Armenian Railways: Five Year Business Plan


Financial Forecast 4.1Financial Model



Download 0.9 Mb.
Page7/22
Date05.08.2017
Size0.9 Mb.
#26304
1   2   3   4   5   6   7   8   9   10   ...   22

4Financial Forecast




4.1Financial Model


Hwtsl has created financial models of the three core railway companies in Armenian Railways to forecast financial results and permit evaluation of marketing and operations strategies. The models are spreadsheet-based and work interactively, as shown in the figure below. Traffic volume is forecast in the model of the Transportation CJSC, and measures of work (tkm and train-km) are passed to the Rollingstock CJSC and Infrastructure CJSC models. These models calculate operating costs and asset requirements based on the work measures, and charge the Transportation CJSC based on the services rendered. Each model presents the company’s financial results in the form of a Balance Sheet, Income Statement and Cash Flow Statement. A description of the models is contained in Appendix B.
Armenian Railways Financial Model


4.1.1Adjustments


The financial models use AR’s 1999 financial reports, traffic data and operating statistics to establish base line cost relationships, and to provide an historical comparison to forecast results. Some adjustments to that data were required to approximate IAS results. The most significant adjustments relate to wagon hire and depreciation.
AR has been involved in an ongoing dispute with other CIS countries relating to wagon hire. This dispute arises from the time that Armenians borders were closed and wagons belonging to foreign railways were trapped on AR and could not be returned. AR believes that it is close to a settlement of this issue. Until a settlement is reached, however, AR has not booked provisional amounts for the historical settlement or for ongoing use of other railway’s wagons. Hwtsl has not attempted to estimate the amount of the historical settlement, and it is not included in the financial model. For future years, the model does estimate wagon hire payments, based on CIS wagon hire rates and the forecast volume of import and export traffic and estimates of the time AR wagons spend off-line and foreign wagons spend on-line.
AR records depreciation expense based on historical asset values and depreciation lives dictated by the Armenian tax authorities. The depreciation lives are accelerated for some asset groups (e.g., locomotives). Hwtsl has based depreciation expense on historical asset values and accumulated depreciation, but substituted estimates of asset useful life. This adjustment will make depreciation expense appear significantly smaller in 2000 than 1999 for some asset groups. This adjustment will affect income, but will not affect cash flow.

4.1.2Internal Charging


As show in the figure on the previous page, the Transportation CJSC is the only entity that receives revenue directly from rail customers.15 The Infrastructure and Rollingstock CJSCs revenues come from charging the Transportation CJSC for services. In 1999, the Infrastructure and Rollingstock CJSCs received a share of the revenue collected by the Transportation CJSC. In future years, AR plans to move toward a more commercial basis of charging for services rendered.
A charging mechanism, based on the cost of providing Infrastructure and Rollingstock services, was developed under a separate contract.16 This charging mechanism was used in the financial models to forecast operating revenues for the Infrastructure and Rollingstock CJSCs and operating expenses for the Transportation CJSC.
The charging mechanism was based on the cost of providing service—it expects the infrastructure and rollingstock suppliers to behave like commercial entities and to not provide services for less than their costs. This means that if the rail sector in Armenia is not profitable, the losses will reside in the Transportation Company.

4.2Financial Forecast


Hwtsl prepared two financial scenarios based on the most likely traffic forecast. One scenario, the “Base Case” assumes that AR continues to operate the way it does today. The second scenario, the “Cost Reduction Case” assumes that AR adopts the cost reduction measures recommended in Chapter 3. Details of these forecasts are contained in the tables at the end of this chapter.

4.2.1Infrastructure CJSC


In the Base Case scenario, the Infrastructure CJSC is forecast to have operating revenues that modestly exceed costs. As shown in the graph, labor grows from 35% of operating expenses to 40%, and materials expense shrinks from 25% to 23%. The operating ratio reduces from 0.99 in 1999 to 0.83 in 2005. Cash flow from operations starts at 486 million AMD (US$ 900,000) in 2000 and increases to 827 million AMD (1.3 million) by 2005. This constitutes the funding from operations available to support capital expenditure.


In the cost reduction scenario, the Infrastructure CJSC’s revenue is nearly the same, but the cost reduction measures—reducing excess track, reducing excess employment and measures to extend the life of materials—reduce operating expenses.


In this scenario, labor grows from 35% of operating expense to 36% and materials remain at 25% throughout the forecast period. The operating ratio reduces from 0.99 in 1999 to 0.73 in 2005. Operating expense are reduced in all categories by 2005:


Expense

Reduction

Labor

19.7%

Materials

6.5%

Fuel

4.9%

Electric

2.1%

Depr

4.5%

Other

11.9%

Cash flow from operations starts at 486 million AMD (US$ 900,000) in 2000 and increases to 954 million AMD (1.6 million) by 2005. This is a 15% increase over the cash from operations available in the Base Case scenario.


Pro Forma financial statements for the Infrastructure CJSC are contained in Table 1-3 at the end of this chapter.


Download 0.9 Mb.

Share with your friends:
1   2   3   4   5   6   7   8   9   10   ...   22



The database is protected by copyright ©ininet.org 2024
send message
    Main page
value that