Internship Report

Internship Report
Finance

Umair Karim Khan

LUMS Internee
SSGCL
 Internship Report

TABLE OF CONTENTS
Introduction_____________________________________________________________3
SSGCL_____________________________________________________________________3
Umair Karim Khan___________________________________________________________4
Part I - FINANCE DEPARTMENT__________________________________________5
I - Capital Budgeting__________________________________________________________5
II – Optimal Capital Structure__________________________________________________8
III – ERP System____________________________________________________________10
Issues & recommendations related to ERP Implementation______________________________11
Recommendation_________________________________________________________________11
Part – II - SSGCL – Issues and recommendations_____________________________14
Vision & Balance Score Card__________________________________________________14
Issue____________________________________________________________________________14
Recommendation_________________________________________________________________14
Change Management________________________________________________________15
Issue____________________________________________________________________________15
Recommendation_________________________________________________________________15
Part – III - Internship Program – Issues and recommendations_____________________16

Introduction
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SSGCL
Profile
Sui Southern Gas Company (SSGC) is Pakistan's leading integrated gas Company. The
company is engaged in the business of transmission and distribution of natural gas
besides construction of high pressure transmission and low pressure distribution systems.
SSGCL transmission system extends from Sui in Balochistan to Karachi in Sindh
comprising over 3,000 KM of high pressure pipeline ranging from 12 - 24" in diameter.
The distribution activities covering over 1200 towns in the Sindh and Balochistan are
organized through its regional offices. An average of about 358,959 million cubic feet
(MMCFD) gas was sold in 2005-2006 to over 1.8 million industrial, commercial and
domestic consumers in these regions through a distribution network of over 27,540 Km.
The company also owns and operates the only gas meter manufacturing plant in the
country, having an annual production capacity of over 510,000 meters.

The Company has an authorized capital of Rs. 10 billion of which Rs 6.7 billion is issued
and fully paid up. The Government owns the majority of the shares which is presently
over 70%.

The Company is managed by an autonomous Board of Directors for policy guidelines

and overall control. Presently, SSGC's Board comprises of 14 members. The Managing
Director/Chief Executive is nominee of GOP and has been delegated with such powers
by the Board of Directors as are necessary to effective conduct the business of the
company.

Vision
To be a model utility providing quality service by maintaining high level of ethical and
professional standards and through optimum use of resources.

Mission
To meet the energy requirements of the customers through reliable, environment friendly,
an sustainable supply of natural gas, while conducting company business professionally,
efficiently, ethically and with responsibility of all our stake holders, community and the
nation.

Values
Integrity
Excellence
Teamwork
Transparency
Creativity
Responsibility to Stakeholders

Umair Karim Khan

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Education
 LUMS Dean’s Honor (MBA)
 Gold Medalist of B.E. (Computer and Information Systems Engineering), NED UET
Year of Passing Institute Degree Percentage % Grade / Position
2007+ LUMS MBA 3.7 GPA
2004 NEDUET B.E. (CIS) 91 % 1st Position
1999 Adamjee Intermediate 86 % A-One
1997 Happy Home Matriculation 90 % 16th Position

Professional Experience
2006 – 2006: Senior Software Engineer – Mazik USA
Projects:
 School Management System

2004 – 2006 : Project Manager – EzValidation Inc (USA based Software House)
Projects:
 EZBIO Enterprise Edition
 EzPassport Enterprise Edition
 BOSA (Biometric Open System Architecture)

Personal
Address: House No A-35, Sector 15-A-5, Bufferzone, Karachi, Pakistan.
Phone # (Res): 021-6958153, 0334-3752135
Email address: umairkarimkhan@hotmail.com, 08010111@lums.edu.pk

Part I - FINANCE DEPARTMENT

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I - Capital Budgeting
Capital Budgeting Model
Issues Identified
 Estimation of WACC
Currently, the weights for debt and equity are taken as 40% and 60% respectively.
Moreover, they are evaluated based on book values. These weights are found to be non
compliant with the current account books.

 Separate cash flows for NPV and IRR

At present, different cash flows are used for both NPV and IRR. Same cash flow may be
used for better DCF analysis.
For NPV, cash flows are estimated as:
CF = EBT + Depreciation – Capital Expenditure - Net tax Payable + (1 - t) * Interest
For IRR, cash flows are estimated as:
CF = EBT + Depreciation – Capital Expenditure - Net tax Payable,
Where Net Tax Payable = Tax on gross profit – t * Depreciation allowance on tax

 Terminal Value
At this time, terminal value is estimated by discounting the future cash flows to the year
at which the project is supposed to be ended (say at year 10). This value is then simply
added to the NPV (at year 0).

Analysis
 Estimation of WACC
Preferably, the market value of debt and equity should be used.
Debt component (D)
Since almost little or no bond is issued, all of the debt is composed of loans.
Hence the Market book value of debt = book value of debt
Equity component (E)
Market value of equity can be easily find as
Market value = Current stock price * # of shares outstanding

Correspondingly the weights should be estimated.

wd = weight of debt = D / (D + E)
we = weight of equity = E / (D + E)
t = tax rate

Therefore,
WACC = (1 – t) * wd * kd + we * ke

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If preferred stock is part of equity, then its weight and cost should be accounted for
accordingly.

 Separate cash flows for NPV and IRR

Same cash flows should be used for the evaluation of NPV and IRR. The cash flows for
NPV evaluation use the flows that take into account the interest affect, and therefore it
should be used for both NPV and IRR evaluation.

CF = EBT + Depreciation – Capital Expenditure - Net tax Payable + (1 - t) * Interest

 Terminal Value
Either terminal value should be discounted to year 0, and then added to NPV, or it should
be accounted for separately from the NPV value. The second option is preferable since
sometimes, only the amount of terminal value is a major part of NPV, which may bias the
opinion of evaluator to under take the project.

Recommendations
 Discounted payback method
Different DCF analysis methods provide different and valuable information to the
evaluator. NPV and IRR (or MIRR) are widely used in the industry, but other DCF
methods may help in effective decision making. Discounted payback method is one of
them. It takes into account the time value of money, and let the evaluator know in which
year the break even will occur (the original investment will be recovered). Sometimes if
terminal value is a major part of NPV, this indicator will show the year end, which will
signify that almost all of the returns will be recovered in year end and the project may not
be feasible.

 Beta Estimation
What is the source of this beta estimate? Is it reliable? If not, then, does company have
enough data to evaluate its beta by classical methods like regression analysis? This
technique requires, in turn, the market’s returns on equity and the firm’s returns on
equity.

 Capital structure
Is this the optimal capital structure, where the cost of capital is minimum? If not then,
probably we need to think about our financing decisions. Is Pecking Order taken into
consideration? Whether they use cost of capital approach or adjusted present value
approach?

o Mechanics of cost of capital estimation

 Estimate cost of equity at different levels of debt
 Estimate cost of debt at different levels of debt
 Use Interest Coverage Ratio (EBIT / Interest) for bond ratings
 Estimate cost of capital at different levels of debt
 Calculate the effect on firm value and stock price

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 Transmission and Distribution cost

All of the operational and maintenance cost has been provided by some other department.
What kind of costing methodology, they have adopted? Is it Activity based costing or
some other method? Whether they have accounted for administrative and general
expenses or not?

 Customized Application
This application is a prime candidate for automation. We have concluded that almost 80-
85% of the application works on same routines for all of the cases. So it would take little
effort to make a customized application (preferably as part of an ERP), which will access
the required sales and P & D data from the central repository and give the evaluation on
an instant basis.

 Use IOS and MCC for capital budgeting

IOS (Investment opportunity schedule) curve shows the available projects and their
respective returns in an order of decreasing returns. MCC (Marginal cost of capital) curve
shows the increase in WACC with respect to increase in the amount of capital raised.

IOS vs MCC

20

15
WACC
10
%

% Return
5

0
0 10 20 30 40 50 60
$ Capital

Projects having returns greater than WACC at corresponding values of capital are
accepted, while all other projects are rejected.

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II – Optimal Capital Structure

SSGCL
Optimal Capital Structure - Financial Model
(in millions)
EBITDA 1100
DA 100
Interest exp 200
Tax rate 35%
Interest rates based upon rating 12%

Number of shares outstanding

Market price per share 30
Beta of the stock 1.15

BV of debt 18000
MV of debt 18000
BV of equity 10000
MV of equity 10000

Risk free rate 6%

Risk premium (CAPM) 4%

Synthetic rating estimation

If interest coverage ratio is
> ≤ to Rating is Spread is Interest rates
-100000 0.199999 D 20.00% 26.00%
0.2 0.649999 C 12.00% 18.00%
0.65 0.799999 CC 10.00% 16.00%
0.8 1.249999 CCC 8.00% 14.00%
1.25 1.499999 B- 6.00% 12.00%
1.5 1.749999 B 4.00% 10.00%
1.75 1.999999 B+ 3.25% 9.25%
2 2.2499999 BB 2.50% 8.50%
2.25 2.49999 BB+ 2.00% 8.00%
2.5 2.999999 BBB 1.50% 7.50%
3 4.249999 A- 1.00% 7.00%
4.25 5.499999 A 0.85% 6.85%
5.5 6.499999 A+ 0.70% 6.70%
6.5 8.499999 AA 0.50% 6.50%
8.50 100000 AAA 0.35% 6.35%

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Optimal capital structure

D / (D + E) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
D/ E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00%
$ Debt 0 2800 5600 8400 11200 14000 16800 19600 22400 25200
Beta 0.52995392 0.568228 0.662442 0.757077024 0.883257 1.059908 1.324885 1.766513 2.64977 5.299539
Cost of Equity 8.12% 8.27% 8.65% 9.03% 9.53% 10.24% 11.30% 13.07% 16.60% 27.20%

EBITDA 1100 1100 1100 1100 1100 1100 1100 1100 1100 1100
Depreciation 100 100 100 100 100 100 100 100 100 100
EBIT 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000
Interest 0 191.8 518 1344 2016 2520 3024 3528 4032 6552
Taxable income 1000 808.2 482 -344 -1016 -1520 -2024 -2528 -3032 -5552
Tax 350 282.87 168.7 -120.4 -355.6 -532 -708.4 -884.8 -1061.2 -1943.2
NI 650 525.33 313.3 -223.6 -660.4 -988 -1315.6 -1643.2 -1970.8 -3608.8
Depreciation (+) 100 100 100 100 100 100 100 100 100 100
Funds from operations 750 625.33 413.3 -123.6 -560.4 -888 -1215.6 -1543.2 -1870.8 -3508.8

Pre-tax Interest coverage ∞ 5.213764 1.930502 0.744047619 0.496032 0.396825 0.330688 0.283447 0.248016 0.152625
Likely rating AAA A B+ CC C C C C C D
Pre-tax cost of debt 6% 7% 9% 16% 18% 18% 18% 18% 18% 26%
Eff-tax rate 35% 35% 35% 26% 17% 14% 12% 10% 9% 5%

Cost of debt 4.13% 4.45% 6.01% 11.83% 14.88% 15.50% 15.92% 16.21% 16.44% 24.61%
Cost of equity 8.12% 8.27% 8.65% 9.03% 9.53% 10.24% 11.30% 13.07% 16.60% 27.20%
Cost of capital 8.12% 7.89% 8.12% 9.87% 11.67% 12.87% 14.07% 15.27% 16.47% 24.87%

30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
0% 20% 40% 60% 80% 100%

Issue
This model has been developed fully, but it still uses synthetic ratings for USA’s
industries from Altman source. For SSGCL I was unable to find relevant data.

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III – ERP System

HRMS
This document addresses issues or the request for the modification of features related to
HRMS – Payroll and Budget in particular and Oracle Financials in general.

To put the discussion into context, at present there exist two systems, as far as payroll and
GL are concerned. The older system, in this document, will be termed as “Payroll
Application” and “GL Application” and the newer system, will be termed as “HRMS –
Payroll Application” and “OF – GL Application” respectively. These are the modules of
Oracle Financial (OF), which itself is a sub part of Oracle E-Business Suite.

Specifically, no single issue has been identified with the current HRMS – Payroll
application.

Testing (Parallel run)

At the same time, it has been maintained that a parallel run (of existing Payroll and new
HRMS – Payroll application) should continue for at least another three to six months,
during which no error or issue should emerge. For parallel run, both systems should be
fed similar data at the same time, so that later on, testing will not affect the integrity of
data.

Modification request
I. Budgeting control system
Payroll Application is not equipped with budget controlling. GL Application has budget
controlling incorporated at Head and Department wise Level.

OF – GL Application was suggested to include budget control information at parent

account levels. All subsidiary accounts were closed in the parent accounts, like salaries &
allowances, wages & allowances, staff welfare benefits, leave encashment etc. At present,
this functionality has been implemented in the system.

HRMS – Payroll Application is proposed to have budgetary control system incorporated

at micro-level, where all subsidiary accounts are taken into consideration. Furthermore,
department wise information should also be available. The main issue is that this option
has not been explored till this date. Moreover, ERP system is also capable to perform
budgeting at the level of individual personnel accounts, but it has been asserted that this
will not be pragmatic for finance operations.

II. MIS generation

Although it has been promised by IT department that it will generate MIS reports
manually by integrating OF with excel, but this may not serve the purpose of the ERP
system itself. The core functions of any ERP system is to provide centralized database
system so that all of the functions of an organization would must be integrated (including

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financial information), to eliminate redundancy, to standardize business processes , to

speed up processing of information and to assist in analysis and decision making.

III. Terminal benefit, funds etc to be incorporated into HRMS

It has been suggested that some functions including terminal benefits, funds etc, which
are not part of payroll application should be incorporated into HRMS system, so that
HRMS deals with the entity of human resource in totality.

Issues & recommendations related to ERP Implementation

1. Lack of planning & documentation
Issue
Planning seems to suffer a lot in this ERP implementation. There should be a definite
plan and time line according to which both IT and Finance should work together. It is
quite surprising that when asked for documentation, ERP consultant was unable to
provide with any of the documents related with planning or the design.

Recommendation
There should be a master plan, according to which we should first identify the modules
that are most necessary for the operations of the division of organization. Then in the
second phase identify those modules that would further assist in decision making and
analysis of the information. Third phase may include those modules that would help in
more customized MIS generation. So these three phases then should be implemented one
after another.

Phase 1: Implementation of Fundamental Modules

Phase 2: Implementation of Additional Functional Modules
Phase 3: Implementation of Extension Modules

After each phase, the consultant should analyze the implementation of ERP and the
associated business processes1, its value addition including the returns on investment, and
address those issues that may cause problems in future phases.

For ERP implementation, for each phase, I suggest the use of iterative model, including
the following stages in sequence.

Requirement specification
The client (the finance department) and the implementer (the IT department), should
work out the details of what exactly they want to be done in that phase and what kind of
application IT would provide them. SRS (Software requirement specification)

1
For Oracle financial implementation in SSGCL, the business processes defined in the Oracle system as
best practices, are used, and the workforce is now supposed to be trained to work accordingly. Another
possibility is that the organization may keep its business processes and the software is the tailored to the
requirements of the business. In those organizations where the business processes are weak or not well
defined. this may not be suitable approach.

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document should be the end result of this exercise. This would act as a contract between
both parties, so that both would be accountable according to the responsibilities assigned
to them.
Planning & budgeting
There should be a well thought out plan for the ERP implementation for this phase,
including the time line involved. Microsoft project can be used for the planning purpose,
with the help of which we can divide the whole phase into different tasks, assigned
working hours and the human resources needed to implement them, and keep track of the
project throughout its implementation. Detail reporting can easily be generated from this
software package, including Gantt chart (time line), task dependency, resource allocation
etc.

Design
This would be the prime responsibility of the IT department. Since they are not
customizing a single bit of software (or probably little customization), design including
architecture and modeling issues would seldom emerge. If not required this stage could
be eliminated.

Implementation
Sufficient training of the human resource is very important, so they would become
acquainted and proficient with the ERP system that is implemented.

Testing
Probably the most important stage for the Oracle Financial implementation is the testing
stage. Thorough testing is needed so that users will not experience any serious hindrance
in their day to day operating tasks. Test cases needed to be written, and the system should
be tested exhaustively for any kind of discrepancy with the required system.

Maintenance
Maintenance is the stage that may take 50% - 60% of the whole ERP implementation
phase. It includes perfective as well as adaptive maintenance.

After each phase the associated documents are produced, so that any kind of
management, improvement and accountability could be taken care of.

Managers should analyze the performance trends, identify bottlenecks, re-allocate the
resources, train users and measure and track the changes.

2. Management issues
There seems to be lack of management and coordination in different functional units,
with respect to management’s main functions, which includes planning, organizing,
coordinating and controlling. Moreover the clear definition of task requirement and the
assignment of responsibility do not exist in the present system. These issues in turn are
causing the ineffectual implementation of plans, inability to meet deadlines in case they
exist, and no one or more than one personnel responsible for the issues.

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3. Human resource development (Training)

SSGLC organization is more than likely in trouble if any of the following holds true:

Symptoms Do they Exist?

 chronic industrial relations problems No
 no means of resolving employee grievances Yes
 increasing / erratic employee turnover No
 increasing number of customer complaints No
 no pride in the organization Yes
 inter-group conflicts Yes
 no career paths for ambitious talented employees Yes
 dissatisfaction with pay and conditions Yes
 unclear job roles Yes
 no clear performance measures Yes
 quality is unimportant Yes
 bad product service / delivery records No
 poor recruitment standards / practices Yes
 no management development programs Yes
 no induction training for new employees Yes
 critical skill shortages Yes
 inter-departmental conflict Yes

This analysis shows that as far as HRM is concerned, SSGCL needs to address various
kinds of issues. Moreover it also depicts that some employees are under valued, some are
under trained and some may be under utilized. Similarly some may be poorly motivated,
and consequently perform well below their true capability. There exists an extensive
COPS (Culture, Organization, People and System) check list, which may help in further
diagnosing and solving these HRM issues.

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Part – II - SSGCL – Issues and recommendations

Vision & Balance Score Card
Issue
Although it has been claimed that SSGCL has now has got a changed vision and to
implement that the organization have hired competent change management professionals,
but the process and the system still seriously lacks commitment and inability to transform
corporate vision and strategy into actions that are quantifiable and address several
perspectives including financial perspective, business process perspective, customer
perspective & learning & growth perspective.

Recommendation
The balanced scorecard is a management system (not only a measurement system) that
enables organizations to clarify their vision and strategy and translate them into action. It
provides feedback around both the internal business processes and external outcomes in
order to continuously improve strategic performance and results. When fully deployed,
the balanced scorecard transforms strategic planning from an academic exercise into the
nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures
tell the story of past events, an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding and evaluating
the journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and innovation."

The balanced scorecard suggests that we view the organization from four perspectives,
and to develop metrics, collect data and analyze it relative to each of these perspectives:
 The Learning and Growth Perspective
 The Business Process Perspective
 The Customer Perspective
 The Financial Perspective

This requires that management should do this valuable exercise so that the vision may
become quantifiable in some sense, vision is streamlined with the corporate strategy and
we would know periodically and approximately that where we stand now (from different
perspective) and where are we heading towards.

Furthermore, performance of managers could also be linked with the balanced score card.

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Change Management
Issue
The presentation carried out by GM – CIS, was full of passion and energy, which had a
considerable influence on internees, showing that we might observe total change over of
the corporate culture. Unfortunately this is not the case when it comes to pragmatic
perspective. The very essence of change is that every employee should feel the change,
its impact on his / her working life, and his / her association with the organization. But as
an internee, we were unable to spot anything a like or far from it. The problem may be
related to the ineffectual implementation of the change vision.

Recommendation
As far as change management is concerned, several business tycoons and professionals
suggest following modules:
1. Envisioning change
o Identifying the Need for Change
o Conceptualizing the Change and Setting Goals

2. Planning change
o Considering Change Scenarios
o Choosing an intervention Path
o Developing a Change Plan

3. Implementing change
o Cultural Transformation
o Enabling Systems and Structures (Role of IT)
o Change Facilitators

4. Institutionalizing change
o Sustaining Organizational Change
o Nurturing Continuous Change

5. People in change
o Change Leaders
o Change Agents
o Recipients of Change

One can clearly observe that first and second module and to the extent the third module
may have been implemented successfully but later segments need particular emphasis
now to achieve the vision and the objectives of the organization.

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Part – III - Internship Program – Issues and

recommendations

Project Assignment
Issue
The projects assigned to me in LNG department were merely research and analysis
related, which has little to do with the practicality of the functions of the department. It
was informed later on that the nature of projects in LNG is of confidential nature and it
could not be shared and the objective of an internship program is to give learning
opportunity to the internee.

The project assigned in Finance department was a concrete one, but involved interaction
with many employees, who were busy most of the time, and therefore wasted lot of time.

Recommendation
In my opinion, the objective of any internship program should be to facilitate the learning
of the internee, provide an environment where he / she could implement and observe the
practicality of the theories learned, manage the resources in a pragmatic sense and be
responsible for the real world tasks assigned. The projects should be of significance for
the organization, so that sense of achievement could be realized.

If proper documentations are maintained then it may help in the understanding of the
internees of the business processes as well as decrease the amount of interaction with
employee.

Resources availability
Issue
In finance department, the resources assigned to me were of limited nature. I had to work
on number of PC’s and use stationary from different employees to accomplish my
assigned work, which wasted lot of time.

Recommendation
Before the appointment of any human resource like any internee, proper resources must
be identified and then assigned to the internees.

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