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Resources unlimited How did we get here?

Resources unlimited How did we get here?. Background. Formed in 1985 through a merger of two natural pipeline companies.

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Resources unlimited How did we get here?

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  1. Resources unlimitedHow did we get here?

  2. Background • Formed in 1985 through a merger of two natural pipeline companies. • 38,000 miles of pipeline stretching from production sites in the southwestern and mountain states to the industrial users and residential customers in the northeastern and midwest regions. • Previously regulated by the federal government. Subsequent deregulation resulted in market instability and fluctuation in baseline profits. • 1986 baseline profit: $1,087 billion; 1987 baseline profit: $803 million; 1986-1988 mean: $945 million

  3. Baseline profits (In millions)

  4. Additional chinks in the armour • In addition to potentially skewed data related to baseline profits, additional problems developed which included the inability to project gas an oil accounts. • In 1988, there were 64 oil accounts. This was estimated to be 86 in 1990. The variant calculation is as follows: 64+86=75 – mean 64-75 = -11; 86-75=11; Each number squared is 121; 121+121=242/2 = 121 variant Using this variant, gas accounts in 1990 can be estimated at 54, based upon 32 accounts in 1988.

  5. Personnel problems

  6. Salary Disparity • Three male employees were being paid $50,000, $55,000 and $52,000, while a female account was being paid $32,000. The female accountant filed a discrimination suit. • The female accountant’s salary could be considered discriminatory if less than two standard deviations from the mean of the male employees. An appropriate raise the female employee is $15,000, calculated as follows: 50,55,52 = 52.3 mean; 50-52.3 = -2.3; 55-52.3 = 2.7; 52-52.3 = -0.3; squared 5.29+7.29+0.09 = 12.67/3; variance = 4.22; standard deviation = 12.67/2 = 2.51661. 2 x standard deviation = 5.033 or $47,000

  7. Fuzzy Math Organizational issues accelerated with the use of derivatives and hedges to stop the company from swirling the drain. The accounting department hatched a plan to “borrow from Peter to pay Paul” in order to buy time. According to senior management, it took approximately 500 gas accounts to produce enough revenue to maintain cash flow for 30 days. This is calculated as 16.6667 accounts per day. After six days, the CEO transferred 100 accounts to a hedge fund to ward off bankruptcy. Ultimately, this did not save the day.

  8. Themes • Skewed data potentially representing unrealistic profits. • Inability to estimate variant data for oil and gas accounts. • Discrimination lawsuit related to disparagement in salaries of male and female accountants. • Accounting practices of hedges based on potentially skewed data and being performed by individuals without the technical abilities necessary to develop derivative models.

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