Case Study Scenario

Resources Unlimited Corporation was formed in 1985 through the merger of two natural pipeline companies. The result was the largest gas distribution network in the United States, with 38,000 miles of pipeline stretching from the production sites in the southwestern and mountain states to the industrial users and residential customers in the northeastern and Midwestern regions.

Originally, the natural gas industry had been regulated by the federal government. Pipeline companies purchased gas at federally approved costs from the producers and then sold that gas at federally approved prices to the users. The demand was steady and the margins were set. It was hard for a pipeline company not to make money.

All this steadiness and certainty changed soon after the merger of the two companies. The natural gas industry was deregulated, and purchase costs at the wellhead and sales prices at the distribution point began to swing wildly, back and forth, with daily changes in supply and demand. The newly appointed President of Resources Unlimited saw this as an opportunity, not as a problem.

The new CEO's vision was to use complex financial instruments called derivatives and hedges to absorb the risk of the cost and price swings. Hedges essentially are offsetting derivative contracts where the price of one commodity is expected to move in opposite directions to the price of another, given a certain event. Both derivatives and hedges sound simple when described briefly; in reality, they are statistically very complex and require people who are technically trained to develop the derivative models and imaginatively minded to envision the hedge relationships.

When a memo from the accounting department arrived on the CEO's desk addressing a potential problem concerning how the derivative model was constructed, no action was taken. The memo originated from a group of accountants who were concerned about talk on the street regarding corporate profits that were considered unrealistic.

The accountants' hope was that after submitting the memo they would be able to encourage the senior leadership to back away from what some in the national media were calling unrealistic profits. The data for the last two years quarterly profits (1987-88) in millions were: 342, 267, 321, 157, 33, 349, 132, and 289. Of major concern amongst the accountants was, "Is the information being reported in the media accurate regarding quarterly sales, were the reports based on skewed data, and upon what baseline was Wall Street going to grade the corporation's future earnings?"

Wall Street's reluctance to baseline the corporation's projected earnings drug on for several months mainly because of incomplete data the corporation was furnishing the analyst in New York. For example, on one such occasion, when information was asked about the number of gas and oil accounts the corporation was expected to have in two years, they were reluctant to respond. The issue was not that they didn't know that they currently had 32 gas and 64 oil accounts in 1988, and that there was a direct variance between the two based on staffing requirements, but when internal analysis projected they would have 86 oil accounts in 1990, they could not estimate the variant number of gas accounts for the same period.

While the mystery of how to project gas accounts into the out years was not sufficient to keep the accounting department from burning whale oil in their lamps, another problem of equal importance was festering two-doors down the hallway. It seems that a female employee filed a discrimination lawsuit over pay. Apparently four employees were performing the same job in the accounting department. Three male employees were being paid $50,000, $55,000, and $52,000 respectively while a female accountant was salaried at $32,000. If there were more than two standard deviations from the mean salary of the top three other employees then a job could potentially be considered discriminatory, how much of a raise would the female accountant have needed (rounded to the nearest $1,000), in order to eliminate possible discrimination charges? All in a day's work - right? Wrong!

Later that year the corporate hallways were swirling with rumors of a joint plan hatched by the accounting department and the strategic planning division. The plan focused on dwindling natural gas accounts. The best guess offered senior management was that the five-hundred gas accounts could only produce enough revenue to maintain the corporation's cash flow for thirty-days. After six-days the CEO transferred (on paper) a number of gas accounts to a dummy hedge fund in hopes of lessening cash demands by buying time for satisfying creditors and Wall Street analysts. But the action was too little and too late.

Resources Unlimited entered into bankruptcy in June of 1994.

You have been asked to review the history of the corporation with specific instructions to determine:

• What did the corporation view as their baseline profits for the years 1987 - 1988?
• Using regression, what would you have projected for profits for the first quarter of 1989?
• What was their exact number of gas accounts in 1990?
• On what basis did they determine salaries for entry level management?
• Exactly how many gas accounts were transferred to the hedge fund in an attempt to ward off bankruptcy?
• Was the pay level of the female accountant such that the company had exposure to a discrimination claim? If so, what would have been an appropriate raise for the female accountant?

You are also tasked to review and assess the following:

• Corporate senior management style
• Accounting practices
• Profit structure
• Lines of communication