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 Resulted in the largest gas distribution network in the U.S. with 38,000 miles of pipeline 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 When the two companies merged, natural gas industry was deregulated Uncertainty and unsteadiness with daily changes in supply and demand Purchase costs and sales began to swing wildly

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 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

Baseline Profits ( ) Mean = 236 Standard Deviation = Variance = 13,323 Standard Error = 40.8 (Standard Deviation/ Sq. rt of # of data points) Mean ± 2 (standard error) ± 81.6 = to Baseline Profits were estimated to be in the range of $156.6 million to $317.8 million

Gas and 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

Discrimination Suit Three male employees salaries: $50,000, $55,000 and $52,000. Mean = Standard Deviation = Two standard Deviations = *2 = Mean minus two standard deviations = = 48, Female Salary: $32,000 $48, $32,000 = $16, (Rounded) Raise for to avoid discrimination suit is $16,000.00

Dwindling Natural Gas Accounts – Hedge Funds 500 gas accounts produce enough revenue for 30 days 500/30 = *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