Resources Unlimited Case Study Leticia Galdamez MSM 630

Resources Unlimited: Case Study Leticia Galdamez MSM 630

Overview • Resource Unlimited • CEO - Problems/Concerns • Baseline Profits • Gas and Oil Accounts • Discrimination Suit • Dwindling Natural Gas Accounts • Bankruptcy

Resource Unlimited • Formed in 1985 through merger of two natural pipeline companies • When the two companies merged, natural gas industry was deregulated • Resulted in the largest gas distribution network in the U. S. with 38, 000 miles of pipeline • Uncertainty and unsteadiness with daily changes in supply and demand • Before the merger, natural gas industry was regulated by the federal government • Gas was purchased by pipeline companies at federally approved costs, it was then sold to the user at the same federally approved price • Purchase costs and sales began to swing wildly

CEO • Saw deregulation as an opportunity, instead of a problem • CEO’s vision was to use derivatives and hedges to absorb the risk of the cost and price swings Problems/Concerns • Derivatives and hedges are very complex and require people who are technically trained to develop models • Memo sent to CEO about concern and unrealistic corporate profits • There was no action taken by the CEO concerning the memo

Baseline Profits (1986 -1988) Baseline Profits (Millions): 342, 267, 321, 157, 33, 349, 132, 289 (Average: 236 Million) • • 400 350 Millions 300 250 200 150 100 342 349 321 289 267 157 132 50 0 33 Profits Mean = 236 Standard Deviation = 115. 42 Variance = 13, 323 Standard Error = 40. 8 (Standard Deviation/ Sq. rt of # of data points) • Mean ± 2 (standard error) • 236. 25 ± 81. 6 = 154. 6 to 317. 8 • Baseline Profits were estimated to be in the range of $156. 6 million to $317. 8 million

Gas and Oil Accounts Gas & Oil Accounts • Oil accounts: 64 (1988) • Gas accounts: 32 (1988) • Oil Accounts: 86 (1990) 34% increase from 1988 • Gas Accounts: ? ? ? (1990) • Since oil accounts increased by 34% from 1988 to 1990, we can assume that gas accounts did as well. At a 34% increase, it went up to 11 accounts which will make it 43 accounts for 1990 86 90 80 64 43 70 60 50 32 40 30 20 1990 10 0 Oil Gas 1988 1990 1988

Discrimination Suit Salaries • Three male employees salaries: $50, 000, $55, 000 and $52, 000. • Mean = 52333. 33 • Standard Deviation = 2054. 81 • Two standard Deviations = 2054. 81*2 = 4109. 62 • Mean minus two standard deviations =52333. 33 -4109. 62 = 48, 223. 38 • Female Salary: $32, 000 • $48, 223. 38 - $32, 000 = $16, 000. 00 (Rounded) Raise for to avoid discrimination suit is $16, 000. 00 Raise Salaries $0 $10 000 $20 000 $30 000 $40 000 $50 000 $60 000 Female Male 3 Male 2 Male 1

Dwindling Natural Gas Accounts – Hedge Funds • 500 gas accounts produce enough revenue for 30 days • 500/30 = 16. 67 • 16. 67*6=100 • After 6 days, the CEO moved over 100 gas accounts to dummy hedge funds • The accounts were moved in hopes of lessening cash demands by buying time for satisfying creditors and wall street analyst. The moved was done too late.

Resource Unlimited Bankruptcy • In the end, Resource Unlimited went into bankruptcy in June, 1994 • Ultimately, they were spending money they didn’t have • Instead of making cutbacks they proceeded to believe that they were going to gain profits they had projected • Avoiding memo from accountants explaining how profits were unrealistic, the CEO avoided fixing serious issues that eventually led to bankruptcy