuary to establish loss development factors, based on historical claims experience as well as industry experience. We apply those factors to current claims information to derive an estimate of the ultimate claims liability. See Note 18 in the Notes to Consolidated Financial Statements for further information. From time to time as incidental to our operations, we become involved in various accidents, lawsuits and/or disputes. As an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, worker compensation claims or other items of general liability as are typical for the industry. In addition, we have extensive operations that must comply with a wide variety of tax laws, environmental laws and labor laws, among others. Should an incident occur, we evaluate the claim based on its nature, the facts and circumstances and the applicability of insurance coverage. When our assessment indicates that it is probable that a liability has occurred and the amount of the liability can be reasonably estimated, we make appropriate accruals or disclosure. We base our estimates on all known facts at the time and our assessment of the ultimate outcome, including consultation with external experts and counsel. We revise these estimates as additional information is obtained or resolution is achieved. AtDecember 31, 2022 , we do not believe any of our outstanding legal matters would have a material adverse effect on our financial position, results of operations or cash flows.
Revenue Recognition
OnJanuary 1, 2018 , we adopted FASB Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606") and all related Accounting Standards Updates by applying the modified retrospective approach to all contracts that were not completed onJanuary 1, 2018 . The new revenue standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new revenue standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations. 45
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Our revenues are primarily generated from the marketing, transportation, storage and terminalling of crude oil and other related products and the tank truck transportation of liquid chemicals, pressurized gases, asphalt and dry bulk. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. To identify the performance obligations, we considered all of the products or services promised in the contracts with customers, whether explicitly stated or implied based on customary business practices. Revenue is recognized when, or as, each performance obligation is satisfied under terms of the contract. Payment is typically due in full within 30 days of the invoice date. Crude oil marketing segment. Crude oil marketing activities generate revenues from the sale and delivery of crude oil purchased either directly from producers or on the open market. Most of our crude oil purchase and sale contracts qualify and are designated as non-trading activities, and we consider these contracts as normal purchases and sales activity. For normal purchases and sales, our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the product to the customer. Revenue is recognized based on the transaction price and the quantity delivered. The majority of our crude oil sales contracts have multiple distinct performance obligations as the promise to transfer the individual goods (e.g., barrels of crude oil) is separately identifiable from the other goods promised within the contracts. Our performance obligations are satisfied at a point in time. For normal sales arrangements, revenue is recognized in the month in which control of the physical product is transferred to the customer, generally upon delivery of the product to the customer. Transportation segment. Transportation activities generate revenue from the truck transportation of liquid chemicals, pressurized gases, asphalt or dry bulk for customers. Each sales order is associated with our master transportation agreements and is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the goods and services are delivered. Pipeline and storage segment. Pipeline and storage activities generate revenue by transporting crude oil on our pipeline and providing storage and terminalling services for our customers. Our operations generally consist of fee-based activities associated with the transportation of crude oil and providing storage and terminalling services for crude oil. Revenues from pipeline tariffs and fees are associated with the transportation of crude oil at a published tariff. We primarily recognize pipeline tariff and fee revenues over time as services are rendered, based on the volumes transported. As is common in the pipeline transportation industry, our tariffs incorporate a loss allowance factor. We recognize the allowance volumes collected as part of the transaction price and record this non-cash consideration at fair value, measured as of the contract inception date. Storage fees are typically recognized in revenue ratably over the term of the contract regardless of the actual storage capacity utilized as our performance obligation is to make available storage capacity for a period of time. Terminalling fees are recognized as the crude oil enters or exits the terminal and are received from or delivered to the connecting carrier or third-party terminal, as applicable. Logistics and repurposing. Logistics activities generate revenue by transporting crude oil, condensate, fuels, oils and other petroleum products from point A to point B for customers. Each sales order is associated with our master transportation agreements and is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the goods and services are delivered.
Recycling and repurposing activities generate revenue by repurposing off-specification fuels, lubricants, crude oil and other chemicals. These recycling and repurposing activities generate revenues from the sale and delivery of product purchased directly from the customer. Our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the product to the customer. Revenue is recognized based on the transaction price and the quantity delivered.
See Note 3 in the Notes to Consolidated Financial Statements for further information.
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