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The Case of the Unidentified Energy Companies Matthew D Crook, Mark D Griffiths and Brian R Walkup Jeremy Martin, an attorney at Menteurs, Imbroglioni and Vory was facing his first major challenge as a new junior partner. The law firm was planning on expanding into preparing contracts for and advising clients in the energy sectors. Thus, they were seeking a number of external financial experts capable of consulting on the more intricate details of financial operations. Such a bold move meant the credibility and reputation of the law firm would be on the line and consequently, its ability to bill at market rates would be at risk. As a result, Jeremy had to ensure that any ‘expert’ identified by the firm really did know a lot about financial operations for an energy firm. The problem was that the energy sector comprises a variety of businesses ranging from mining to transportation to manufacturing and retailing. Jeremy decided that the best way would be to identify any likely candidates and then have them perform a short test to verify their capabilities. After consulting with established experts in the field, Jeremy determined that qualified candidates ought to understand the essential structural differences between services, manufacturing/processing operations and direct sale to end consumers and businesses. Candidates should demonstrate their understanding of the concepts of value-additivity and market risk as measured by beta. In particular, potential consultants must have a strong grasp of how business cycles affect energy sector firms and must understand the fundamental differences between diversified versus stand-alone operations. After some deliberation, Jeremy chose a sample of 14 firms in the energy sector, each of which had a distinct and specific business model. Jeremy assigned an intern to average the past five years of accounting information and to present the information in the form of a Balance Sheet (Table 1), an Income Statement (Table 2), and Selected Ratios (Table 3) all without any other identifying characteristics. Candidates for the position would then be asked to match the financial data with the brief description of the following firms. The candidates ought to provide guidance regarding their identification process. Major Operations Brief Description 1 Railroad Founded in the 1880s, the firm operates a transcontinental railway carrying bulk commodities and merchandise freight. The company owns nearly 15,000 miles of track across Canada and the U.S. 2 Solar Products This firm is a full-service provider focused on the emerging technology of solar modules for the conversion of sunlight into power. Not only does the firm design and manufacture solar cells, but also provides engineering support with regards to project development, construction, operations and maintenance. 3 Petroleum Refiner Operating a company-owned full coking medium-sour crude oil refinery and a medium complexity crude oil refinery, this company controls and operates pipelines; crude oil transports; crude oil gathering tank farms; and crude oil storage capacity. 4 Electrical Utility This highly regulated firm provides electricity to over 5 million retail customers and wholesale providers across eleven states. The power generation comes from sources including coal-fired, natural gas and hydroelectric plants. 5 Deep-water Driller With a small fleet of drillships, the firm contracts on a day-rate basis with firms in the oil and natural gas industry for ultra-deepwater drilling services in the U.S. Gulf of Mexico, Brazil, and Nigeria. Each of the ships is the underlying collateral for a tranche of long-term debt. 6 Waste-to-Energy Provider Targeting municipalities in North America, the company offers alternatives to traditional landfill waste storage by operating facilities that convert waste to energy. In addition to waste-to-energy services, they recover scrap metal from waste, house unrecoverable conventional waste in company-owned landfills, and operate energy transfer stations and renewable electricity generation facilities. 7 LED & RF Component Manufacturer Using traditional as well as emerging lighting technology, this firm provides industrial lighting solutions for both public and private commercial applications. In addition to designing and manufacturing lighting systems, the firm manufactures the components that are used in the systems including power products, diodes, semiconductor field-effect transistors, and power modules used in computer servers, solar inverters, uninterruptible and industrial power supplies. 8 Coal Mine This firm produces coal for the both power plants (thermal) and ferrous metal (metallurgical) manufacturers from twenty-two surface and underground mines located in seventeen U.S. states. 9 Gas Driller, Gatherer & Transporter Operating nearly 7,700 producing wells and a large network of gathering and transportation pipelines, the firm develops natural gas and oil assets through exploration and acquisition. Their customers include utilities, mid-stream and industrial users. 10 Gas Retailer & Convenience Stores Operating over 1,800 retail convenience store locations in the U.S. and Canada, this firm sells motor fuel both as a primary seller to retail customers and uses their distribution network to provide fuel to small wholesale customers. To subsidize the low margins from fuel sales, the firm offers convenience merchandise, car wash facilities, video/game rentals, money orders and ATM access. The firm has franchisee agreements with large commercial chains to provide food offerings in their convenience store locations. 11 Retail & Commercial Heating Fuel As a distributor and service provider for of home heating oil and propane for residential and commercial customers in the U.S., the firm is a full service provider for heating and air conditioning equipment. The fuel services are provided as a delivery only service in a highly regulated industry with very in-elastic customer demand. 12 Bio-fuel & Facilities Manager Going public recently, this company utilizes emerging technology for the production and sales of advanced biofuels and renewable chemicals. In addition to biodiesel production and distribution, the company distributes feedstock from third parties and provides contractor services and consulting in facility management and operation for other biodiesel production facilities. 13 Specialty Chemical & Bio-fuels As an international seller and producer of diversified chemical products, biofuels, and bio-based specialty chemicals, this company synthesizes biodiesel and petro-diesel blends. Producing a high volume of products for U.S. use, the firm distributes products directly to end-users through trucks, rail, and barges. The firm also provides products used in the agricultural chemical, coatings, chemical intermediates, and specialty polymers industries.. 14 Government owned Nuclear Power Utility Operating facilities for generating electrical and thermal power, this state controlled company manufactures nuclear fuel rods for generation facilities. The state owns 81% of shares, a publically traded closed-end fund owns 10% and other shareholders own 9.00%. Table 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Common Size Balance Sheets Current Assets Cash & Equivalents 3.13% 15.94% 6.18% 0.54% 7.15% 7.18% 10.47% 5.11% 0.01% 10.88% 12.30% 11.51% 22.45% 4.07% Short-term Investments 0.00% 3.35% 0.00% 0.67% 0.00% 0.00% 26.39% 3.10% 1.15% 0.00% 0.59% 0.00% 16.25% 2.89% Net Receivables 3.74% 11.18% 8.71% 3.26% 2.66% 5.89% 5.84% 3.89% 2.23% 7.11% 14.88% 8.09% 8.52% 2.23% Inventory 0.00% 6.16% 22.77% 0.00% 0.00% 0.00% 6.96% 3.81% 0.30% 10.33% 10.16% 9.38% 11.78% 5.28% Other Current Assets 2.71% 8.89% 2.96% 4.26% 2.51% 5.66% 3.03% 2.14% 4.08% 0.74% 7.95% 3.44% 2.87% 4.42% Total Current Assets 9.57% 45.53% 40.61% 8.73% 12.31% 18.73% 52.69% 16.18% 7.08% 29.07% 45.88% 32.43% 61.87% 17.73% Non-current Assets Long-term Investments 0.87% 4.51% 0.00% 0.00% 0.00% 1.71% 0.00% 2.45% 2.63% 0.00% 0.00% 1.00% 0.00% 5.96% Property, Plant & Equip 85.54% 26.72% 58.16% 71.33% 82.37% 55.18% 19.63% 73.71% 88.65% 64.49% 8.30% 48.24% 37.40% 75.62% Goodwill 1.23% 3.50% 0.00% 0.16% 0.00% 5.08% 18.04% 2.80% 0.00% 2.23% 31.86% 15.52% 0.00% 0.00% Intangible Assets 0.00% 0.00% 0.00% 0.00% 0.00% 1.24% 9.27% 0.00% 0.00% 0.00% 11.15% 1.06% 0.03% 0.69% Other Assets 2.78% 19.73% 0.64% 17.10% 5.32% 18.06% 0.36% 4.86% 1.64% 4.21% 2.80% 1.76% 0.72% 0.00% Deferred Long-term Charges 0.00% 0.00% 0.59% 2.69% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Table 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Common Size Balance Sheets Current Liabilities Accounts Payable 7.47% 3.54% 16.34% 2.20% 0.72% 0.57% 3.94% 2.85% 4.25% 11.08% 3.09% 5.91% 4.81% 1.22% Short-term Debt 1.64% 0.83% 0.05% 3.28% 3.00% 2.52% 0.00% 1.76% 1.82% 0.92% 0.00% 3.23% 0.00% 1.83% Other Current Liabilities 0.00% 12.56% 4.04% 6.52% 2.82% 8.58% 2.76% 3.72% 1.15% 5.13% 31.89% 3.39% 5.37% 3.81% Total Current Liabilities 9.11% 16.93% 20.42% 11.99% 6.54% 11.67% 6.70% 8.34% 7.21% 17.13% 34.99% 12.53% 10.18% 6.86% Non-current Liabilities Long-term Debt 30.10% 6.13% 29.52% 30.08% 38.24% 34.99% 0.00% 43.78% 37.89% 25.03% 18.31% 10.52% 0.00% 19.50% Other Liabilities 25.09% 10.14% 0.14% 30.09% 2.16% 28.75% 1.60% 14.31% 16.67% 10.83% 2.60% 9.14% 6.23% 0.92% Deferred Long-term Charges 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.09% 0.00% 7.93% 0.73% Minority Interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Negative Goodwill 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Liabilities 64.29% 33.21% 50.08% 72.17% 46.93% 75.41% 8.29% 66.43% 61.77% 52.99% 57.56% 32.19% 24.33% 28.02% Shareholders' Equity Stock Options & Warrants 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.59% 0.00% 0.00% Redeemable Preferred Stock 0.00% 0.00% 0.00% 0.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 22.10% 0.00% 0.00% Preferred Stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Common stock 13.30% 0.00% 32.37% 6.25% 0.04% 0.34% 0.01% 0.02% 0.03% 0.02% 46.49% 0.00% 0.00% 24.99% Additional paid-in capital 0.29% 38.17% 0.00% 11.41% 52.99% 18.44% 66.56% 32.20% 30.33% 10.06% 0.00% 35.47% 68.32% 0.07% Retained earnings 36.81% 28.82% 0.00% 10.77% 0.90% 5.40% 24.74% 1.99% 6.93% 4.31% 0.00% 9.39% 6.64% 16.94% Treasury stock 0.00% 0.00% 0.00% 0.00% 0.00% -0.03% 0.00% -0.69% -0.10% 0.00% 0.00% -0.54% 0.00% 0.00% Other stockholders' equity 0.00% 0.02% 28.34% 0.00% 0.00% 0.36% 0.00% 0.10% 54.52% 0.00% 1.47% 0.00% 30.00% AOIC (loss) -14.70% -0.21% 0.00% -0.64% -0.85% 0.08% 0.41% -0.03% 1.04% 7.51% -4.05% 0.00% 0.71% 0.00% Total Shareholders' Equity 35.71% 66.79% 49.92% 27.83% 53.07% 24.59% 91.71% 33.57% 38.23% 47.01% 42.44% 67.81% 75.67% 71.98% Total Liabilities & Shareholders' Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Table 2 Common Size Income Statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Revenue 0.00% 65.06% 83.44% 27.42% 48.37% 59.33% 60.38% 80.75% 30.01% 91.33% 66.93% 87.80% 80.63% 22.58% Gross Profit 100.00% 34.94% 16.56% 72.58% 51.63% 40.67% 39.62% 19.25% 69.99% 8.67% 33.07% 12.20% 19.37% 77.42% Operating Expenses Research & Development 0.00% 4.12% 0.00% 0.00% 0.00% 0.00% 11.19% 0.00% 0.00% 0.00% 0.00% 0.00% 1.19% 0.00% Selling General & Admin 0.00% 11.07% 0.99% 0.00% 10.12% 5.88% 15.81% 3.67% 13.79% 0.51% 1.27% 4.63% 0.00% 0.00% Compensation & Benefits 26.86% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.00% 0.00% 0.00% 0.00% 1.24% 16.40% Depreciation and Amortization 9.72% 0.00% 1.34% 11.48% 19.93% 12.48% 1.85% 12.21% 28.81% 0.89% 1.11% 0.00% 0.00% 24.76% Non recurring expenses 0.08% 4.38% 0.00% 0.00% -4.37% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other expenses 43.32% 3.35% 4.77% 42.38% 0.00% 8.92% 0.26% 7.20% 7.77% 5.02% 26.63% 0.27% 0.85% 37.66% Operating Income or Loss 20.02% 12.01% 9.46% 18.72% 24.49% 13.38% 10.52% -3.83% 17.62% 2.25% 4.06% 7.40% 16.09% 13.46% Other Income or Loss 0.03% 0.45% -0.99% 1.58% -0.25% -2.14% 0.83% -0.60% 0.00% 0.02% -0.06% 0.26% 1.31% 14.47% EBIT 20.05% 12.46% 8.47% 20.30% 24.24% 11.24% 11.34% -4.44% 17.62% 2.27% 4.00% 7.66% 17.40% 27.93% Interest Expense 5.04% 0.15% 0.80% 6.54% 17.06% 4.59% 0.00% 7.17% 10.07% 0.07% 0.94% 0.61% 0.02% 18.49% Income before tax 15.01% 12.31% 7.67% 13.75% 7.18% 6.65% 11.34% -11.60% 7.55% 2.19% 3.06% 7.05% 17.38% 9.44% Tax Expense (Credit) 3.15% 1.50% 0.00% 4.53% 3.27% 2.19% 2.18% -4.34% 2.82% 0.74% 1.25% 1.39% 5.37% 2.23% Minority interest earnings 0.00% 0.00% 0.00% 0.20% 0.00% 0.33% 0.00% 0.00% 0.00% 0.00% 0.00% -0.04% 0.00% 0.00% Net Income from Continuing Ops 11.86% 10.81% 7.67% 9.42% 3.91% 4.79% 9.16% -7.27% 4.73% 1.46% 1.81% 5.62% 12.02% 7.21% Table 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Ratios Inventory Turnover - 5.55 11.28 - - - 3.81 8.94 20.74 56.61 16.63 15.05 5.98 0.67 FA Turnover 0.42 1.97 5.29 0.39 0.12 0.62 2.24 0.57 0.23 9.93 30.42 3.33 2.33 0.21 TA Turnover 0.36 0.53 3.08 0.28 0.10 0.34 0.44 0.42 0.21 9.61 2.53 1.61 0.87 0.16 Debt ratio 31.7% 7.0% 29.6% 33.4% 44.7% 37.5% 0.0% 45.5% 39.7% 38.9% 18.3% 13.8% 0.0% 21.3% TIE 3.98 83.00 10.61 3.10 1.42 2.45 - (0.62) 1.75 30.31 4.25 12.53 788.59 1.51 ROE 0.12 0.09 0.47 0.09 0.01 0.07 0.04 (0.09) 0.03 0.30 0.11 0.13 0.14 0.02 ROA 0.04 0.06 0.24 0.03 0.00 0.02 0.04 (0.03) 0.01 0.14 0.05 0.09 0.10 0.01 Operating Margin 20.1% 12.5% 8.5% 20.3% 24.2% 11.2% 11.3% -4.4% 17.6% 2.3% 4.0% 7.7% 17.4% 27.9% Current Ratio 1.05 2.69 1.99 0.73 1.94 1.60 7.87 1.94 0.98 1.70 1.31 2.59 6.08 2.58 Quick Ratio 0.85 2.15 1.44 0.61 1.36 1.14 6.01 1.45 0.86 0.99 1.04 1.87 4.63 2.04 Profit Margin 0.12 0.11 0.08 0.09 0.04 0.05 0.09 (0.07) 0.05 0.01 0.02 0.06 0.12 0.07 BEP 0.07 0.07 0.26 0.06 0.02 0.04 0.05 (0.02) 0.04 0.22 0.10 0.12 0.15 0.04 DSO 38.15 77.55 10.32 42.50 106.03 62.44 48.60 33.65 39.64 4.05 21.50 18.37 35.63 52.05 D(Inv)O - 65.71 32.36 - - - 95.81 40.82 17.60 6.45 21.94 24.25 61.07 545.45 D(AP)O - 37.71 23.21 104.36 57.96 10.19 54.23 30.57 251.67 6.91 6.68 15.27 24.94 126.10 Cash cycle (days) - 105.55 19.47 (61.87) 48.07 52.25 90.17 43.90 (194.43) 3.59 36.76 27.35 71.77 471.40 Yahoo Beta 0.78 3.15 0.56 0.52 1.64 0.38 2.32 1.69 1.11 1.60 0.19 2.50 0.36 N/A Google beta 1.32 1.87 - 0.37 1.64 0.45 1.52 2.01 0.91 - 0.15 N/A 0.45 N/A Google P/e 33.46 16.91 7.96 15.90 7.95 39.62 37.06 - 23.54 23.08 7.70 7.74 10.41 N/A

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1. Railroad: The financial data for company 1 matches to this description. A railroad company is going to have high property, plant and equipment that accounts for the cost of land, railways, locomotives and freight cars. The land assets would not be depreciated and many other assets have long useful lives. This helps to account for the relatively low percentage of DD&A compared to the amount of PPE. As a transportation company there will no inventory held for resale, and possibly very little other supply inventory on hand. This helps to account for the lack of a cost of sales amount. By using Google I was able to determine that the company description matched with Canadian Pacific Railway, Ltd. Using the financials from 2009 – 2013, I was able to recalculate the PPE % and other factors to verify my selection.
2. Solar Products: The financial data for company 2 matches to this description. As a manufacturer and designer of solar cells, the company will have noticeable research and development expense. This aspect narrowed the selections to company numbers 2, 7, and 13....
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