Company Quick10K Filing
Grana & Montero
20-F 2019-12-31 Filed 2020-06-15
20-F 2018-12-31 Filed 2019-05-01
20-F 2017-12-31 Filed 2018-07-02
20-F 2016-12-31 Filed 2018-05-16
20-F 2015-12-31 Filed 2016-05-02
20-F 2013-12-31 Filed 2014-04-30

GRAM 20F Annual Report

Part I.
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II.
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Business Conduct and Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-8.01 d862224dex801.htm
EX-10.01 d862224dex1001.htm
EX-10.01.1 d862224dex10011.htm
EX-10.05 d862224dex1005.htm
EX-12.01 d862224dex1201.htm
EX-12.02 d862224dex1202.htm
EX-13.01 d862224dex1301.htm
EX-13.02 d862224dex1302.htm

Grana & Montero Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d862224d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

For the transition period from                      to                     

Commission file number 001-35991

 

 

GRAÑA Y MONTERO S.A.A.

(Exact name of Registrant as specified in its charter)

 

 

N/A

(Translation of Registrant’s name into English)

Republic of Peru

(Jurisdiction of incorporation or organization)

Av. Paseo de la República 4667

Surquillo

Lima 34, Peru

(Address of principal executive offices)

Daniel Urbina Pérez, Chief Legal Officer

Tel. 011-51-1-213-6565

relacion.inversionistas@gym.com.pe

Av. Paseo de la República 4667

Surquillo

Lima 34, Peru

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Shares, par value s/1.00 per share, American Depositary Shares, each representing five

Common Shares

  GRAM  

New York Stock Exchange*

New York Stock Exchange

 

 

 

*

Not for trading purposes, but only in connection with the registration on the New York Stock Exchange of the American Depositary Shares representing those common shares.

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation

pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

At December 31, 2019    871,917,855 shares of common stock

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐    Accelerated filer  ☒   Non-accelerated filer  ☐   Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP   ☐

 

                                         

 

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other   ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow. Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I. INTRODUCTION

     1  

ITEM 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      6  

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE      6  

ITEM 3.

  KEY INFORMATION      6  

A.

  Selected Financial Data      6  

B.

  Capitalization and Indebtedness      14  

C.

  Reasons for the Offer and Use of Proceeds      14  

D.

  Risk Factors      14  

ITEM 4.

  INFORMATION ON THE COMPANY      42  

A.

  History and Development of the Company      42  

B.

  Business Overview      43  

C.

  Organizational Structure      100  

D.

  Property, Plant and Equipment      102  

ITEM 4A.

  UNRESOLVED STAFF COMMENTS      102  

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS      102  

A.

  Operating Results      103  

B.

  Liquidity and Capital Resources      127  

C.

  Research and Development, Patents and Licenses, Etc.      133  

D.

  Trend Information      133  

E.

  Off-Balance Sheet Arrangements      137  

F.

  Tabular Disclosure of Contractual Obligations      138  

G.

  Safe Harbor      138  

ITEM 6.

  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      138  

A.

  Directors and Senior Management      138  

B.

  Compensation      145  

C.

  Board Practices      146  

D.

  Employees      148  

E.

  Share Ownership      150  

ITEM 7.

  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      151  

A.

  Major Shareholders      151  

B.

  Related Party Transactions      152  

C.

  Interests of Experts and Counsel      153  

ITEM 8.

  FINANCIAL INFORMATION      153  

A.

  Consolidated Statements and Other Financial Information.      153  

B.

  Significant Changes.      155  

ITEM 9.

  THE OFFER AND LISTING      156  

A.

  Offer and Listing Details      156  

B.

  Plan of Distribution      156  

C.

  Markets      156  

D.

  Selling Shareholders      158  

E.

  Dilution      158  

F.

  Expenses of the Issue      158  

ITEM 10.

  ADDITIONAL INFORMATION      158  

A.

  Share Capital      158  

B.

  Memorandum and Articles of Association      158  

C.

  Material Contracts      158  

D.

  Exchange Controls      160  

E.

  Taxation      160  

F.

  Dividends and Paying Agents      166  

G.

  Statement by Experts      166  

H.

  Documents on Display      166  

I.

  Subsidiary Information      166  

 

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ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      166  

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      167  

A.

  Debt Securities      167  

B.

  Warrants and Rights      167  

C.

  Other Securities      167  

D.

  American Depositary Shares      167  

PART II.

       170  

ITEM 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      170  

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      170  

ITEM 15.

  CONTROLS AND PROCEDURES      171  

A.

  Disclosure Controls and Procedures      171  

B.

  Management’s Annual Report on Internal Control Over Financial Reporting      171  

C.

  Attestation Report of the Registered Public Accounting Firm      173  

D.

  Changes in Internal Control Over Financial Reporting      173  

ITEM 16.

  [RESERVED]      174  

ITEM 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT      174  

ITEM 16B.

  CODE OF BUSINESS CONDUCT AND ETHICS      174  

ITEM 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES      174  

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      175  

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      175  

ITEM 16F.

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      175  

ITEM 16G.

  CORPORATE GOVERNANCE      175  

ITEM 16H.

  MINE SAFETY DISCLOSURE      176  

ITEM 17.

  FINANCIAL STATEMENTS      176  

ITEM 18.

  FINANCIAL STATEMENTS      176  

ITEM 19.

  EXHIBITS      176  

 

 

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PART I.

INTRODUCTION

Certain Definitions

All references to “we,” “us,” “our,” “our company,” “the group” and “Graña y Montero” in this annual report are to Graña y Montero S.A.A., a publicly-held corporation (sociedad anónima abierta) organized under the laws of Peru. In this annual report, we refer to our principal subsidiaries, joint operations, joint ventures and associated companies as follows: (i) in our Engineering and Construction (“E&C”) segment: GyM S.A. as “GyM”; Vial y Vives—DSD S.A. as “Vial y Vives—DSD”; GMI S.A. as “GMI”; Morelco S.A.S. as “Morelco”; (ii) in our Infrastructure segment: Norvial S.A. as “Norvial”; Survial S.A. as “Survial”; Concesión Canchaque S.A. as “Canchaque”; GyM Ferrovías S.A. as “GyM Ferrovías”; Concesionaria La Chira S.A. as “La Chira”; GMP S.A. as “GMP”; and Concar S.A. as “Concar”; (iii) in our Real Estate segment: Viva GyM S.A. as “Viva GyM” and Inmobiliaria Almonte S.A.C. as “Almonte”. For more information on our subsidiaries, joint operations, joint ventures or associated companies, see notes 6a, 6c and 15 to our audited annual consolidated financial statements included in this annual report.

The gas pipeline concession of Gasoducto Sur Peruano S.A. (“GSP”) was terminated on January 24, 2017, and, as a result, we have recognized impairments with respect to our investment in and account receivables from GSP and our participation in the related construction consortium (Consorcio Constructor Ductos del Sur, or “CCDS”). Both GSP and CCDS are in the process of being liquidated. Additionally, we have recently sold certain assets and businesses, including: on April 24, 2017, the sale of our interest in Compañía Operadora de Gas del Amazonas (“COGA”); on June 6, 2017, the sale of our interest in GMD S.A. (“GMD”); on April 11, 2018, the sale of our interest in Stracon GyM S.A. (“Stracon GyM”); and, on December 4, 2018, the sale of our interest in CAM Chile S.A. (“CAM”) and CAM Servicios del Perú S.A. (“CAM Servicios”). In addition, we are in the process of marketing for sale our subsidiary Adexus S.A. (“Adexus”), which entered into Chilean bankruptcy proceedings on November 19, 2019. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments (2017—2020)—Asset Sales.”

The term “U.S. dollar” and the symbol “US$” refer to the legal currency of the United States; the term “sol” and the symbol “S/” refer to the legal currency of Peru; the term “Chilean peso” and the symbol “CLP” refer to the legal currency of Chile; and the term “Colombian peso” and the symbol “COP” refer to the legal currency of Colombia.

Presentation of Financial Information

Our consolidated financial statements included in this annual report have been prepared in soles and in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). Our annual consolidated financial statements as of December 31, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019 have been audited by Moore Assurance S.A.S. (a member firm of Moore Global Network Limited) in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Our consolidated financial statements for the year ended December 31, 2017 included in this annual report were restated in our annual report on Form 20-F for the fiscal year ended December 31, 2018. In our consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2017, we inadvertently presented the gain on the sale of GMD under “Gain from the sale of investments” in error and, accordingly, we restated our 2017 income statement and the related notes to reflect GMD as a discontinued operation. The previously issued consolidated financial statements of the company for the 2017 fiscal year (and the related audit opinion) included in the company’s annual report on Form 20-F for the year ended December 31, 2017 should not be relied upon. For more information, see note 2.31 to our audited annual consolidated financial statements included in this annual report.

We manage our business in three segments: Engineering and Construction (E&C); Infrastructure; and Real Estate. Prior to December 31, 2017, in addition to the foregoing segments, we had a Technical Services segment. However, we transferred Concar from this segment to our Infrastructure segment beginning on April 1, 2017; on

 

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June 6, 2017, we sold our interest in our former technical services subsidiary, GMD; and we are in the process of marketing for sale Adexus, our other technical services subsidiary. The historical segment financial information included in this annual report has been adjusted accordingly. For information on our results of operations by business segment, see note 7 to our audited annual consolidated financial statements included in this annual report.

As a result of the sale of GMD on June 6, 2017, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the years ended December 31, 2017, 2018 and 2019. We have also reclassified our selected financial information for the years ended December 31, 2015 and 2016 included in this annual report to show GMD as a discontinued operation. In addition, (i) on December 4, 2018, we sold our interests in each of CAM and CAM Servicios, (ii) on April 11, 2018, we sold our interest in Stracon GyM, and (iii) we are in the process of marketing for sale our subsidiary Adexus. As a result, we present CAM, CAM Servicios and Stracon GyM as discontinued operations, and Adexus as an investment held for sale, in our audited annual consolidated financial statements for the years ended December 31, 2018 and 2019. We have also reclassified our consolidated financial statements for the years ended December 31, 2017, and the selected financial information for the years ended December 31, 2015 and 2016 included in this annual report to show CAM, CAM Servicios and Stracon GyM as discontinued operations and Adexus as an investment held for sale. We have also revised historical backlog data included in this annual report to exclude the presentation of entities that are presented as discontinued operations.

We requested that the staff of the U.S. Securities and Exchange Commission (the “SEC”) grant relief from the financial statement filing requirements of Rule 3-09 of Regulation S-X (“Rule 3-09”) pursuant to Section 2430 of the Division of Corporation Finance Financial Reporting Manual, with respect to our investment in GSP. The SEC has not granted our company’s waiver request and, as a result, our company was required to file with the SEC separate financial statements for GSP for 2015, 2016 and 2017, with 2016 being audited. However, it has been impracticable for our company to comply with this requirement, because the audit opinion that was issued with respect to GSP’s 2016 financial statements included a disclaimer; our company’s loss of significant influence over GSP; and GSP’s limited management as the entity is in insolvency proceedings. We believe that GSP’s financial statements would not provide additional material information to investors. However, we cannot assure you that that the SEC will not take actions against our company relating to our non-compliance, and, among other matters, in the event of a capital raise, our company may be temporarily unable to have a registration statement for a public offering of securities in the United States declared effective by the SEC. For more information, see “Item 3.D. Key Information —Risk Factors—Risks Related to Recent Developments (2017 - 2020)—Our inability to provide audited financial statements for GSP in accordance with Rule 3-09 may result in enforcement actions by the SEC or may, among other matters, cause us to be unable to complete a public offering in the United States.” For more information on GSP, see notes 5(e) and 15 to our audited annual consolidated financial statements included in this annual report.

Non-IFRS Data

In this annual report, we present EBITDA, a non-GAAP financial measure. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable IFRS measure. We present EBITDA because we believe it provides readers with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons on a consistent basis. Our management uses EBITDA, among other measures, for internal planning and performance measurement purposes. We believe that EBITDA is useful in evaluating our operating performance compared to other companies operating in our sectors because the calculation of EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending, which items may vary for different companies for reasons unrelated to overall operating performance. EBITDA should not be construed as an alternative to net profit or operating profit, as an indicator of operating performance, as an alternative to cash flow provided by operating activities or as a measure of liquidity (in each case, as determined in accordance with IFRS). EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies. For our definition of EBITDA and a reconciliation of EBITDA to the most directly comparable IFRS financial measure, see “Item 3.A. Key Information—Selected Financial Data—Non-GAAP Financial Measure and Reconciliation.”

 

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Currency Translations

Our consolidated financial statements are prepared in soles. For a description of our translation of amounts in currencies other than soles in our consolidated financial statements, see note 2.4 to our audited annual consolidated financial statements included in this annual report.

We have translated some of the soles amounts contained in this annual report into U.S. dollars and some U.S. dollars amounts contained in this annual report into soles, for convenience purposes only. Unless otherwise indicated or the context otherwise requires, the rate used to translate soles amounts to U.S. dollars and U.S. dollars amounts into soles was S/3.317 to US$1.00, which was the exchange rate reported for December 31, 2019 by the Peruvian Superintendency of Banks, Insurance and Private Pension Fund Administrators (Superintendencia de Banca, Seguros y AFPs, or “SBS”). We present our backlog in U.S. dollars. For contracts denominated in soles or other local currencies, amounts have been converted into U.S. dollars based on the exchange rate published by the SBS on December 31 of the corresponding year. When we present our ratios of backlog and revenues in this annual report, we similarly convert our revenues, which are reported in soles, into U.S. dollars based on the exchange rate reported for December 31 of the corresponding year. For conversions of macroeconomic indicators (particularly in “Item 5.D. Operating and Financial Review and Prospects—Trend Information” in this annual report), average annual exchange rates for the currencies of each of the countries addressed are used. The Federal Reserve Bank of New York does not report a noon buying rate for soles. The U.S. dollar equivalent information presented in this annual report is provided solely for convenience of the reader and should not be construed as implying that the soles or other currency amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate.

Rounding

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be arithmetic aggregations of the figures that precede them.

Backlog

This annual report includes our backlog for our Engineering and Construction (E&C), Infrastructure and Real Estate segments. We do not include backlog in this annual report in our Infrastructure segment for: (i) our Norvial toll road concession because its revenues from the concession are derived from toll fees charged to vehicles using the highway, and, as a result, such revenues are dependent on vehicular traffic levels; and (ii) our Energy line of business because: (a) our revenues from hydrocarbon extraction services are dependent on the amounts of oil and gas we produce and market prices, which fluctuate significantly; (b) our revenues from our gas processing plant are dependent on the amount of gas we process and market prices for natural gas liquids, which fluctuate significantly; and (c) our revenues from our fuel storage terminal operation partially depend on the volume of fuel stored and dispatched. When we present backlog on a segment basis, we do not include eliminations that are included in our consolidated backlog. Backlog is not a measure defined by IFRS, and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog. Backlog is not audited. We have revised historical backlog data included in this annual report to exclude the presentation of entities that are presented as discontinued operations. For our definition of backlog, see “Item 4.B. Information on the Company—Business Overview—Backlog.” See also “Item 3.D. Key Information—Risk Factors—Risks Related to our Company—Our backlog and our ratio of historical backlog to revenues may not be reliable indicators of future revenues or profit.”

The GSP gas pipeline concession was terminated on January 24, 2017, which had a significant impact on our backlog for our E&C and our consolidated backlog. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments (2017—2020)—Termination of the Gasoducto Sur Peruano Concession.”

Reserves Estimates

This annual report includes our estimates for proved reserves in Blocks I and V, where GMP provides hydrocarbon extraction services to, and Blocks III and IV, where GMP extracts hydrocarbon under license agreements with, Perupetro S.A. (“Perupetro”). These reserves estimates were prepared internally by our team of engineers and

 

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have not been audited or reviewed by any independent external engineers. For further information on these reserves estimates, see “Item 3.D. Key Information—Risks Related to Our Company—Additional Risks Related to our Infrastructure Business” and “Item 4.B. Information on the Company—Business Overview—Infrastructure—Principal Infrastructure Lines of Business—Energy—Oil and Gas Production.”

Market Information

We make estimates in this annual report regarding our competitive position and market share, as well as the market size and expected growth of the engineering and construction, infrastructure and real estate services industries in Peru and elsewhere in Latin America. We have made these estimates on the basis of our management’s knowledge and statistics and other information, which we believe to be the most recently available as of the date of this annual report, from government agencies, industry professional organizations, industry publications and other sources. While we believe these estimates to be accurate as of the date of this annual report, we have not independently verified the data from third-party sources and our internal data has not been verified by any independent source. We paid Great Place to Work ® Institute, a human resources consulting, research and training firm, for our employees to participate in their market survey referenced in this annual report (Copyright © 2019 Great Place to Work ® Institute, Inc. All rights reserved.). In this annual report we present gross domestic product (“GDP”) both on a nominal and real basis. Real GDP is nominal GDP adjusted to exclude the effect of inflation. Unless otherwise indicated, references to GDP are to real GDP.

Measurements and Other Data

In this annual report, we use the following measurements:

 

   

“m” means one meter, which equals approximately 3.28084 feet;

 

   

“m2” means one square meter, which equals approximately 10.7630 square feet;

 

   

“km” means one kilometer, which equals approximately 0.621371 miles;

 

   

“hectare” means one hectare, which equals approximately 2.47105 acres;

 

   

“tonne” means one metric ton, which equals approximately 2,204.6 pounds;

 

   

“bbl” or barrel of oil means one stock tank barrel, which is equivalent to approximately 0.15898 cubic meters;

 

   

“boe” means one barrel of oil equivalent, which equals approximately 160.2167 cubic meters, determined using the ratio of 5,658 cubic feet of natural gas to one barrel of oil;

 

   

“cf” means one cubic foot;

 

   

“M,” when used before bbl, boe or cf, means one thousand bbl, boe and cf, respectively;

 

   

“MM,” when used before bbl, boe or cf, means one million bbl, boe and cf, respectively;

 

   

“MW” means one megawatt, which equals one million watts; and

 

   

“Gwh” means one gigawatt hour, which equals one billion watt hours.

In this annual report, we use the term “accident incidence rate” with respect to our E&C segment, which is calculated as the number of injuries divided by the total number of hours worked by all full-time employees of our E&C segment during the relevant year divided by 200,000 (which reflects 40 hours worked per week in a 50-week year by 100 equivalent full-time workers).

 

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Forward-Looking Statements

This annual report contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Item 3.D. Key Information—Risk Factors,” which may cause our actual results, performance or achievements to differ materially from the forward-looking statements that we make.

Forward-looking statements typically are identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “project,” “plan,” “believe,” “potential,” “continue,” “is/are likely to,” or other similar expressions. Any or all of our forward-looking statements in this annual report may turn out to be inaccurate. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including, among others:

 

   

the impact that the ongoing Novel Coronavirus 2019 (“COVID-19”) pandemic, and governments’ extraordinary measures to limit the spread of the virus, will ultimately have on economic activity and the industries in which we operate;

 

   

the impact on our business reputation from our past association with Odebrecht S.A. (“Odebrecht”) affiliates in Peru;

 

   

the potential effects of investigations of our company and certain of our former directors and senior management, or any future investigations, regarding corruption or other illegal acts, including the outcome from our ongoing settlement and cooperation agreement discussions with Peruvian authorities;

 

   

the potential impact of the class action civil lawsuit against our company and certain of our former directors and former and current executive officers, including the outcome of ongoing settlement discussions;

 

   

uncertainty with regards to the timing and amount of any payment we are entitled to receive as an equity investor and creditor of GSP in connection with the government payment required as a result of the termination of the GSP pipeline concession;

 

   

our ability to fund our working capital and other obligations through cash flow from operating activities, financing sources or the sale of assets;

 

   

our ability to comply with the covenants in our debt instruments or obtain waivers in the event of non-compliance;

 

   

our ability to obtain financing on favorable terms, including our ability to obtain performance bonds and similar financings required in the ordinary course of our business;

 

   

our ability to consummate asset sales or other strategic transactions on favorable terms on a timely basis, or at all;

 

   

global macroeconomic conditions, including commodity prices;

 

   

economic, political and social conditions in the markets in which we operate, including as a result of political disputes between the executive branch and congress in Peru, and widespread protests in Chile and, to a lesser extent, Colombia;

 

   

major changes in government policies at the national, regional or municipal levels, including in connection with infrastructure concessions, investments in infrastructure and affordable housing subsidies;

 

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social conflicts that disrupt infrastructure projects, particularly in the mining sector;

 

   

interest rate fluctuation, inflation and devaluation or appreciation of the sol or Chilean peso or Colombian peso in relation to the U.S. dollar (or other currencies in which we receive revenue);

 

   

our backlog may not be a reliable indicator of future revenues or profit;

 

   

the cyclical nature of some of our business segments;

 

   

the level of capital investments and financings available for infrastructure projects of the types that we perform, both in the private and public sectors;

 

   

competition in our markets, both from local and international companies;

 

   

volatility in global prices of oil and gas, including as a result of disputes among OPEC members;

 

   

changes in real estate market prices, customer demand, preference and purchasing power, and financing availability and terms;

 

   

our ability to obtain zoning and other license requirements for our real estate development;

 

   

changes in tax, environmental, health and safety, or other laws and regulations;

 

   

natural disasters, severe weather or other events that may adversely impact our business; and

 

   

other factors identified or discussed under “Item 3.D. Key Information—Risk Factors.”

The forward-looking statements in this annual report represent our expectations and forecasts as of the date of this annual report. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this annual report. In particular, the COVID-19 pandemic, and governments’ extraordinary measures to limit the spread of the virus, are disrupting economic activity and the industries in which we operate, and consequently adversely affecting our business, results of operation and financial condition and, as conditions are recent, uncertain and changing rapidly, it is difficult to predict the full extent of the impact that the pandemic will have on our company.

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

 

A.

Selected Financial Data

The following selected consolidated financial data should be read together with “Part I. Introduction. Presentation of Financial Information,” “Item 5. Operations and Financial Review and Prospects” and our audited annual consolidated financial statements included in this annual report.

 

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The following selected financial data as of December 31, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019 have been derived from our audited annual consolidated financial statements included in this annual report. The following selected financial data as of December 31, 2015, 2016 and 2017 and for the years ended December 31, 2015 and 2016 have been derived from our audited annual consolidated financial statements not included in this annual report. Our annual consolidated financial statements for the years ended December 31, 2017, 2018 and 2019 have been audited by Moore Assurance S.A.S. (a member firm of Moore Global Network Limited) in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our consolidated financial statements for the year ended December 31, 2017 included in this annual report were restated in our annual report on Form 20-F for the year ended December 31, 2018. For more information, see note 2.31 to our audited annual consolidated financial statements included in this annual report and “Item 5. Operations and Financial Review and Prospects—Overview—Restatement of Financial Results for Fiscal Year 2017.”

 

     For the year ended December 31,  
     2015     2016(1)     2017
Restated
    2018     2019(1)     2019(1)  
           (in millions of S/)                

(in millions of

US$)(2)

 

Income Statement Data:

            

Revenues

     5,542.3       4,137.3       4,014.0       3,899.5       4,085.0       1,231.5  

Cost of sales

     (5,210.6     (3,821.2     (3,511.6     (3,225.0     (3,643.2     (1,098.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     331.7       316.1       502.5       674.5       441.8 (3)      133.2  

Administrative expenses

     (291.3     (278.3     (322.5     (278.4     (213.9     (64.5

Other income and expenses, net(3)

     18.3       (21.9     (33.3     (61.2     (324.9     (97.9

Profit (losses) from sale of investments

     —         46.3       34.5       —         (1.9     (0.6

Other (expenses) income, net

     0.3       (0.5     0.5       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     58.4       61.8       181.7       334.7       (98.9     (29.8

Financial (expense) income, net(3)

     (97.7     (179.8     (137.0     (197.1     (157.1     (47.3

Share of the profit and loss obtained from associates and joint ventures under the equity method of accounting

     24.4       (590.1     0.5       (3.7     (218.8     (66.0

Profit (loss) before income tax

     (14.9     (708.1     45.1       133.9       (474.7     (143.1

Income tax

     (78.7     152.2       (46.3     (113.3     (320.0     (96.5

Profit (loss) from continuing operations

     (93.5     (556.0     (1.2     20.6       (794.7     (239.6

Profit (loss) from discontinued operations

     149.1       104.4       210.4       36.8       (44.0     (13.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit (loss)

     55.6       (451.6     209.2       57.4       (838.6     (252.8

Net profit (loss) attributable to controlling interest(4)

     7.1       (509.7     148.7       (83.2     (884.7     (266.7

Net profit (loss) attributable to non-controlling interest(4)

     48.5       58.1       60.5       140.6       46.1       13.9  

 

(1)

For the effects on our results of operations for 2016 and 2019 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments (2017—2020)” and notes 5(e) and 15 to our audited annual consolidated financial statements included in this annual report. In particular, in 2016 we recognized an impairment to our investment in GSP of S/593.1 million, which is recorded in Share of the profit and loss obtained from associates and joint ventures under the equity method of accounting. As of December 31, 2019, we impaired the remaining amount of our investment in GSP. In 2019, we also recognized an impairment of US$81.5 million (S/276 million) to the long-term account receivables from GSP; adjusted the net present value of the account by US$17 million (S/58 million) pursuant to IFRS rules; and wrote off US$54 million (S/180 million) on the deferred income tax asset associated with the company’s investment in GSP, which are recorded, primarily, in Other income and expenses, net, Share of the profit and loss obtained from associates and joint ventures under the equity method of accounting, and Income tax.

(2)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

(3)

Reflects exchange losses due to the depreciation of the sol against the U.S. dollar and our U.S. dollar denominated liabilities. For more information, see note 27 to our audited annual consolidated financial statements included in this annual report.

(4)

We consolidate the results of our subsidiaries in our financial statements and we reflect the profit corresponding to the minority interests in our subsidiaries under “net profit attributable to non-controlling interests” in our income statement. With respect to our joint operations, we recognize in our consolidated financial statements the revenue and expenses, including our share of any asset, liability, revenue or expense we hold jointly with partners. We reflect the results of our associated companies under the equity method of accounting in our consolidated financial statements under the line item “share of the profit and loss in associates” in our income statement. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Acquisitions,” “—General—Accounting for Subsidiaries, Joint Operations, Joint Ventures and Associated Companies” and note 2.2 to our audited annual consolidated financial statements included in this annual report.

 

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     As of December 31,  
     2015      2016(1)      2017      2018      2019(1)      2019(1)  
Balance Sheet Data:           (in millions of S/)                   

(in millions of

US$)(2)

 

Total current assets

     5,200.4        4,328.7        3,891.9        2,985.5        2,865.3        863.8  

Cash and cash equivalents(3)

     554.0        607.0        626.2        801.1        949.0        286.1  

Accounts receivables

     2,143.3        1,862.5        2,381.9        1,631.2        1,302.9        392.8  

Outstanding work in progress

     1,278.2        680.9        61.8        28.5        49.4        14.9  

Inventories(4)

     1,159.2        1,104.3        770.7        514.0        552.6        166.6  

Other current assets

     65.7        74.0        51.3        10.7        11.4        3.4  

Total non-current assets

     3,699.6        4,718.0        4,775.7        4,197.1        3,333.8        1,005.1  

Long-term accounts receivables(5)

     687.8        1,754.4        2,180.8        2,133.5        1,623.6        489.5  

Investments in associates and

joint ventures

     637.0        389.8        268.7        257.8        37.0        11.2  

Property, plant and equipment

     1,111.8        1,113.6        865.7        470.6        443.9        133.8  

Intangible assets(6)

     878.3        960.3        940.1        847.1        853.3        257.3  

Other non-current assets

     384.7        499.9        520.4        488.1        376.0        113.3  

Total current liabilities

     4,092.3        4,537.0        3,549.2        2,665.8        2,470.8        744.9  

Short-term borrowings

     1,265.1        2,007.1        1,093.4        865.6        499.0        150.4  

Accounts payable(7)

     2,779.6        2,453.1        2,356.7        1,768.1        1,810.3        545.8  

Other current liabilities

     47.6        76.8        99.1        32.1        161.5        48.7  

Total non-current liabilities

     1,725.8        2,019.9        2,529.4        2,048.9        1,847.5        557.0  

Long-term borrowings

     1,310.3        1,341.0        1,544.2        1,274.1        1,224.1        369.0  

Other non-current liabilities

     415.5        678.9        985.2        774.8        623.4        188.0  

Capital stock

     660.1        660.1        660.1        729.4        871.9        262.9  

Shareholders’ equity

     2,558.8        1,980.4        2,123.3        2,088.4        1,477.8        445.5  

Non-controlling interest

     523.1        509.3        465.7        401.6        398.3        120.1  

 

 

(1)

For the effects on our financial condition as of December 31, 2016 and 2019 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments (2017—2020)—Termination of the Gasoducto Sur Peruano Concession” and notes 5(e) and 15 to our audited annual consolidated financial statements included in this annual report. In particular, in 2016 we recognized an impairment to our investment in GSP of S/593.1 million, which is recorded in Share of the profit and loss obtained from associates and joint ventures under the equity method of accounting. As of December 31, 2019, we impaired the remaining amount of our investment in GSP, which is recorded in Investments in associates and joint ventures. In 2019, we also recognized an impairment of US$81.5 million (S/276 million) and adjusted the net present value of the account by US$17 million (S/58 million) pursuant to IFRS rules, which are recorded in Long-term account receivables; and wrote off US$54 million (S/180 million) on the deferred income tax asset associated with the company’s investment in GSP, which is recorded in Other non-current assets.

(2)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

(3)

As of December 31, 2019, includes reserved funds in the amount of S/552.4 million (US$166.5 million), which funds are held in trusts for purposes of the group’s engineering and construction, real estate and infrastructure projects and certain of the group’s outstanding bonds. For more information, see note 9 to our audited annual consolidated financial statements included in this annual report.

(4)

Includes investments for the purchase of land by our Real Estate segment. These investments in land are recorded at acquisition cost and are not marked-to-market for changes in fair value. See note 14 to our audited annual consolidated financial statements included in this annual report.

(5)

Includes payments required to be made by the Peruvian government for the amounts we invest to purchase trains and other infrastructure for the Lima Metro. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—General—Infrastructure” and note 11 to our audited annual consolidated financial statements included in this annual report.

(6)

We recognize our investments in the construction of the highway of our Norvial concession as intangible assets. See note 17 to our audited annual consolidated financial statements included in this annual report.

(7)

Includes S/607.1 million, S/810.8 million, S/726.3 million, S/496.5 million and S/307.8 million in advance payments made by our clients as of December 31, 2015, 2016, 2017, 2018 and 2019, respectively, in connection with our E&C segment and the operation and maintenance of infrastructure assets contracts. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—General—Engineering and Construction” and note 21 to our audited annual consolidated financial statements included in this annual report.

 

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     As of and for the year ended December 31,  
     2015     2016(1)     2017
Restated
    2018     2019(1)     2019(1)  
     (in millions of S/)          

(in millions of

US$)(2)

 

Other Data:

            

EBITDA(3) (in millions of S/ or US$)

     538.4       (240.5     572.3       695.9       (159.0     (47.9

Gross margin

     6.0     7.6     12.5     17.8     10.8     —    

EBITDA margin(4)

     9.7     (5.8 )%      14.3     14.3     (3.9 )%      —    

Outstanding shares (thousands)

     660,054       660,054       660,054       729,434       871,918      
—  
 

Profit (loss) per share (in S/or US$)

     0.08       (0.68     0.31       (0.08     (1.02     (0.31

Profit (loss) attributable to controlling interest per share (in S/or US$)

     0.01       (0.77     0.23       (0.13     (1.08     (0.32

Dividend per share (in S/or US$)(5)

     0.05       —         —         —         —         —    

Net debt(6)/ EBITDA ratio

     3.8x       (12.1x     3.6x       1.9x       (4.8x     —    

Backlog (in millions of US$) (Unaudited)(7)

     3,918.4       3,011.6       2,388.4       1,257.2       1,396.4       —    

Backlog/revenues ratio (Unaudited)(7)

     1.9x       1.8x       1.3x       1.1x       1.2x       —    

 

(1)

For the effects on our results of operations and backlog for 2016 and 2019 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments (2017—2020)—Termination of the Gasoducto Sur Peruano Concession” and notes 5(e) and 15 to our audited annual consolidated financial statements included in this annual report.

(2)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

(3)

For further information on the definition of EBITDA, see “—Non-GAAP Financial Measure and Reconciliation.”

(4)

Reflects EBITDA as a percentage of revenues.

(5)

Payment of dividends for the year’s profit.

(6)

Net debt is calculated as total borrowings (including current and non-current borrowings) less cash and cash equivalents. Cash and cash equivalents include the reserved funds; see note 9 to our audited annual consolidated financial statements included in this annual report.

(7)

For further information on our backlog, see “Item 4.B. Business Overview—Backlog.” Does not include, in our Infrastructure segment, our Norvial toll road concession and our Energy line of business. Backlog is calculated as of the last day of the applicable year. Revenues are calculated for that year and converted into U.S. dollars based on the exchange rate published by the SBS on December 31 of the corresponding year, which was S/3.413 to US$1.00 as of December 31, 2015, S/3.36 to US$1.00 as of December 31, 2016, S/3.245 to US$1.00 as of December 31, 2017, S/3.379 to US$1.00 as of December 31, 2018 and S/3.317 as of December 31, 2019. Includes revenues only for businesses included in our backlog.

The following tables set forth summary financial data for each of our business segments. For more information on the results of operations of our segments, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations” and note 7 to our audited annual consolidated financial statements included in this annual report. The effects of the termination of the GSP gas pipeline concession on our results of operations and financial condition for 2016 and 2019 are reflected in Corporate (the Parent Company Operations) and, with respect to CCDS, in our E&C segment.

Beginning on April 1, 2017, we transferred Concar from our former Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results.

1. Engineering & Construction

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Income Statement Data:

            

Revenues

     4,352.7       2,936.8       2,331.9       1,960.9       2,797.3       843.3  

Cost of sales

     (4,244.4     (2,876.6     (2,155.4     (1,898.8     (2,699.0     (813.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     108.3       60.2       176.5       62.1       98.4       29.7  

Administrative expenses

     (243.6     (212.0     (188.2     (136.1     (141.4     (42.6

Other income and (expenses), net

     6.4       (14.2     (46.5     (13.5     9.9       3.0  

Other (losses) gains, net

     (0.2     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     (129.2     (166.1     (58.1     (87.5     (33.1     (10.0

Financial (expense) income, net

     (96.8     (50.8     (38.2     (67.7     (68.5     (20.7

Share of the profit or loss in associates under the equity method of accounting

     15.0       16.5       31.0       11.4       (3.6     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before income tax

     (210.9     (200.4     (65.3     (143.9     (105.2     (31.7

Income tax

     (15.2     19.7       0.9       14.4       (35.5     (10.7

Profit from discontinued operations

     104.2       87.2       76.8       44.1       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit (loss)

     (121.8     (93.4     12.4       (85.4     (140.7     (42.4

Net profit attributable to controlling interest

     (131.2     (87.2     12.1       (86.9     (137.1     (41.3

Net profit (loss) attributable to non-controlling interest

     9.3       (5.7     0.3       1.5       (3.6     (1.1

 

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2. Infrastructure

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Income Statement Data:

            

Revenues

     1,353.1       1,174.8       1,447.9       1,883.3       1,587.3       478.5  

Cost of sales

     (1,107.2     (963.4     (1,187.8     (1,532.6     (1,262.9     (380.7

Gross profit

     245.9       211.4       260.2       350.6       324.4       97.8  

Administrative expenses

     (67.0     (66.1     (63.9     (68.8     (71.2     (21.5

Other income and (expenses), net

     2.0       1.3       5.8       1.4       50.0       15.1  

Other (losses) gains, net

     (0.1     (0.5     0.4       —         —         —    

Operating profit

     180.8       146.1       202.5       283.0       203.1       61.2  

Financial (expense) income, net

     (22.9     (9.6     (19.5     (20.1     (13.2     (4.0

Share of the profit or loss in associates under the equity method of accounting

     0.9       1.6       1.6       1.6       2.3       0.7  

Profit before income tax

     158.9       138.1       184.5       264.6       192.2       58.0  

Income tax

     (46.5     (39.9     (55.2     (80.5     (80.2     (24.2

Net profit

     112.4       98.3       129.3       184.0       112.1       33.8  

Net profit attributable to controlling interest

     93.0       74.4       103.8       152.3       81.3       24.5  

Net profit (loss) attributable to non-controlling interest

     19.4       23.8       25.5       31.8       30.8       9.3  

3. Real Estate

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Income Statement Data:

                                                                                                       

Revenues

     215.8       411.5       647.5       630.1       264.4       79.7  

Cost of sales

     (164.0     (275.0     (500.2     (342.2     (193.6     (58.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     51.8       136.5       147.4       288.0       70.8       21.3  

Administrative expenses

     (20.5     (28.4     (21.2     (50.7     (22.0     (6.7

 

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     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Other income and (expenses), net

     1.8       0.8       (3.7     (2.0     20.0       6.0  

Other (losses) gains, net

     —          —          49.0       —          —          —     

Profit from the sale of investments

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     33.0       108.9       171.5       235.3       68.8       20.7  

Financial (expense) income, net

     (10.9     (11.6     (18.3     (8.3     (38.5     (11.6

Share of the profit or loss in associates under the equity method of accounting

     14.9       6.8       0.5       —          0.5       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

     37.0       104.2       153.6       226.9       30.7       9.3  

Income tax

     (7.6     (27.1     (35.9     (69.2     (7.0     (2.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit

     29.3       77.2       117.7       157.8       23.7       7.2  

Net profit attributable to controlling interest(4)

     12.4       22.1       48.6       28.9       (5.0     (1.5

Net profit (loss) attributable to non-controlling interest(2)

     17.0       55.1       69.1       128.9       28.7       8.7  

 

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

(2)

The net profit attributable to controlling interests of our Real Estate segment is significantly affected by the financing and commercial arrangements we use to purchase land and to develop real estate projects. Depending on the level of non-controlling interests used to finance our real estate projects, our Real Estate segment tends to have significant net profit attributable to non-controlling interests. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—General—Real Estate.”

Non-GAAP Financial Measure and Reconciliation

In this annual report, we present EBITDA, a non-GAAP financial measure. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable IFRS measure. We define EBITDA as net profit plus: financial (expense) income, net; income tax; and depreciation and amortization.

We present EBITDA because we believe it provides readers with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons on a consistent basis. Our management uses EBITDA, among other measures, for internal planning and performance measurement purposes. We believe that EBITDA is useful in evaluating our operating performance compared to that of other companies operating in our sectors because EBITDA eliminates the effects of financing and income taxes and the accounting effects of capital spending, which items may vary for different companies for reasons unrelated to overall operating performance. EBITDA should not be construed as an alternative to net profit or operating profit, as an indicator of operating performance, as an alternative to cash flow provided by operating activities or as a measure of liquidity (in each case, as determined in accordance with IFRS). EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies. The following table sets forth the reconciliation of our net profit to EBITDA on a consolidated basis.

 

     For the year ended December 31,  
     2015     2016     2017
Restated
    2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Net profit (loss)

     55.6       (451.6     209.2       57.4       (838.6     (252.8

Financial expense

     518.6       942.5       473.9       630.1       621.7       187.4  

Financial income

     (420.9     (762.7     (336.8     (433.0     (464.7     (140.1

Income tax

     78.7       (152.2     46.3       113.3       320.0       96.5  

Depreciation and amortization

     306.4       183.4       179.7       189.5       202.6       61.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     538.4       (240.5     572.3       557.3       (159.0     47.9  

 

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(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 1, 2019.

The following table shows a reconciliation of the EBITDA for our three segments, Parent company operations and intercompany eliminations:

 

     For the year ended December 31,  
     2015     2016     2017
Restated
    2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Engineering and construction

     231.3       19.3       120.0       19.2       2.9       0.9  

Infrastructure

     272.2       237.1       300.9       411.5       355.5       107.2  

Real estate

     52.8       121.4       177.3       241.0       76.2       23.0  

Parent company operations

     (34.1     (1,025.2     125.9       (27.8     (1,077.3     (324.8

Intercompany eliminations

     16.2       406.2       (151.8     (86.6     483.7       145.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     538.4       240.5       572.3       557.3       (159.0     (47.9

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

The following tables set forth the reconciliation of our net profit to EBITDA for each of our business segments and certain of our lines of business or subsidiaries within these segments. The effects of the termination of the GSP gas pipeline concession on our results of operations and financial condition for 2016 are reflected in Corporate (the Parent Company Operations) and, with respect to the related construction consortium (CCDS), in our E&C segment. Beginning on April 1, 2017, we transferred Concar from our Technical Services segment to our former Infrastructure segment. This change does not impact our consolidated financial results. For more information, see note 7 to our audited annual consolidated financial statements included in this annual report.

1. Engineering & Construction

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Net profit (loss)

     (48.8     (93.5     12.4       (85.4     (140.7     (42.4

Financial expense

     375.8       555.8       212.3       284.7       252.2       76.0  

Financial income

     (279.0     (505.0     (174.1     (217.0     (183.7     (55.4

Income tax

     15.2       (19.7     (0.9     (14.4     35.5       10.7  

Depreciation and amortization

     168.1       81.6       70.3       51.3       39.6       11.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     231.3       19.3       120.0       19.2       2.9       0.9  

 

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2. Infrastructure

2.1 Full Segment

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)

 

Net profit

     112.4       98.3       129.7       184.0       112.1       38.8  

Financial expense

     78.2       101.7       62.6       143.1       127.0       38.3  

Financial income

     (55.3     (92.0     (43.1     (123.1     (113.8     34.3  

Income tax

     46.5       39.9       55.2       80.5       80.2       24.3  

Depreciation and amortization

     90.5       90.0       96.9       126.8       150.0       45.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     272.3       237.8       300.9       411.5       355.5       107.2  

2.2 All Toll Roads

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)

 

Net profit

     53.5       44.9       55.0       29.2       (0.8     (0.2

Financial expense

     10.8       14.9       7.7       28.6       34.8       10.5  

Financial income

     (14.8     (9.6     (3.5     (7.2     (10.3     (3.1

Income tax

     18.8       15.5       20.9       8.8       6.9       2.1  

Depreciation and amortization

     10.9       11.1       11.0       42.9       46.6       14.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     79.2       76.8       91.1       102.3       77.4       23.3  

2.3 Mass Transit

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Net profit

     18.8       23.9       19.5       87.1       81.4       24.5  

Financial expense

     7.9       20.5       18.4       72.5       43.6       13.1  

Financial income

     (4.9     (25.8     (14.0     (87.0     (65.9     (19.9

Income tax

     8.1       10.9       9.5       38.0       39.6       11.9  

Depreciation and amortization

     0.1       0.1       0.1       0.2       0.3       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     30.0       29.6       33.5       110.8       99.2       29.9  

2.4 Energy

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Net profit

     20.2       12.0       38.1       65.0       52.8       15.9  

Financial expense

     50.3       61.7       34.8       37.9       46.1       13.9  

Financial income

     (30.5     (52.0     (23.3     (26.9     (34.9     (10.5

Income tax

     7.7       5.3       13.2       26.3       22.9       6.9  

Depreciation and amortization

     74.2       72.5       79.4       76.6       93.8       28.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     121.8       99.5       142.1       178.9       180.8       45.5  

3. Real Estate

 

     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Net profit

     29.3       77.2       117.7       157.8       23.74       7.1  

Financial expense

     47.7       65.1       36.0       25.2       58.8       17.7  

Financial income

     (36.8     (53.5     (17.7     (16.9     (20.3     (6.1

 

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     For the year ended December 31,  
     2015      2016      2017      2018      2019      2019  
     (in millions of S/)     

(in millions of

US$)(1)

 

Income tax

     7.6        27.1        35.9        69.2        7.0        2.1  

Depreciation and amortization

     4.9        5.6        5.3        5.7        7.0        2.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     52.8        121.4        177.3        241.0        76.2        23.0  

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

(2)

Our E&C segment EBITDA includes S/15.0 million, S/16.5 million, S/31.0 million, S/11.4 million and S/3.8 million in 2015, 2016, 2017, 2018 and 2019, respectively, which represents GyM’s 43.3% equity interest in Viva GyM’s net profit.

 

B.

Capitalization and Indebtedness

Not applicable.

 

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

D.

Risk Factors

Risks Related to Recent Developments (2017—2020)

The ongoing COVID-19 pandemic and government measures to contain the spread of the virus are disrupting economic activity in the countries where we operate and adversely affecting our business, results of operations and financial condition.

The recent outbreak of the Novel Coronavirus 2019 (COVID-19) pandemic, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the world since the end of 2019. The virus has spread significantly in Latin America to date, and we cannot assure you that the virus will not spread more widely in the region. In such event, the countries where we operate are likely to have less resources to address the health care effects of the pandemic. In response, countries around the world—including Peru as well as Chile and Colombia—have adopted extraordinary measures to contain the spread of COVID-19, including imposing travel restrictions, requiring closures of non-essential businesses, establishing restrictions on public gatherings, instructing residents to practice social distancing, issuing stay-at-home orders, implementing quarantines and similar actions. Depending on how the spread of the virus continues to evolve, governments may extend these measures for longer periods.

The COVID-19 pandemic and these government measures have significantly increased economic uncertainty and are likely to cause a global recession. Moreover, the impact of the pandemic on economic activity has been sudden and severe, and we cannot predict the extent to which economies in the countries where we operate will ultimately be impacted. Even if the initial outbreaks of COVID-19 subside, we cannot predict whether subsequent outbreaks will reoccur, or whether governments will implement longer-term measures that continue to affect economic activity and capital investment levels. As a result, the negative impact of COVID-19 may continue well beyond the containment of the virus. In response to the sudden decline in economic activity, governments around the world, including in Latin America, have announced large stimulus programs to assist families and businesses. However, we cannot assure you that these programs will be sufficient to reactivate economy activity; moreover, the governments in the countries where we operate are likely to have less resources to stimulate their local economies.

The COVID-19 pandemic is significantly and adversely affecting our business, results of operations and financial condition. From mid-March through the end of May 2020, substantially all of our engineering and construction and real estate projects were mandatorily shut down. Although certain projects are gradually resuming, we cannot assure you when we will be able to resume work on our projects in full. Our infrastructure operations, which have for the most part been declared essential businesses, have continued; however, certain of our infrastructure businesses have been adversely affected, in particular, by the sharp decline in traffic volumes and oil and gas prices (also due to the

 

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dispute in March among OPEC member countries). Our results and operations of the first quarter of 2020 were adversely impacted by the pandemic. We expect that our results of operations for the second quarter of 2020 will be significatively more impacted, as adverse conditions have persisted for a longer period during the second quarter. We are evaluating measures to reduce our expenses and preserve liquidity. However, depending on how long current conditions persist and unless we are able to benefit from government stimulus programs, the pandemic is likely to have a material adverse effect on our business, results of operation and financial condition.

Our reputation has been adversely affected by our association with Odebrecht’s affiliates in Peru

We participated in six construction and operation of infrastructure projects in Peru with affiliates of Odebrecht during the period from 2005 to 2017. Our reputation has been adversely affected as a result of the plea agreements and criminal convictions of Odebrecht and certain key persons related to Odebrecht in connection with corruption, money laundering and criminal organization. Peruvian authorities have initiated criminal investigations into the dealings of Odebrecht’s affiliates in Peru, the scope of which include certain consortia in which we participated. Moreover, as a result, our company and certain of our former directors and senior management are the subject of criminal investigations relating to corruption allegations. These investigations are ongoing.

In January 2019, Odebrecht executed a settlement and cooperation agreement with the Peruvian government regarding several infrastructure projects in the country, including certain projects in which we participated. Under the agreement, Odebrecht has agreed to pay compensation to the Peruvian government over the course of several years and to cooperate with, and provide evidence to, prosecutors in connection with ongoing investigations by the Peruvian government. Former senior officers of Odebrecht’s affiliate in Peru have indicated to Peruvian prosecutors that certain of our former directors and senior management were aware that Odebrecht had made corrupt payments to government officials in connection with certain projects in which we participated.

In December 2019, we entered into a preliminary settlement and cooperation agreement with the Peruvian anticorruption prosecutor and the ad hoc Peruvian state counsel in respect of investigations relating to past projects in which the company participated with Odebrecht and investigations relating to an alleged participation in the “construction club”. The terms of the preliminary settlement and cooperation agreement are confidential in accordance with Peruvian law and under discussion with Peruvian authorities.

Our reputation is a key factor in our clients’ evaluation of whether to engage our services, key industry players’ willingness to partner with us, financial institutions’ willingness to provide us credit, and recruiting and retaining talented personnel to our company. The impact on our business reputation related to our association with Odebrecht and the alleged actions of our former board members and senior management has had, and is likely to continue to have, a material adverse effect on our business, financial condition and results of operations. The outcome of the ongoing investigations and settlement discussions, any new charges or news reports containing new allegations against the company, or other similar developments, could further damage the reputation of the company.

Investigations regarding potential corruption or other illegal acts could have a material adverse effect on our business, financial condition and results of operations

Our company and certain of our subsidiaries, and certain of our former directors and senior management, have been charged in connection with criminal and civil investigations relating to certain of our projects in connection with our association with Odebrecht and in connection with our alleged participation in what is referred to as the “construction club.”

In connection with investigations relating to the IIRSA South project concession (tranche II), the Peruvian criminal prosecutor moved to charge our company and our construction subsidiary, GyM, as criminal defendants in connection with the project. In response, the Peruvian First National Preparatory Investigation Court (Primer Juzgado de Investigación Preparatoria Nacional) notified us of its decision to formally include our company and GyM in its criminal investigation. We appealed the court’s decision and, in June 2018, the First Court of Appeals of the Superior Court of Lima revoked the judicial order that indicted our company and GyM, among other corporate defendants, in the criminal investigation on charges of collusion and other crimes and rejected the petition, without prejudice, made by the prosecutor to incorporate both companies in the aforementioned process. Nevertheless, in February of 2020, we were notified that the criminal prosecutor had filed a new motion to bring criminal charges against our company and GyM in connection with the IIRSA South project concession (tranche II). We cannot predict the outcome of this motion.

 

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Separately, in connection with these investigations, in December 2018, the Peruvian First National Preparatory Investigation Court resolved to include our company and GyM as civilly-responsible third parties in the investigations related to the IIRSA South project concession (tranche II) and GyM as a civilly-responsible third party in the investigations related to Tranches 1 and 2 of the Lima Metro. These proceedings are ongoing.

Peruvian prosecutors have included José Graña Miró Quesada, a shareholder and the former Chairman of our company, in an investigation for the crime of collusion, and Hernando Graña Acuña, a shareholder, a former board member of our company and former chairman of our subsidiary GyM, for the crime of money laundering against the Peruvian government, each in connection with the IIRSA South project concession (tranche II), in which we participated with Odebrecht. Gonzalo Ferraro Rey, the former Chief Infrastructure Officer of our company, has also been included in an investigation for the crime of money laundering in connection with the same project. In addition, José Graña Hernando Graña, as well as Juan Manuel Lambarri, the former chief executive officer of our subsidiary GyM, have been charged in connection with Tranches 1 and 2 of the Lima Metro project. In August 2019, José Graña indicated in public statements to the media that he and Hernando Graña had initiated a process of plea bargaining with Peruvian prosecutors in respect of multiple projects in which our company participated with Odebrecht and in respect of the alleged “construction club.” According to José Graña’s public statements, in the plea bargaining process, both he and Hernando Graña are cooperating with the Peruvian prosecutor, which may include providing information related to wrongdoing or knowledge of improper behavior while they were at the company. However, given the confidential nature of these proceedings, the reported information is limited and difficult to verify. We cannot assure you what they will ultimately say to the government, or that their statements will not adversely affect the company’s business.

A conviction of corruption or settlements with government authorities could lead to criminal and civil fines as well as penalties, sanctions, injunctions against future conduct, profit disgorgement, disqualifications from directly and indirectly engaging in certain types of business, the loss of business licenses or permits, debarment from contracting or from participating in bidding processes with the Peruvian government, or other restrictions. Moreover, our alleged involvement in corruption investigations, and any findings or admissions of wrongdoing in such investigations, could further damage our reputation and have a material adverse impact on our ability to compete for business. In addition, such investigations may affect the company’s ability to secure financing in the future. Furthermore, investigations could continue to divert management’s attention and resources from other issues facing our business.

In May 2018, Peruvian Supreme Decree No. 096-2018-EF set forth guidelines to determine the value of assets to be put in trust to guarantee eventual compensation to the Peruvian government that is required for companies that have been partners of companies that have been, or whose officers or representatives have been, convicted of, or have admitted to, corruption, money-laundering or similar crimes, which includes our company and our subsidiary GyM. Following discussions with the Peruvian government, in February 2019, we established a trust in favor of the Peruvian government in respect of any liabilities arising from Tranches 1 and 2 of the Lima Metro project and Tranche II of the IIRSA project, to which we assigned shares of our subsidiary GMI, which is estimated to be worth approximately US$23.4 million (S/79.1 million). We cannot assure you that the Peruvian government will not claim the assets set forth in this trust or require that our company place additional assets in trust, nor can we assure you that these assets will fully satisfy any eventual obligations we may have to the Peruvian government.

Management has estimated the value of the company’s contingencies to be approximately US$84.4 million (S/279.8 million), and taking into account the net present value, established a provision in the company’s financial statements in the amount of US$46.6 million (S/153.9 million). This includes amounts in respect of probable liabilities arising from the investigations of Tranche II of the IIRSA project, Tranches 1 and 2 of the Lima Metro project, the GSP project and the “construction club” investigation (described below). We cannot provide assurance that our liability will not exceed the amount estimated by management and provisioned for in the financial statements of the company. Furthermore, if the company is further charged in connection with wrongdoing in respect of other projects, this contingent amount could increase significantly.

 

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We cannot assure you that the scope of the foregoing proceedings will not be expanded to incorporate other projects in which we have been involved, that our company will not be included in other investigations or proceedings as a criminal defendant or civilly-responsible third party in Peru or elsewhere, or that other of our former or current directors and senior management will not be included in the foregoing proceedings. We continue to evaluate alternatives to resolving ongoing investigations against our company and our subsidiary GyM, including the negotiation of a settlement and cooperation agreement with Peruvian authorities. However, we cannot assure you that these investigations will be resolved in a manner that is favorable to our company.

INDECOPI and Peruvian prosecutors have initiated investigations alleging that certain construction companies in Peru, including our company, colluded to receive public contracts

The Peruvian National Institute for the Defense of Free Competition and the Protection of Intellectual Property (“INDECOPI”) initiated in 2017 investigations regarding allegations that certain construction companies in Peru, including our subsidiary GyM, colluded as a “construction club” to receive public contracts. In February 2020, INDECOPI initiated an administrative proceeding against several construction companies, including our subsidiary GyM, aiming to impose civil fines on the investigated companies.

Separately, in December 2018, GyM was formally included as a civilly-responsible third party, along with eleven other construction companies, in the criminal investigation conducted by a Peruvian public prosecutor based on facts similar to those under investigation by INDECOPI. In December 2019, the prosecutor criminally charged GyM and another of our subsidiaries, CONCAR, and other companies in the construction sector in Peru, as well as a former director and senior management of our company, with collusion and other alleged crimes. As described above, the company’s management has made estimates, and established provisions, in the company’s audited consolidated financial statements for the investigations in respect of the company and its subsidiaries, including in respect of the company’s alleged participation in what is referred to as the “construction club”. We cannot provide assurance that our liability will not exceed the amount estimated by management and provisioned for in the financial statements of GyM and CONCAR. Furthermore, if GyM, CONCAR or any other subsidiary of the company is further charged in connection with wrongdoing in respect of other projects, this contingent amount could increase significantly.

We cannot assure you that any of our company’s other current or former directors or senior management will not be included in these investigations or proceedings in the future, nor can we predict the outcome of any such investigations or proceedings, the timing thereof or how they may impact our business, financial condition and results of operations. We also cannot predict whether prosecutors or INDECOPI will bring additional investigations or proceedings in the future. We continue to evaluate alternatives to resolving ongoing investigations against our subsidiaries GyM and CONCAR, including the negotiation of a settlement and cooperation agreement with Peruvian authorities. However, we cannot assure you that these investigations will be resolved in a manner that is favorable to our company.

A conviction of corruption or settlements with government authorities could lead to criminal and civil fines as well as penalties, sanctions, injunctions against future conduct, profit disgorgement, disqualifications from directly and indirectly engaging in certain types of business, the loss of business licenses or permits, debarment from contracting or from participating in bidding processes with the Peruvian government, or other restrictions.

We are currently negotiating a settlement and cooperation agreement with Peruvian authorities in connection with the criminal investigations against our company

In December 2019, we entered into a preliminary settlement and cooperation agreement with the Peruvian anticorruption prosecutor and the ad hoc Peruvian state counsel in respect of investigations relating to past projects in which the company participated with Odebrecht and investigations relating to an alleged participation in the “construction club”. The terms of the preliminary settlement and cooperation agreement are confidential in accordance with Peruvian law and under discussion with Peruvian authorities.

Although in the preliminary settlement and cooperation agreement, the Peruvian government undertook to enter into a final settlement and cooperation agreement within sixty business days, we have not reached a final agreement, and the parties continue to discuss the terms of the settlement. Although we expect to reach a final

 

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agreement with the government, we cannot guarantee that the government will execute the agreement within a reasonable time frame or at all, nor can we guarantee that any final settlement and cooperation agreement will be executed on terms favorable to the company. In particular, we cannot provide assurances that the government will not require compensation in an amount materially greater than the amount we have estimated and provisioned; that our company will be able to pay any compensation required pursuant to the terms of any final settlement and cooperation agreement; or a final settlement and cooperation agreement will not contain measures that restrict the company’s business in the future, including limitations on the company’s ability enter into contracts with the Peruvian government. We also cannot guarantee what impact any settlement and cooperation agreement, which may require admission of wrongdoing, will have on our reputation.

A class action civil lawsuit in the United States may adversely affect our company

A class action civil lawsuit was filed in 2017 against our company and certain of our former directors and former and current executive officers in the United States. In February 2020, we executed a term sheet with the plaintiffs that provides the general terms and conditions for a final settlement agreement. The term sheet stipulates a settlement amount of US$20 million plus interest after a certain time period. The company recorded provisions of US$15 million as of December 31, 2019, and the remaining US$5 million is expected to be covered by the company’s D&O insurance. It is not certain whether the negotiation of a final settlement agreement will be successful, and if so, whether any such agreement will be approved by the court. In such case, we would expect the lawsuit to resume.

If the lawsuit continues to be litigated, we cannot assure you that our position will prevail. If our position does not prevail, the lawsuit may have a material adverse effect on our business, financial condition and results of operations.

There is substantial uncertainty with regard to the amount, timing and manner in which the payment for the termination of the GSP gas pipeline concession will be paid

There is substantial uncertainty with regards to the payment contemplated under the GSP gas pipeline concession contract as a result of the termination of the gas pipeline concession, including with respect to the amount, timing and manner in which the payment will be made, or if it will be made at all.

Although the concession contract provides that payment must be made within one year of termination, the Peruvian Ministry of Energy and Mines has not made payment or, to our knowledge, initiated the payment process or the auction process for a new concessionaire. As a result, after the six-month period mandated by the concession contract for the parties to discuss the matter, in October 2019, we asserted our rights against the Peruvian government by filing a request for arbitration before the International Centre for Settlement of Investment Disputes. However, in December 2019 we withdrew our request for arbitration, as required by Peruvian authorities under the preliminary settlement and cooperation agreement we entered into with Peruvian anticorruption prosecutor and the ad hoc Peruvian state counsel.

As of the date of this annual report, we are analyzing available contractual and legal options to recover as a creditor of GSP. However, we cannot guarantee that any of these options will be successful, or that we will be able to recover all or any of the amounts owed to the company as a result of the termination of the GSP gas pipline concession on a timely basis, or at all. Failure to receive the expected payment on a timely basis, or at all, would have a material adverse effect on our business, financial condition and results of operations.

We have made certain estimates in our consolidated financial statements with respect to the expected payment for the termination of the GSP contract. As of December 31, 2019, we fully impaired the remaining amount of our investment in GSP. However, we maintain S/544 million (US$164 million) in long-term account receivables as a creditor of GSP.

 

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Our inability to provide audited financial statements for GSP in accordance with Rule 3-09 may result in enforcement actions by the SEC or may, among other matters, cause us to be unable to complete a public offering in the United States

We have been unable to provide certain financial statements of GSP that are required by Rule 3-09 to be included in our company’s annual report. Under Rule 3-09, we are required to present or generate financial statements of GSP as of December 31, 2015 and for the period from November 2, 2015 to December 31, 2015, as of and for the year ended December 31, 2016 and as of and for the year ended December 31, 2017, with the financial statements of GSP as of and for the year ended December 31, 2016 audited in accordance with the standards of the Public Company Accounting Oversight Board. It is currently impracticable for our company to comply with this requirement, because the audit opinion that was issued with respect to GSP’s 2016 financial statements included a disclaimer, our company’s loss of significant influence over GSP, and GSP’s limited management as the entity is in insolvency proceedings.

We believe that the information presented by separate financial statements of GSP would not provide to our company’s investors additional material information not already included in our company’s own consolidated financial statements included in this annual report. As a result, we do not believe that the omission of those financial statements will have a material impact on a reader’s understanding of our financial condition or results of operations. Nevertheless, we requested a waiver from the SEC from the requirement to file the consolidated financial statements of GSP described above, and the SEC has not granted our waiver request.

As a result, we are currently not fully compliant with our reporting requirements with the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). The SEC may impose penalties or otherwise take action against our company. In addition, the SEC may not declare effective any registration statement that we file that requires the financial statements under Rule 3-09 to be included. If, as a result, we are unable to complete a registered offering, our ability to access the public capital markets in the United States would be impaired. Furthermore, the Rule 144 safe harbor for certain sales of our ADSs in the United States is currently unavailable.

We were in default under certain of our debt instruments during 2017, 2018 and 2019, and we cannot assure you that we will not be in default under our debt instruments in the future, or that we will be able to obtain additional waiver in the event of any future defaults

In 2019, our subsidiary Adexus entered into Chilean bankruptcy proceedings to restructure its outstanding indebtedness and, as a result, we were in default under our loan agreement with CS Peru Infrastructure Holdings LLC. We received a waiver for the default on February 28, 2020. As a result, this indebtedness of US$35 million was recorded as a current liability as of December 31, 2019, of which US$10 million was repaid at the time of the waiver. Also during 2019, our construction subsidiary GyM was under a continuing default under the Financial Stability Framework Agreement with respect to its failure to comply with certain ratios between Tranche A (client invoices) and Tranche B (client provisions). No event of default was formally notified to GyM by the lenders, and GyM procured a waiver from the lenders in July 2019. In addition, during the years 2017 and 2018 we were in default under certain of our debt instruments, including due to: delays in delivering audited financial statements; defaults with respect to certain financial ratio and other covenants; and delays in paying certain amounts outstanding. We procured waivers from our creditors under such instruments.

We cannot assure you that we will not breach the covenants under these or other of our debt instruments in the future and, in such event, that we would be able to obtain the required waivers from our creditors. Failure to successfully obtain waivers could force us to precipitate the sale of assets, including on unfavorable terms, to repay these debt instruments. Moreover, if we are not able to renegotiate the terms of any debt instruments in which we are in default, or repay them promptly, our ability to obtain financings, including performance guarantees or similar financings required under many of our business contracts, would be impaired, which may have a material adverse effect on our business, financial condition and results of operations.

We may be unable to access financing that we need to operate our business on favorable terms or at all

Due to uncertainty relating to the investigations of our company, our creditors and other banks operating in the Peruvian market have placed restrictions on our ability, and the ability of other construction companies, to acquire future credit lines or other financings. We cannot assure you that we will be able to obtain new financings in the future on favorable terms or at all. We may encounter difficulties in obtaining performance bonds or credit support that we require to secure, among other things, bids, advance payments and performance for our projects.

 

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Our ability to obtain financings will also depend in part upon prevailing conditions in credit and capital markets, which are beyond our control. Emerging markets have been affected by changes in the U.S. monetary policy, resulting at times in a withdrawal of investments and increased volatility in the value of their currencies. If interest rates rise significantly in the United States, emerging market economies, including Peru, could find it more difficult and expensive to borrow capital and refinance existing debt. Higher interest rates globally or in Peru would in turn impact our costs of funding.

Currently, volatility and instability due to the ongoing COVID-19 pandemic and government measures to contain the spread of the virus also has, and may continue to, negatively affect the general willingness of lenders to extend credit. At the same time, the COVID-19 pandemic has also put further pressure on our liquidity needs, including for short-term working capital; from mid- March through the end of May, substantially all of our engineering and construction and real estate projects have been mandatorily shut down, and, although work on many of our projects will begin to resume generally, we cannot assure you when we will be able to resume work on our projects in full.

An inability to procure adequate financing or credit on favorable terms or all could have a material adverse effect on our business, financial condition and results of operation.

We may not be able to sell assets on favorable terms or at all

As part of our strategic action plan in response to the termination of the GSP gas pipeline concession, our board of directors approved the sale of certain non-strategic assets, in order to raise funds to make payments in respect of debt related to the termination of the GSP gas pipeline concession. In 2017 and 2018 we undertook multiple divestitures. In addition, we continue marketing for sale our subsidiary Adexus. Moreover we are also evaluating the sale of additional assets, including part of our land bank, which we do not consider to be strategic to our business, to meet our liquidity needs. However, we cannot assure you that we will be able to continue to sell assets on favorable terms or at all. If we are not able to sell assets on a timely basis, our ability to address our liquidity needs may be adversely affected. Conversely, if we sell significant assets, our business and results of operations will be diminished.

We may be subject to takeover transactions, and we cannot assure you that any such transaction, if it were to occur, would be favorable to our shareholders.

We may be increasingly subject to takeover actions, including as a result of uncertainties relating to the ongoing investigations and the effects of the COVID-19 pandemic. In November 2019, IG4 Investimentos Ltda, a Brazilian hedge fund, announced its intention to acquire a significant stake in our company, indicating that it had signed a memorandum of understanding with certain former directors and other shareholders and that it was interested in undertaking a partial public tender offer. Since that announcement, we have received due diligence inquiries from IG4 Investimentos Ltda, which we have responded on the basis of public information. We cannot assure you that IG4 Investimentos Ltda, or any other offeror, will launch (and if launched, consummate) a public tender offer or other acquisition of company securities. If IG4 Investimentos Ltda, or any other offeror, does launch a tender offer or other acquisition transaction, we cannot assure you that the consideration, or other terms and conditions offered to our shareholders pursuant to any tender offer or other acquisition transaction will be favorable to our shareholders. If IG4 Investimentos Ltda, or any other offeror, acquires a significant stake in, or control of, the company, we cannot assure you that the interests of such new controlling or significant shareholders will be aligned with those of the company’s other shareholders.

Risks Related to Our Company

Global economic conditions could adversely affect our financial performance

Global economic conditions, in particular fluctuations in commodity prices and financings costs, may impact our clients’ investment decisions. Should our clients choose to postpone or suspend new investments or delay or cancel the execution of existing projects as a result of global economic conditions, demand for our products and services

 

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would decline, which may result in a decline in revenues and in under-utilization of our capacity. Since mid-March of 2020, the ongoing COVID-19 pandemic has disrupted economic activity and is likely to cause a global recession. In addition, our business may be impacted by adverse economic developments even after economic conditions have improved because of the lag time between when investments decisions are made and when the projects are executed. Furthermore, financial difficulties suffered by our clients, joint operation partners, subcontractors or suppliers due to global economic conditions could result in payment delays or defaults, or increase our costs or adversely impact our project execution. Accordingly, a global economic downturn could have a material adverse effect on our financial performance.

We face significant competition in each of our markets

Each of the markets in which we operate is competitive. We compete on the basis of, among other factors, price, performance, product and service quality, skill and execution capability, client relations, reputation and brand, and health, safety and environmental record. We face significant competition from both local and international players. Some of these competitors may have greater resources than us or specialized expertise in certain sectors. In addition, a portion of our business is derived from open bidding processes which can be highly competitive. Certain of our markets are highly fragmented with a large number of companies competing for market share. Our competitors may be more inclined to take greater or unusual risks or accept terms and conditions in a contract that we might not deem acceptable. Moreover, we cannot assure you that we will not face new competition from industry players entering or expanding their operations in our markets. If we are unable to compete effectively, our ability to continue to grow our business or maintain our market share would be affected. In addition, because one of the factors on which we generally compete is price, increased competition could impact our operating margins. Accordingly, our business and financial performance could be adversely affected by competition in our markets.

A major change in government policies could affect our business

Our business is significantly affected by national, regional and municipal government policies and regulations in the countries where we operate, including with respect to infrastructure concessions or similar contracts to the private sector, public spending in infrastructure investment and government housing subsidies, among others. Any adverse change in government policies with respect to these matters could result in a material adverse effect on our business and financial performance. Recently, as a result of the ongoing COVID-19 pandemic, the Peruvian government has recently temporarily shut down substantially all construction activity. Additionally, the Peruvian Congress has suspended the payment of tolls on roads during the period of quarantine.

Social conflicts may disrupt infrastructure projects

Despite Peru’s ongoing economic growth and stabilization, high levels of poverty and unemployment and social and political tensions continue to be pervasive problems in the country. Peru has, from time to time, experienced social and political turmoil, including riots, nationwide protests, strikes and street demonstrations. In recent years, certain regions experienced strikes and protests related mainly to the environmental impact of mining activities, which resulted in commercial disruptions. These protests may lead to the suspension of mining projects. Social conflicts may disrupt, delay or suspend infrastructure projects in the future, which could have a material adverse effect on our business and financial performance.

In addition, beginning in October 2019, Chile has suffered from widespread social unrest and vandalism that has had a significant economic and political impact on the country. As a result, the Chilean congress convened a plebiscite initially to be held in March 2020 to determine whether constitutional amendments should be implemented. The vote has been postponed to October 2020 as a result of the COVID-19 pandemic. This process may result in further social unrest and protest and could also result in substantial structural changes in Chile that could adversely impact the private sector, including our operations in the country.

Additionally, beginning in November 2019, Colombia has experienced civic unrest in the form of a national strike and anti-government protests. As such, our Colombian operations could be adversely impacted by changing economic, political and social conditions in Colombia and by the Colombian government’s response to such conditions.

 

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New projects may require the prior approval of local indigenous communities

Peruvian Law No. 29,785, regarding the Prior Consultation Right of Local Indigenous Communities, which was enacted in accordance with the International Labor Organization Convention No. 169 (Ley del Derecho a la Consulta Previa a los Pueblos Indígenas y Originarios, Reconocido en el Convenio 169 de la Organización Internacional del Trabajo), establishes a prior non-binding consultation procedure (procedimiento de consulta previa). Under this law the Peruvian government must carry out consultation procedures with local indigenous communities, whose rights may be directly affected by new legislative or administrative measures, including the granting of certain permits or new concessions or similar contracts, such as for mining, energy and oil and gas projects. Local indigenous communities do not have a veto right; and therefore, upon completion of this prior consultation procedure, the Peruvian government retains the discretion to approve or reject the applicable legislative or administrative measure. However, we cannot assure you that these consultation procedures will not negatively influence a decision by Peruvian government to grant us a permit, concession or consent and, therefore, adversely affect new projects and concessions. Accordingly, our business and financial performance may be materially and adversely affected.

Our backlog and our ratio of historical backlog to revenues may not be reliable indicators of future revenues or profit

The amount of our backlog is not necessarily indicative of future revenues or profits related to the performance of the related contracts. Our backlog amount is subject to revision over time and our ability to realize revenues from our backlog is subject to a number of uncertainties. Cancellations, scope adjustments or deferrals may occur, from time to time, with respect to contracts reflected in our backlog and could reduce the amount of our backlog and the revenue and profits that we actually earn. For example, the termination of the GSP gas pipeline concession on January 24, 2017 reduced our backlog as of December 31, 2016 by US$855 million, 30.2% of our E&C backlog and 21.4% of our total backlog as of that date. Contracts may also remain in our backlog for an extended period of time and poor performance could also impact our profit from the contracts in our backlog. In addition, our backlog is expressed in U.S. dollars based on period-end exchange rates while a significant portion of our contracts are payable in soles or other local currencies. As a result, any depreciation of local currency would diminish the amount of revenues eventually earned relative to backlog.

Our backlog may decline in the future. We cannot assure you that we will be able to obtain sufficient contracts in the future in number and magnitude to increase our backlog. Additionally, the amount of new contracts that we obtain can fluctuate significantly from period to period due to factors that are beyond our control.

Moreover, the ratio of our historical backlog to revenues earned in subsequent years is volatile and substantially affected by a number of factors, some of which are outside our control, including levels of contract scope adjustments and our ability to enter into new contracts (which are substantially influenced by general macroeconomic conditions), delays and cancellations, foreign exchange rate movements and our ability to increase the scale of our operations to expand the amount of work we carry out beyond that previously contracted. Accordingly, historical correlations between backlog and revenues may not recur in future periods.

Our success depends on key personnel

Our success depends, to a significant degree, upon the services of our senior management, board of directors and other key personnel. Members of our management team are not subject to non-competition agreements with us. We cannot assure you that we will be successful in retaining our current senior management or members of our board of directors, nor can we assure you that, in such event, we would be able to find suitable replacements. In addition, the success of our business depends on our ongoing ability to attract, train and retain qualified engineers and other personnel. In recent years, the availability in Peru of qualified personnel who have the necessary expertise and experience has been lower than demand and, therefore, competition for human resources has become intense. We cannot assure that we will be able to hire and retain the number of qualified personnel required to meet the needs of, or to grow, our business. If we are unable to attract, train and retain the qualified personnel that we require at reasonable cost, our business and financial performance could be adversely affected.

 

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Our success depends, to a large extent, on our reputation for the quality, reliability, timely delivery and safety of our products and services

We believe our track record and reputation are key factors in our clients’ evaluation of whether to engage our services and purchase our products, encouraging key industry players to partner with us, and recruiting and retaining talented personnel to our company. Our reputation is based, to a large extent, on the quality, reliability, timeliness and safety of our products and services. If our products do not meet expected standards or we fail to meet our deadlines, our relationship with our clients and partners could suffer, the reputation of our company could be adversely affected, we may not be invited to new bidding processes and our ability to capture new business could be severely diminished.

The nature of our business exposes us to potential liability claims and contract disputes

We may be subject to a variety of legal or administrative proceedings, liability claims or contract disputes. The government, clients and other third parties may present claims against us for injury or damage caused, directly or indirectly, by our operations, for example for alleged failures in our engineering and construction, the operation of our infrastructure concessions (such as our toll roads or the Lima Metro), and real estate developments we sell. Although we have a range of insurance coverage policies and have adopted risk management and risk avoidance programs designed to reduce potential liabilities, a catastrophic event resulting from the services we have performed or products we have provided could result in significant professional or product liability, warranty or other claims against us as well as reputational harm, especially if public safety is impacted. We may in the future be named as a defendant in legal proceedings where our clients or third parties may make a claim for damages or other remedies with respect to our projects or other matters. Any liability not covered by our insurance, or in excess of our insurance limits, could result in a significant loss for us, which may affect our financial performance.

We are susceptible to operational risks that could affect our business and financial performance

Our business is subject to numerous industry-specific operational risks, including natural disasters, adverse weather conditions, operator error or other accidents, mechanical and technical failures, explosions and other events and accidents, many of which are beyond our control. Such occurrences could result in injury or loss of life, severe damage to and destruction of property and equipment, business interruption, pollution and other environmental damage, clean-up responsibilities, regulatory requirements, investigations and penalties, potential liability claims and contractual disputes. In addition, such occurrences could materially impact our reputation. Although we maintain comprehensive insurance covering our assets and operations at levels that our management believes to be adequate, our insurance coverage will not be sufficient in all circumstances or to protect against all hazards. The occurrence of such an operational risk could have a material adverse effect on our business and financial performance.

Deterioration in our safety record could adversely affect our business and financial performance

Our ability to retain existing clients and attract new business is dependent on our ability to safely operate our business. Existing and potential clients consider the safety record of their services providers to be of high importance in their decision to award service contracts. Some of our activities, in particular in our E&C segment, can be high risk by their nature. If one or more accidents were to occur at a site, the affected client may terminate or cancel our contract and may be less likely to continue to use our services. Although our track record on safety matters is consistent with industry standards, we cannot assure you that we will not experience accidents in the future, causing our safety record to deteriorate. Accidents may be more likely as we continue to grow, particularly if we are required to hire less experienced employees due to shortages of skilled labor. Moreover, often times we do not perform these activities by ourselves and accidents can happen due to errors committed by partners and subcontractors over whom we have no control. Because many of our clients require us to report our safety metrics to them as part of the bidding process and because a substantial part of our client base is comprised of major companies with high safety standards, a general deterioration in our safety record could have a material adverse impact on our business including our ability to bid for new contracts.

Any safety incidents or deterioration in our safety record could adversely impact our ability to attract and retain qualified employees. In addition, we could also be subject to liability for damages as a result of accidents and could incur penalties or fines for violations of applicable safety laws and regulations.

 

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Increases in the prices of energy, raw materials, equipment or wages could increase our operating costs

Our business requires significant purchases of energy, raw materials and components, including, among others, large quantities of fuel, cement and steel, as well as purchases or leases of equipment. Certain inputs used in our operations are susceptible to significant fluctuations in prices, over which we may have little control. The prices of some of these inputs are affected to a significant extent by the prices of commodities, such as oil and iron. Global oil prices increased in 2017, decreased in 2018, increased in 2019 but declined precipitously in March 2020 as a result of a dispute among OPEC members about global prediction levels and the effect on demand caused by the disruption of economic activity associated with the ongoing COVID-19 pandemic. We cannot assure you that oil prices will remain low in the future (although increased oil prices would benefit revenues in our Energy line of business). Substantial increases in the prices of such commodities generally result in increases in our suppliers’ operating costs and, consequently, lead to increases in the prices they charge for their products. Moreover, we do not have long-term contracts for the supply of our key inputs, and, as a result, if prices increase significantly or if we are required to find alternative suppliers, our costs to procure these inputs may increase significantly. In addition, growing demand for labor, especially when coupled with shortages of qualified employees in the countries where we operate, may result in significant wage inflation. To the extent that we are unable to pass along to our clients increases in the prices of our key inputs or increases in the wages that we must pay, our operating margins could be materially adversely impacted.

We may not be able to recover on claims against clients for payment

If a client fails to pay our invoices on time or defaults in making its payments to us, we could incur significant losses. We occasionally bring claims against clients for delayed payments, additional costs that exceed the contract price or for amounts not included in the original contract price, including change orders. These types of claims can occur due to matters such as owner-caused delays or changes from the initial project scope, and, occasionally, they can be the subject of lengthy proceedings. When these types of events occur and unresolved claims are pending, we may invest significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. Moreover, we have recently encountered difficulties collecting on claims, even following successful arbitration awards, particularly against the government. A failure to promptly recover on these types of claims and change orders could have a material adverse effect on our financial performance.

If we are unable to enter into consortia or other strategic alliances, our ability to compete for new business may be adversely affected

We may join with other companies to form joint operations or other strategic alliances to compete for a specific concession or contract, including with partners that contribute expertise in a specific field. Because a consortium or alliance can often offer stronger combined qualifications than a company on a stand-alone basis, these arrangements can be important to the success of a particular bid. If we are unable to enter into consortia or other strategic alliances, our ability to compete for new business may be adversely affected.

Our consortia and other strategic alliances may be affected by disputes with, or the unsatisfactory performance by, our partners

Although we have a thorough partner selection process, consortia and other strategic alliances that we enter into as part of our business, including arrangements where operating control may be shared with unaffiliated third parties, may involve risks not otherwise present when we operate independently, including: sharing approval rights over major decisions; responsibility for our partners’ unpaid obligations or liabilities; ensuring ethical and compliance behavior; and inconsistencies in our and our partners’ economic or business interests or goals. Any disputes between us and our partners may result in delays, litigation or operational impasses. We may also incur liabilities as a result of action taken by our partners. In addition, if we participate in consortia or other strategic alliances where we are not the controlling party, we may have limited control over operational, financial and other management decisions and actions and the success of the consortium or other strategic alliance will depend largely on the performance of our partners. These risks could adversely affect our ability to transact the business of such consortium or other strategic alliance, and could result in the termination of the applicable concession or contract. Under these circumstances, we may be required to make additional investments and provide additional services to ensure adequate performance and delivery. These additional obligations could result in reduced profits or, in some cases, increased liabilities or significant losses for us. In addition, failure by a partner to comply with applicable laws or regulations could negatively

 

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impact our business and, in the case of government contracts, could result in fines, suspension or even debarment from participating in bidding processes. As a result, our business and financial performance could be adversely affected by disputes involving our consortia or other strategic alliances.

We are dependent upon third parties to complete many of our contractual obligations

We rely on third-party suppliers to provide a significant amount of the materials and equipment used in our businesses. A portion of the work performed under our infrastructure concessions and, to a lesser extent, other contracts is performed by third-party subcontractors. As a result, the timely completion and quality of our projects may depend on factors beyond our control, including the quality and timeliness of the delivery of materials supplied for use in the project and the technical skills of subcontractors hired for the project. If we are unable to find qualified suppliers or hire qualified subcontractors, our ability to meet our contractual obligations could be impaired. In addition, if the amount we are required to pay for supplies, equipment or subcontractors exceeds what we have estimated, we may suffer losses under our contract. If a supplier or a subcontractor fails to provide supplies, equipment or services as required under a negotiated arrangement for any reason, or provides supplies, equipment or services that are not of an acceptable quality, we may be required to source those supplies, equipment or services on a delayed basis or at a higher price than anticipated, which could impact our financial performance. In addition, faulty materials or equipment could result in claims against us for failure to meet contractual specifications, and failure by suppliers or subcontractors to comply with applicable laws and regulations could negatively impact our reputation and our business and, in the case of government contracts, could result in fines, suspension or even debarment from participating in bidding processes. These risks may be intensified during economic downturns if these suppliers or subcontractors experience financial difficulties. As a result, our business and financial performance may be adversely affected by our dependence on third-party providers.

Failure to comply with, or changes in, laws or regulations could have a material adverse effect on our business and financial performance

We operate in highly regulated industries. Our business and financial performance depends on our and our clients’ ability to comply on a timely and efficient basis with extensive national, regional and municipal laws and regulations relating to, among other matters, environmental, health and safety, building and zoning, labor, tax and other matters. The cost of complying with these laws and regulations can be substantial. In addition, compliance with these laws and regulations can cause scheduling delays. Although we believe we are in compliance with applicable laws and regulations in all material respects, including our concessions or similar contractual obligations, we cannot assure you we have been or will be at all times in full compliance. Failure by us or our clients to comply with these laws and regulations, or our concessions or similar contractual obligations, could result in a range of adverse consequences for our business, including subjecting us to significant fines, civil liabilities and criminal sanctions, requiring us to comply with costly restorative orders, the shutdown of operations, and revocation of permits and termination of concessions or similar contracts. In addition, we cannot assure you that future changes to existing laws and regulations, or stricter interpretation or enforcement of existing laws and regulations, will not impair our ability to comply with such laws and regulations or increase our compliance costs.

We may be held liable for environmental damage caused by our operations

The nature of certain of our operations requires us to assume risks of causing environmental and other damages. We may be held liable for the environmental damage we cause, including the incidental consequences of human exposure to hazardous substances or other environmental damage. We may be subject to clean up costs or penalties in the event of certain discharges into the environment and/or environmental contamination and damage. Our environmental liability insurance may not be sufficient or may not apply to certain types of environmental damage. Any substantial liability for environmental damage could have a material adverse effect on our financial performance.

New environmental regulation as a result of climate change could impact our business and financial performance

Growing concerns about climate change could result in the imposition of additional or more stringent environmental requirements or regulations. For example, there are ongoing international efforts to address greenhouse emissions, such as the Kyoto Protocol or the more recent Paris Agreement, which are in various stages of negotiation

 

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and implementation. If more stringent environmental regulation is adopted in the countries where we operate, we may be obliged to incur higher expenditures than anticipated, adversely affecting our financial performance. In addition, future remediation requirements in the event that we are found responsible for environmental damage may be substantial and could impact our financial condition. Moreover, more stringent environmental regulation could increase the costs of projects for our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the demand for our services. Accordingly, new environmental regulation could have a material adverse effect on our business and financial performance.

We may not be able to effectively protect ourselves against financial market risks

Our operations are exposed to financial market risks, such as risks related to exchange rates, commodity prices and interest rates. Fluctuations in currency, commodity prices or interest rates could adversely affect our financial performance. We cannot assure you that derivative financial instruments, if any, will protect us from the adverse effects of financial market risks. While hedging transactions are intended to reduce market risks, such transactions may expose us to other risks, such as counterparty risk. We may not be able to adequately protect ourselves against financial market risks and may not ultimately achieve an economic benefit from our hedging strategy.

The loss of a key client in some of our lines of business may affect our business and financial performance

In some of our lines of business, such as our Infrastructure segment, a substantial amount of the revenue we receive is concentrated among a limited number of clients, including the Peruvian government. If one or more of these major clients fail or delay in paying our fees, or if there is a significant reduction or cancellation of business by one or more of these major clients, our business and financial performance may be adversely affected. If we are not able to capture new clients to replace the loss of business from existing key clients, our financial performance may be adversely affected.

Our use of the percentage-of-completion method of accounting for our Engineering and Construction segment could result in a reduction of previously recorded profits

In accordance with IFRS, we measure and recognize a large portion of our revenues under the percentage-of-completion accounting methodology which required us to make assumptions and estimates as of the date of the company’s consolidated financial statements.

Revenues from engineering and construction contracts are recognized by the percentage-of-completion method, which requires estimating the contract revenue and contract costs that will be obtained at culmination of work. Accordingly, these projections are determined by management based on their estimated budgets and adjusted periodically to reflect actual performance as work is completed. When changes occur that were not approved in a project’s original scope of work, income is recognized as equivalent to the costs incurred (i.e., no profit is recognized) until such changes have been approved.

Contract revenue and contract costs related to contracts are recognized in the company’s consolidated statement of income for the accounting periods in which the relevant work was executed. However, any expected or likely cost overruns that would exceed total expected revenue under the contract is recorded as an expense at the time of incurrence. In addition, any change in management’s estimates are reflected in contract revenue and contract cost for the period when such estimates are revised. Such adjustments could be material and could result in reduced profitability. In certain contracts, the terms of the agreement allow our customers to withhold certain amounts until construction is completed. Under these contracts, total collection from customers may not be realized until construction is completed.

While management believes that the estimates made pursuant to the percentage-of-completion method at the end of the 2019 year and prior years are reasonable and made in accordance with the above methodology, given the uncertainties associated with these types of contracts and inherent in the nature of some of the industries in which we operate, it is possible for actual costs to vary from estimates previously made, including due to changes in facts and circumstances, which may result in reductions or reversals of previously recorded profits.

 

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Labor unrest could adversely affect our financial performance

All of our manual laborers and a portion of our employees are members of labor unions. Our practice is generally to extend benefits we offer our unionized employees to non-unionized employees. In our E&C segment, collective bargaining agreements are negotiated at two levels, on an annual basis between the Peruvian National Federation of Civil Construction and the Peruvian Chamber of Construction, without our direct involvement, and on a per project basis directly between the unions and us in accordance with such annual agreement. We also have collective agreements with our employees in certain of our business segments, which are also negotiated periodically. Although we consider that our relationship with unions is currently positive, we cannot assure you that we will not experience work slowdowns, work stoppages, strikes or other labor disputes in the future, which could result in the interruption or delay of our operations. Such interruptions or delays could have an adverse impact on our business, including on the cost of our projects and our ability to make timely delivery. Moreover, our operations may also be affected by labor unrest in our clients’ or our partners’ workforce.

The proceeds from our insurance policies may not be sufficient and we may not be insured against all risks

We maintain insurance coverage both as a corporate risk management strategy and in order to satisfy the requirements under certain regulations and contracts. We cannot assure you that proceeds from our insurance policies, however, will be sufficient to cover the damages resulting from any event covered by such policies. Certain risks are not covered under the terms of our insurance policies, such as interruption of operations. In such event, we may incur significant expenses to rebuild our facilities, repair or replace our equipment, or cover other damages. In addition, if any of our third-party insurers fail, abruptly cancel our coverage or otherwise cannot satisfy their insurance requirements to us, then our overall risk exposure and operational expenses could be increased. Moreover, we may not be able to renew our insurance policies on favorable terms, or at all. Although in the past we have been generally able to cover our insurance needs, we cannot assure you that we will be able to secure all necessary insurance in the future.

An increase in import duties and controls, or other restrictions on our obtaining instruments and equipment, may have a material adverse effect on our financial performance

Our future success depends in part on our ability to select and purchase high quality mechanical instruments and equipment at attractive prices. While we have historically been able to do so, such instruments and equipment may become subject to higher import taxes than currently apply. We cannot assure you that there will not be further increases in import taxes, changes in laws related to imports or the imposition of quotas by countries from which we import mechanical instruments and equipment, any of which could have a material adverse effect on our business. Furthermore, our ability to pay our instrument or equipment suppliers could be affected by our failure to obtain, on a timely basis, authorization from the Ministry of Justice pursuant to Law 30737 to make such payments. Law 30737 requires that companies such as our company that have been partners of groups that have been, or whose officers or representatives have been, convicted of, or have admitted to, corruption, money-laundering or similar crimes, submit money transfers abroad to the Peruvian Ministry of Justice for pre-approval. We cannot assure you that any such approvals will be granted in a timely manner or at all, and such restrictions may limit our ability to purchase necessary instruments and equipment.

The government may declare the nullity of public bidding processes after we have been awarded a project or concession

Even if we win the public bidding for a project or concession, the government may subsequently declare the process void for political, budgetary or other reasons and may cancel or terminate the project or concession awarded to us. For example, in June 2014, we were determined the winner of a public bidding for a concession to operate the fare collection system of Lima’s integrated transportation system for a period of 16 years. However, in January 2015, the Municipality of Lima notified us that the board of directors of the Instituto Metropolitano Protransporte de Lima – Protransporte had declared the nullity of the public bidding process, based on a report issued by the Peruvian Ministry of Economy and Finance, which concluded that the Ministry should have pronounced itself with respect to the concession prior to the bidding process instead of afterwards. We initiated a judicial proceeding in July 2015 to challenge such declaration of nullity, which proceedings remain ongoing. If upheld by the courts, the declaration of nullity of projects or concessions awarded to us could affect our future results of operations. Moreover, the uncertainty that results from these type of decisions may adversely impact investor confidence in Peru and our business.

 

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Debarment from participating in government bidding processes could have an adverse impact on our business and financial performance

We or one or more of our subsidiaries would face debarment from participating in government bidding processes for one to three years if, including potentially as a result of the ongoing investigations against our company and GyM, we or our subsidiaries were found to have violated certain provisions of the Peruvian State Contracting Law (Ley de Contrataciones del Estado). We and our subsidiaries are required to comply with a large number of contractual obligations with the government in our business, and we cannot assure you that we will be in full compliance at all times. Moreover, the imposition of a debarment on a subsidiary could affect the ability of our company or our other subsidiaries (not just the subsidiary that was debarred), to participate in government bids under the Peruvian State Contracting Law. Approximately 99.9%, 82.5% and 97.3% of our E&C revenues for the 2019, 2018 and 2017 years, respectively, came from public-sector contracts in Peru. As of December 31, 2019, 72.8% of our backlog is comprised of contracts with the public sector. As a result, if we are debarred from participating in government bidding processes, our business and financial performance could be affected. To extent that economic conditions reduce private sector investments, being debarred from contracting with the Peruvian or other governments could further impact our company.

We may not be able to successfully expand outside of Peru

One of our long term strategies has been to continue to expand our operations outside of Peru, particularly in Chile and Colombia. We cannot assure you that we will be able to replicate our success in Peru in other countries. Our international expansion is subject to additional challenges, including: our ability to assimilate cultural differences and practices; our limited familiarity with local laws, regulators and contractors; our ability to attract and manage foreign personnel; the absence of a local workforce formed in our corporate values and familiar with our operations; competition in foreign markets, including from industry players with significantly greater local experience and reputation; and other risks specific to these countries. Moreover, we may not be able to make equity investments when needed by our foreign operations, due to restrictions imposed by Law 30737 on our ability to transfer funds abroad without pre-approval of the Peruvian Ministry of Justice.

Many countries in Latin America have suffered significant economic, political and social crises in the past, and these events may occur again in the future. If we are unable to overcome these challenges, we may not be able to successfully expand internationally.

We may not be able to make successful acquisitions

Part of our long-term strategy has been to evaluate strategic acquisition opportunities to expand our operations and geographic footprint, especially in Chile and Colombia. We may not be able to identify appropriate acquisition opportunities, or, if we do, we may overpay for these acquisitions or may not otherwise be able to negotiate terms and conditions that are acceptable to us. We may also face difficulties obtaining financing to pay for acquisitions. Law 30737 currently requires that payments we make abroad be submitted to the Peruvian Ministry of Justice for pre-approval, and we cannot assure you that any such approvals will be granted in a timely manner or at all.

In addition, we may not be able to obtain regulatory approvals, including antitrust approvals, required to consummate acquisitions. Furthermore, even if we are able to successfully consummate an acquisition, we may encounter challenges in integrating the acquired business effectively and profitably into our operations. The integration of an acquisition involves a number of factors that may affect our operations, including diversion of management’s attention, difficulties in retaining personnel and entry into unfamiliar markets. Acquired businesses may not achieve the levels of productivity anticipated or otherwise perform as expected. Acquisitions may bring us into businesses we have not previously conducted and expose us to additional business risks that are different from those we have traditionally experienced, including new geographic, market, operating and financial risks. Moreover, acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies. Even if such liabilities are assumed by the sellers, we may have difficulties enforcing our rights, contractual or otherwise. We cannot assure you that future acquisitions will meet our strategic objectives.

 

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Our IT security measures may be breached or compromised and we may sustain system outages

Security breaches, whether intentional or unintentional, may threaten the confidentiality, integrity or availability of our information resources and may allow unauthorized access to our systems, disrupt our digital operations, corrupt data, or allow persons to misappropriate confidential data. Any breach of our network security measures could cause interruptions in our services or operations, damage our reputation and harm our ability to operate our business. This may result in client or supplier dissatisfaction and a loss of business. Our security measures may be inadequate to prevent security breaches, and we may be required to expend significant capital and other resources to protect against the threat of security breaches and to alleviate problems caused by breaches as well as by any unplanned unavailability of our IT systems caused by other reasons, which may adversely affect our business and financial performance.

Our services may infringe upon the intellectual property rights of others

Our services may infringe the intellectual property rights of third parties, and we may have infringement claims asserted against us. These claims may harm our reputation, increase our costs and prevent us from offering certain services or products. Any claims or litigation relating to intellectual property, even if ultimately decided in our favor, could be time-consuming and costly, injure our reputation or require us to enter into royalty or licensing arrangements. Any limitation on our ability to provide a service or product could result in our loss of revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future projects, which may adversely affect our business and financial performance.

Additional Risks Related to our Engineering and Construction Business

We are vulnerable to the cyclical nature of the end-markets we serve

Demand for our engineering and construction services is dependent on conditions in the end-markets we serve, which include, among others, the mining, power, oil and gas, transportation, real estate and other infrastructure sectors in Peru, as well as the mining sector in Chile and the energy sector in Colombia. Consequently, our engineering and construction business is closely linked to the performance and growth of these sectors, and it is exposed to many of the risks faced by our clients operating in these sectors, over which we have no control. These industries tend to be cyclical in nature and, as a result, although downturns can impact our entire company, our engineering and construction business has historically been subject to periods of very high and low demand. Factors that can affect these sectors include, among others, macroeconomic conditions, climate conditions, the level of private and public investment, the availability of credit, changes in laws and regulations, and political and social stability. The mining and oil and gas sectors, in particular, are also driven by worldwide demand for the underlying commodities, including, among others, silver, gold, copper, oil and gas, which can be affected by such other factors as global economic conditions and geopolitical affairs. A decline in prices for minerals, oil and gas has had in the past, and could have in the future, a significant impact on our clients’ exploration and production activities and, as a result, on their demand for our engineering and construction services. Since mid-March 2020, many of these sectors have been adversely affected by the COVID-19 pandemic and governments’ extraordinary measures to limit the spread of the virus. Accordingly, continuing adverse developments in the end-markets served by our engineering and construction business could have a material adverse effect on our financial performance.

Decreases in capital investments by our clients may adversely affect the demand for our services

Our engineering and construction business is directly affected by changes in private-sector and, to a lesser extent, public-sector investments for large-scale infrastructure projects. In addition, our engineering and construction business is directly affected by the availability and cost of financings for these projects. In the markets where we operate, investments and financings for large-scale projects have historically been influenced by macroeconomic and other factors which are beyond our control, including in the case of public-sector investment, government spending levels. As a result, we cannot assure you that clients will not choose to limit or not undertake new projects or delay, suspend or cancel existing projects. In 2018, Peru experienced a growth rate of 5.40% in private and public investment and, in 2019, Peru experienced a decline of 1.5%. In addition, since mid-March 2020, due to the COVID-19 pandemic and governments’ extraordinary measures to limit the spread of the virus, public and private sector investment in engineering and construction and infrastructure projects has stalled. Reductions in anticipated capital investments or available financing for large-scale projects could have a material adverse effect on our financial performance.

 

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Our revenues may fluctuate based on project cycles, which we may not control

The substantial majority of the revenues from our engineering and construction business is generated from project awards, the timing of which may be unpredictable and outside of our control, especially considering the highly competitive bidding processes and complex and lengthy negotiations they involve. These processes can be impacted by a wide variety of outside factors including governmental approvals, financing contingencies and overall market and economic conditions. Moreover, because a significant portion of our revenues is generated from large-scale projects, our results of operations can fluctuate quarterly or yearly depending on whether and when project awards occur and the commencement and progress of work under awarded contracts. As a result, we are subject to the risk that revenues may not be derived from awarded projects as quickly as anticipated.

Our business may be adversely affected if we incorrectly estimate the costs of our projects

We conduct our engineering and construction business under various types of contractual arrangements where costs are estimated in advance. In some of our contracts (i.e., lump-sum, unit price and EPC), we bear the risk of some or all unanticipated cost overruns, including those due to inflation or certain unforeseen events. Risks under contracts which could result in cost overruns include: difficulties in performance of our subcontractors, suppliers, or other third parties; changes in laws and regulations or difficulties in obtaining permits or other approvals; unanticipated technical problems; unforeseen increases in the cost of inputs, components, equipment, labor, or the inability to obtain these on a timely basis; delays caused by weather conditions; incorrect assumptions related to productivity or scheduling estimates; and project modifications that create unanticipated costs or delays. These risks tend to be exacerbated for longer term contracts since there is increased risk that the circumstances under which we based our original bid could change. In many of our contracts, we may not be able to obtain compensation for additional work performed or expenses incurred. Our failure to estimate accurately the resources and time required to complete a project could adversely affect our profitability. Even under our cost-plus contracts, our inability to complete projects within the estimated budget could affect our relationship with our clients and negatively impact awards of future contracts. As a result, if we incorrectly estimate the costs of our projects, our business and financial performance could be adversely affected.

We may be unable to deliver our services in a timely manner

The success of our engineering and construction business depends on our ability to meet the standards and schedules required by our clients. Significant delays that prevent us from providing our services on agreed time frames could adversely affect our client relations and reputation. Delays may occur for a number of reasons, including: our inability to adequately foresee the needs of our clients; delays caused by our joint operation partners, subcontractors or suppliers; insufficient production capacity; equipment failure; shortage of qualified workers; changes to customs regulations; and natural disasters. Failure to finish construction by the contractual completion date set forth in the contract could result in costs that reduce our projected profit margins, including a requirement to pay daily penalties and damages. If we are unable to meet deadlines, either due to internal problems or as a result of events over which we have no control, we may lose the trust of our clients and, therefore, experience a decrease in the demand for our services. In such event, our business and financial performance could be adversely affected.

We may not be able to obtain compensation for additional work or expenses incurred as a result of client-requested change orders

Clients often determine, after commencement of the project, to change various elements of the project. Some of our contracts may also require that clients provide us with design or engineering information or with equipment or materials to be used on the project, and, in some cases, the client may provide us with deficient design or engineering information or equipment or materials or may provide the information or equipment or materials to us later than required by the project schedule. Our project contracts generally require the client to compensate us for additional work or expenses incurred due to client requested change orders or failure of the client to provide us with specified design or engineering information or equipment or materials. Under these circumstances, we generally negotiate with the client with respect to the amount of additional time required to make these changes and the compensation to be

 

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paid to us. We are subject to the risk that we are unable to obtain, through negotiation, arbitration, litigation or otherwise, adequate amounts to compensate us for the additional work or expenses incurred by us due to client-requested change orders or failure by the client to timely provide required items. A failure to obtain adequate compensation for these matters could require us to record an adjustment to amounts of revenue and gross profit that were recognized in prior periods. Any such adjustments, if substantial, could have a material adverse effect on our financial performance.

We may have difficulty obtaining performance bonds that we require in the normal course of our operations

In our engineering and construction business, it is industry practice for customers to require performance bonds or other forms of credit support to secure, among other things, bids, advance payments and performance. We cannot assure you that in the future we will not encounter difficulties in obtaining such performance bonds or credit support. The Peruvian market for these types of credit instruments is small; moreover, under Peruvian banking regulations, lenders are required to impose limits on the amount of credit they extend to a group of affiliated companies. In addition, the ongoing COVID-19 pandemic may limit the availability of credit support that is available for engineering and construction businesses. Failure to provide performance bonds or credit support on terms required by clients may result in our inability to compete for or win new projects.

Additional Risks Related to our Infrastructure Business

A substantial or extended decline in oil prices may adversely affect our financial performance

A substantial part of the revenues of our infrastructure business depends upon prevailing prices for oil. Historically, oil prices and markets have been volatile and are likely to continue to be volatile in the future. Moreover, global oil prices have fluctuated significantly in recent years, with the average Brent crude prices decreasing from US$66.87 per barrel in 2017 to US$53.80 per barrel in 2018, and increasing to US$66.00 per barrel in 2019. The price of oil has dropped precipitously due in part to the COVID-19 pandemic as well as to disputes between OPEC members, to US$30.80 as of March 31, 2020 and US$ 18.83 as of April 30, 2020. Oil is a commodity and its price is subject to wide fluctuations in response to relatively minor changes in supply and demand for oil, market uncertainty, and a variety of additional factors beyond our control. Those factors include, among others: global demand and supply; political developments in producing regions; weather conditions; governmental regulations; international conflicts and acts of terrorism; the price and availability of alternative sources of energy; and overall local and global economic conditions. Moreover, lower oil prices may not only decrease our revenues on a per unit basis, but may also reduce the amount of oil we can produce economically, if any, and, as such, may have a negative impact on the reserves of the fields in which we operate. As result, our financial performance could be materially and adversely affected by declines in oil prices.

Our reserves estimates depend on many assumptions that may turn out to be inaccurate and are not subject to review by independent reserve auditors

The process of estimating oil and gas reserves is complex, although the fields where we produce oil and gas are mature (Block I has been in production for over 100 years, Block III for approximately 100 years, Block IV for approximately 95 years and Block V for over 50 years). In order to prepare our reserves estimates presented in this annual report, we must project production rates and timing of development expenditures as well as analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil prices, drilling and operating expenses, capital expenditures, taxes, and availability of funds. Therefore, estimates of reserves are inherently imprecise. Moreover, our reserve estimates included in this annual report have been prepared internally by our team of engineers, and have not been audited or reviewed by independent engineers. Future real production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable reserves will most likely vary from the estimates presented in this annual report, and those variances may be material. Any significant variance could materially affect the estimated reserves of the fields in which we operate.

 

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Our service contracts with Perupetro for Block I and Block V are currently set to expire in December 2021 and October 2023, respectively, which may adversely affect our financial performance

We operate and extract oil and natural gas from Block I under a 20-year hydrocarbon extraction service contract with Perupetro S.A., which was extended for an additional 10-year term and expires in December 2021. Average daily production during 2019 was 647 barrels of crude oil. We operate 219 wells using various oil extraction systems and operate a network of production batteries and pipelines to collect, measure and deliver oil in fiscalization point close to the Talara refinery. In addition, we operate and extract oil and natural gas from Block V under a 20-year hydrocarbon extraction service contract with Perupetro, which was extended for an additional 10-year term and expires in October 2023. Average daily production during 2019 in this field was 105 barrels of crude oil. We operate 40 wells in this field using various oil extraction systems. Our failure to renew either of these service contracts on favorable terms or at all could adversely affect our business or results of operations.

Our return on our investment in our concessions may not meet estimated returns

Our return on any investment in a concession is based on the terms and conditions of the concession, its duration and the amount of capital invested as well as the amount of revenues collected, debt service costs, payment of penalties and other factors. For example, traffic volume at toll roads may be affected by a number of factors beyond our control, including security conditions; general economic conditions; demographic changes; fuel prices; reduction in commercial or industrial activities in the regions served by the roads; changes in laws regarding toll payments, including related to the effects of the COVID-19 pandemic; and natural disasters. Decreased traffic at Norvial could adversely affect our financial performance. Although some of our concessions allow for adjustments based on economic conditions, certain concessions provide that adjustment requests be approved only if certain limited events specified in our concession contracts have occurred. If a request of adjustment is not granted, our financial performance could be affected. Given these factors and the possibility that governmental authorities could implement policies that affect our contractual return on investment in a way that we did not anticipate, we cannot assure you that our return on any investment under any concession will meet our estimates.

Governmental entities may terminate prematurely our concessions and similar contracts under various circumstances, some of which are beyond our control

Our ability to continue operating our concessions and similar public-sector contracts depends on governmental authorities, which may terminate the concession or contract pursuant to the provisions set forth therein or in accordance with applicable legislation, including the failure to comply with any contractual terms (including the concessionaire’s default on debt) or applicable law, including after giving effect to changes in laws (including any changes related to the effects of the COVID-19 pandemic). Moreover, the relevant governmental authority may terminate and/or repossess a concession at any time, if, in accordance with applicable law, the governmental authority determines that it is in the public interest to do so. The relevant governmental authority may also assume the operation of a concession in certain emergency situations, such as war, public disturbance or threat to national security. In addition, in the case of force majeure, the relevant governmental authority may require us to implement certain changes to our operations. If the government terminates any of our concessions, under Peruvian law, it is generally required to compensate us for the amount of our unrecovered investment, unless the concession is revoked pursuant to applicable law or the terms of the concession which would imply a serious breach of the concession’s terms by us. Such compensation process is likely to be time consuming and the amount paid to us may not fully compensate us. We cannot assure you that we would receive such compensation on a timely basis or in an amount equivalent to the value of our investment in a concession plus lost profits.

We are exposed to risks related to the operation and maintenance of our concessions and similar contracts

The operation and maintenance requirements under our concessions could encounter delays or cause us to exceed our budgeted costs for such projects, which could limit our ability to realize the expected return on these projects, increase our operating or capital expenses and adversely affect our business and financial performance. In addition, our operations may be adversely affected by interruptions or failures in the technology and infrastructure systems that we use to support our operations, including toll road collection and traffic measurement systems. The Lima Metro in particular may be susceptible to outages due to power loss, telecommunications failures and similar events. The failure of any of our technology systems may cause disruptions in our operations, adversely affecting our

 

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profitability. While we have business continuity plans in place to reduce the adverse impact of information technology system failures on our operations, we cannot assure you that these plans will be effective. Furthermore, accidents and natural disasters may also disrupt the construction, operation or maintenance of our projects and concessions, which could adversely affect our business and financial performance.

We may not be successful in obtaining new concessions

The market for infrastructure concessions in Peru is competitive. We compete with Peruvian and foreign companies for infrastructure concessions in Peru, some of whom may have greater financial and other resources or particular expertise pertinent to a specific concession. Additionally, our public-sector clients may face budget deficits that may prohibit the development of infrastructure concessions, which could affect our business. We may also not be able to obtain additional concessions if the government decides not to award new concessions, due to budget constraints or policy changes or because alternative financing mechanisms are used. Recently, the awarding of concessions and the use of public-private associations in Peru have stalled, due in part to concerns related to the corruption scandal surrounding Odebrecht and its potential effect on government officials in the country. In addition, we may be temporarily unable to bid for or participate in new government concessions due to the outcome of the corruption investigations and civil and criminal proceedings facing the company in Peru, or any final settlement and cooperation agreement that we execute with the Peruvian government. Our inability to bid for or obtain new concessions may adversely affect our business and financial performance.

Moreover, we cannot assure you whether or when we will undertake any of the projects that have been awarded to us but for which contract negotiations are ongoing or stalled, in particular the concessions for Vía Expresa Sur, with respect to which we recently received a letter from the Municipality of Lima in which the Municipality communicated its desire to cease discussions to relaunch the project.

Additional Risks Related to our Real Estate Business

We are exposed to risks associated with the development of real estate

Our real estate business is subject to the risks that generally affect the real estate industry, such as availability and prices of suitable land, environmental and zoning regulations, interruptions in supply and volatility of the prices of construction materials and equipment, and changes in the demand for real estate. Our real estate business is specifically affected by the following risks: macroeconomic conditions in Peru that may impact the growth of the real estate sector as a whole, particularly in the residential market, including an increase in unemployment or a decrease in wage levels; an increase in prevailing interest rates or lack of available credit; changes in government subsidies for affordable housing; unfavorable real estate market conditions, such as an oversupply of residential units or scarcity of suitable land in particular areas; the level of customer interest in our new projects or the sales price per unit necessary to sell the unit may be lower than expected; customer perception of the security, convenience and attractiveness of our projects and the areas in which they are located; cost overruns, many of which may be beyond our control, that exceed our estimates and affect our profit margins, including the price of labor, land, insurance, taxes and public charges; the construction and sale of units may not be completed on schedule; bankruptcy or significant financial difficulties of large industry players, which cause a loss of confidence in the industry; limitations when contracting with government entities; and restrictions on real estate development imposed by local, regional and national authorities which often render restrictive or higher bureaucratic laws and regulations. Recently, real estate sales have slowed significantly due to the COVID-19 pandemic and government measures to contain the spread of the virus, and to a lesser extent, due to modifications by the government to a program (Bono de Buen Pagador) that encourages social interest housing sales as well as access to credit. The occurrence or continuation of any of the above events may have a material adverse effect on our business and financial performance.

Real estate prices may not continue to rise and may decline

Real estate prices in Peru have risen significantly over the last decade. We cannot assure you that this increase in real estate prices does not represent a bubble. Real estate prices in Peru may not continue to rise or may decline significantly, particularly if financing costs rise or consumer confidence in the real estate market erodes. In addition, real estate prices in Peru may decline significantly due to the ongoing COVID-19 pandemic and government measures to contain the spread of the virus. If real estate prices decline significantly, our business and financial performance could be materially and adversely affected.

 

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Our business may be adversely affected if we are not able to obtain the necessary licenses and/or authorizations for our developments in due time

Real estate development requires obtaining certain licenses, authorizations and registrations. In Peru, municipal authorities are responsible for issuing most of the licenses that are required during the development stage, including zoning, demolition, construction and conformity (conformidad de obra) licenses, among others. As of March 31, 2020, we have approximately 17 real estate projects in various stages of development. For some of these projects, we have not yet initiated administrative proceedings with the appropriate authorities, or such proceedings are pending approval. A denial or an extended delay in issuing licenses, authorizations or registrations, or an extended delay by municipal authorities in approving licensing procedures, may render land unsuitable for development, delay the completion of planned projects, increase our costs or otherwise negatively impact the pricing of projects and adversely affect our business and financial performance.

The scarcity of financing, an increase in interest rates or an increase in the security required by financial institutions as collateral may adversely affect the ability or willingness of prospective buyers to purchase our real estate properties. In most cases, the purchasers of our residential or commercial properties finance at least part of the purchase price with mortgage loans. In 2017, 2018 and 2019, approximately 88%, 92% and 93%, respectively, of our residential units were sold to purchasers who received government subsidies to finance the purchase of homes. An increase in interest rates, whether as a result of market conditions or government action or otherwise, may cause a decrease in the demand for our residential and commercial properties and for land development. An increase in interest rates could also increase our own financing costs, which may, in turn, increase the sale price of our projects and adversely affect our business and financial performance.

We may experience difficulties in finding desirable land and increases in the price of land may increase our cost of sales and decrease our earnings

The continued growth of our real estate business depends in large part on our ability to continue to acquire land at a reasonable cost. As more developers enter or expand their operations in the Peruvian real estate sector, land prices could rise significantly and suitable land could become scarce or overpriced due to increased demand or decreased supply. A resulting rise in land prices may increase our cost of sales and decrease our earnings. We may not be able to acquire suitable land at reasonable prices in the future, which may have a negative impact on our financial performance.

Changing market conditions may adversely affect our ability to sell home inventories in our land and at expected prices

There is a lag between the time we acquire land and the time that we can bring the developed properties to market. Lag time varies by sector and on a project-by-project basis. As a result, we face the risk that demand for real estate may decline or that other developments may occur during this period that affect market conditions, and that we will not be able to dispose of developed properties or undeveloped land at expected prices or profit margins or within anticipated time frames or at all. Significant expenditures associated with investments in real estate, such as maintenance costs, architectural fees in high-end projects, construction costs and debt payments, cannot generally be reduced if changes in market conditions cause a decrease in expected revenues from our properties. Moreover, the market value of home inventories and undeveloped land can fluctuate significantly because of changing market conditions. As a result of these and other factors beyond our control, we may be forced to sell properties or land at a loss or for prices that generate lower profit margins than we anticipate.

Determinations by INDECOPI may adversely affect our ability to enforce binding contracts

In resolving consumer protection complaints in the real estate sector, INDECOPI has made determinations against real estate developers resulting in the modification of contractual provisions applicable to purchasers. Some purchasers of real estate properties have taken advantage of these INDECOPI determinations and filed complaints

 

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against developers before INDECOPI and/or made public claims through the media seeking to obtain compensation for alleged deficiencies in housing construction as well as the modification of the terms of their contracts, which may have a negative impact on our real estate business. Although we have a small number of such complaints in INDECOPI, an increase in consumer complaints and consumer protective measures, particularly those resulting in the modification of contractual terms, may affect our ability to enforce our contracts under their original terms if we are not able to counter such claims, which in turn may have a negative impact on our real estate business.

Risks Related to Peru

Economic, social and political developments in Peru could adversely affect our business and financial performance

The substantial majority of our operations are conducted in Peru and depend on economic and political developments in the country. As a result, our business may be materially and adversely affected by economic downturns, currency depreciation, inflation, interest rate fluctuation, government policies, regulation, taxation, social instability, political unrest, drug trafficking, terrorism and other developments in or affecting the country, over which we have no control. In the past, Peru has experienced periods of severe economic recession, large currency devaluation and high inflation. We cannot assure you that Peru will not experience similar adverse economic developments in the future. In addition, Peru has experienced periods of political instability that has included a succession of regimes with differing economic policies and programs. Previous governments have imposed controls on prices, exchange rates, local and foreign investments and international trade, restricted the ability of companies to dismiss employees, expropriated private-sector assets and prohibited the remittance of profits to foreign investors. We cannot assure you that the Peruvian government will continue to pursue open-market policies that stimulate economic growth and social stability.

Moreover, investigations against former or current government officials relating to bribery payments made by Odebrecht have, and may continue to, result in political uncertainty in Peru. In March 2018, President Pedro Pablo Kuczynski presented his resignation, due to allegations of corruption for vote-buying in connection with the impeachment proceeding against him, and his first vice president, Martín Vizcarra, was sworn in as acting president. In September 2019, the executive branch, invoking article 134 of the constitution, dissolved congress and called for new legislative elections which were held in January 2020. The term of the new legislature will end on the same date as the current presidential term in July 2021. Criminal investigations have been initiated against former presidents Alejandro Toledo, Ollanta Humala, Alan García and Pedro Pablo Kuczynski. On April 17, 2019, former President Alan García committed suicide as prosecutors were preparing to detain him over matters relating to criminal investigations. Several corruption scandals regarding authorities at municipal, regional and national government levels are also ongoing, and former and current government officials have been detained. These corruption investigations have resulted in lower investments in large projects.

The political instability caused by these events could affect macroeconomic conditions in the country, including currency volatility, as well as have a negative effect on our business.

Fluctuations in the value of the sol could adversely affect financial performance

Fluctuations in the value of the sol relative to the U.S. dollar could adversely affect Peru’s economy. In addition, fluctuations in the value of the sol to the U.S. dollar can materially adversely affect our results of operations.

In 2017, 39.3% and 43.8% of our revenues were denominated in soles and U.S. dollars, respectively, whereas 63.9% and 18.3% of our costs of sales were denominated in soles and U.S. dollars, respectively. In 2018, 32.5% and 55.6% of our revenues were denominated in soles and U.S. dollars, respectively, whereas 63.0% and 23.1% of our costs of sales were denominated in soles and U.S. dollars, respectively. In 2019, 54% and 35% of our revenues were denominated in soles and U.S. dollars, respectively, whereas 64% and 21% of our costs of sales were denominated in soles and U.S. dollars, respectively. In the past the exchange rate between the sol and the U.S. dollar has fluctuated significantly. We cannot assure you that the value of sol against other currencies will not fluctuate significantly in the future, which could adversely affect the Peruvian economy and our business, financial condition and results of operations.

 

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In addition, although Peruvian law currently imposes no restrictions on the ability to convert soles to foreign currency, in the 1980s and early 1990s, Peru imposed exchange controls, including controls affecting the remittance of dividends to foreign investors. We cannot assure you that exchange controls in Peru will not be implemented in the future. The imposition of exchange controls could have an adverse effect on the economy and on your ability to receive dividends from us as a holder of ADSs.

Inflation could adversely affect our financial performance

In the past, Peru has suffered through periods of hyperinflation, which have materially undermined the Peruvian economy and the government’s ability to create conditions that support economic growth. A return to a high inflation environment would also undermine Peru’s foreign competitiveness, with negative effects on the level of economic activity and employment.

As a result of reforms initiated in the 1990s, Peruvian inflation decreased significantly from four-digit inflation during the 1980s. The Peruvian economy experienced annual inflation of 4.4% in 2015, 3.2% in 2016, 1.4% in 2017, 2.2% in 2018 and 1.9% in 2019, as measured by the Peruvian Consumer Price Index (Índice de Precios al Consumidor del Perú).

If Peru experiences substantial inflation in the future, our costs of sales and administrative expenses could increase which could affect our operating margins. Inflationary pressures may lead to governmental intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Peruvian economy. For example, in response to increased inflation, the Peruvian Central Bank, which sets the Peruvian basic interest rate, may increase or decrease the basic interest rate in an attempt to control inflation or foster economic growth.

Changes in tax laws may increase our tax burden and, as a result, negatively affect our financial performance

The Peruvian Congress and government regularly implement changes to tax laws that may increase our tax burden. These changes may include modifications in our tax rates and, on occasions, the enactment of temporary taxes that in some cases have become permanent taxes. Tax reforms related to the Peruvian income tax, value added tax and tax code have recently been approved, but we are unable to estimate the impacts that these reforms may have on our business. The effects of any tax reforms that could be proposed in the future and any other changes that result from the enactment of additional reforms have not been, and cannot be, quantified. However, any changes to our tax regime may result in increases in our overall costs and/or our overall compliance costs, which could negatively affect our financial performance.

Earthquakes, severe weather and other natural disasters could adversely affect our business and financial performance

Peru is located in an area that experiences seismic activity and occasionally is affected by earthquakes. For example, in 2007, an earthquake with a magnitude of 7.9 on the Richter scale struck the central coast of Peru, severally damaging the region south of Lima. Such conditions may result in physical damage to our properties and equipment, closure of one or more of our project sites and infrastructure concessions, inadequate work forces in our markets and temporary disruptions in the supply of construction materials. In addition, Peru has also experienced adverse climate conditions (due to climate change or otherwise) and adverse weather patterns, such as El Niño, an oceanic and atmospheric phenomenon that causes a warming of temperatures in the Pacific Ocean, resulting in heavy rains off the coast of Peru and potentially flooding. Poor weather conditions can have significant adverse effects on our engineering and construction activities as well as on our operation and maintenance of infrastructure assets business. Any of these factors may materially adversely affect the Peruvian economy and our business and financial performance.

A resurgence of terrorism in Peru could adversely affect the Peruvian economy and, as a result, our business and results of operations

In the past, Peru experienced severe terrorist activity that reached its peak of violence against the government and private sector in the late 1980s and early 1990s. In the mid-1990s, terrorist groups suffered significant defeats, including the arrest of leaders, resulting in considerable limitations in their activities. Despite the suppression of terrorist activity, we cannot assure you that a resurgence of terrorism in Peru, or other criminal activity, including drug trafficking, will not occur, or if there is such a resurgence, it will not disrupt the economy of Peru and our business.

 

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The Peruvian economy could be affected by adverse economic developments in regional or global markets

Financial and securities markets in Peru are influenced, to varying degrees, by economic and market conditions in regional or global markets. Although economic conditions vary from country to country, investors’ perceptions of events occurring in one country may adversely affect cash flows and securities from issuers in other countries, including Peru. Changes in social, political, regulatory and economic conditions in large economies or in laws and policies governing foreign trade or affecting global financing conditions could create uncertainty in the international markets and could have a negative impact on emerging market economies, including the Peruvian economy, which in turn could have a negative impact on our operations. Since mid-March of 2020, the ongoing COVID-19 pandemic has disrupted economic activity and is likely to cause a global recession. The worsening of current global conditions or a new economic or financial crisis could affect Peru’s economy and, consequently, materially adversely affect our business and financial performance.

Risks Related to Chile, Colombia and other Latin American Countries

We face risks related to our operations outside of Peru

Latin American economic, political and social conditions may adversely affect our business. Our financial performance may be significantly affected not only by general economic, political and social conditions in Peru but also in other markets where we operate or intend to operate, including Chile and Colombia. During 2017, 2018, 2019, approximately 28.0%, 14.2% and 15.4%, respectively, of our revenues on a consolidated basis derived from operations outside of Peru.

These countries have suffered significant economic, political and social crises in the past, and these events may occur again in the future. We cannot predict whether changes in current administrations will result in changes in governmental policy and whether such changes will affect our business. Instability in the region has been caused by many different factors, including: significant governmental influence over local economies; substantial fluctuations in economic growth; high levels of inflation; changes in currency values; exchange controls or restrictions on expatriation of earnings; high domestic interest rates; wage and price controls; changes in governmental economic or tax policies, including retroactive changes; imposition of trade barriers, including import duties on information technology equipment; electricity rationing; liquidity of domestic capital and lending markets; unexpected changes in regulation; expropriations; and high levels of organized crime, terrorism and social conflicts, as well as overall political, social and economic instability. Moreover, macroeconomic conditions in these countries are highly influenced by global commodity prices, including the price of copper for Chile and the price of oil and gas for Colombia.

In addition, beginning in October 2019, Chile has suffered from widespread social unrest and vandalism that has had a significant economic and political impact on the country. The protests began over the government’s announcement of an increase in subway fares in Santiago and quickly grew into broader unrest over economic inequality, including claims about transportation costs, funding for education, health care costs and pension amounts, among others. The Chilean government imposed a state of emergency and nighttime curfews in Santiago and other cities; however, protests and violence continued. The Chilean government took a series of social and economic measures to tackle the issues at the heart of the unrest, and the Chilean congress convened a plebiscite initially to be held in March 2020 to determine whether constitutional amendments should be implemented. The plebiscite has been rescheduled to October 2020 as a result of the COVID-19 outbreak. This process may result in further social unrest and protest and could also result in substantial structural changes in Chile that could adversely impact the private sector, including our operations in the country.

Additionally, beginning in November 2019, Colombia experienced civic unrest in the form of a national strike and anti-government protests. Demonstrators in the country, protesting for several reasons, including opposing certain economic and political reforms proposed by the administration of President Duque, public corruption and the implementation of the peace agreement between Colombia and the guerrilla Fuerzas Armadas Revolucionarias de

 

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Colombia (FARC). In addition, protestors have demanded reforms related to pensions, access to education, environmental protection and inequality, among others. Our Colombian operations could be adversely impacted by rapidly changing economic, political and social conditions in Colombia and by the Colombian government’s response to such conditions. Additionally, any changes in the government administration, changing regulations or policies relating to the construction and infrastructure sectors, or shifts in political attitudes in Colombia could adversely affect our business.

Risks Related to our ADSs

We have identified material weaknesses in our internal control over financial reporting, and if we cannot maintain effective internal controls or provide reliable financial and other information in the future, investors may lose confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our ADSs

Based on the assessment of our internal control over financial reporting as of December 31, 2019, as required by Section 404 of the U.S. Sarbanes Oxley Act of 2002 (“SOX”), management has concluded that, as of such date, our internal control over financial reporting was not effective at the reasonable assurance level due to control deficiencies that constituted material weaknesses. Material weaknesses consisted of:

 

   

deficiencies in the operational effectiveness of controls over SOX compliance, including (1) inadequate monitoring of entities that provide services to companies in our group and may have an impact in our financial reporting, (2) the lack of a procedure or implementation of controls for the assurance of the integrity and correctness of key reports and (3) the absence of self-assessment by controls owners;

 

   

deficiencies in the design and operational effectiveness of the controls established in the accounting closing process with respect to the preparation and review of the annual and interim consolidated financial statements, including (1) inadequate supporting documentation for significant transactions prior to reflecting in accounting records, (2) late adoption of applicable accounting rules affecting our interim consolidated financial statements, (3) delay in undertaking evaluations required under IFRS 9 (Financial Instruments) and (4) failure to finalize a manual for accounting policies for all subsidiaries and our group as a whole; and

 

   

deficiencies in (1) the implementation of our new payroll system (SAP) for employees established in 2019 and (2) the segregation of duties for both our new employee payroll system (SAP) and our existing construction worker payroll system.

The material weaknesses described above did not result in adjustments to our annual consolidated financial statements. However, these material weaknesses could result in misstatements in our financial results and disclosures, which could result in a material misstatement to our annual consolidated financial statements not being prevented or detected. Because of these material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019, based on criteria in Internal Control-Integrated Framework (2013) issued by the COSO.

For more information, see “Item 15. Controls and Procedures.” A “material weakness” is a deficiency, or combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement in financial statements will not be prevented or detected in a timely basis.

We are in the process of implementing measures to address these material weaknesses. We may not be able to remediate these identified material weaknesses. Moreover, we may in the future discover other areas of our internal controls that have material weaknesses or that need improvement, particularly with respect to businesses that we acquire.

 

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Any failure to maintain an effective internal control over financial reporting, or implement required new or improved controls, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, or if our independent registered public accounting firm is unable to provide us with an unqualified opinion regarding the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our ADSs.

The market price of our ADSs may fluctuate significantly, and you could lose all or part of your investment

Volatility in the market price of our ADSs may prevent you from being able to sell your ADSs at or above the price you paid for them. The market price and liquidity of the market for our ADSs may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, among others: actual or anticipated changes in our results of operations, quarterly fluctuations, or failure to meet expectations of financial market analysts and investors; the impact of corruption allegations and investigations; investor perceptions of our prospects or our industries; operating performance of companies comparable to us and increased competition in our industries; new laws or regulations or new interpretations of laws and regulations applicable to our business; general economic trends in Peru; catastrophic events, such as earthquakes and other natural disasters; and developments and perceptions of risks in Peru and in other countries.

Substantial sales of ADSs or common shares could cause the price of our ADSs or common shares to decrease

Significant shareholders hold a large number of our common shares. These securities are eligible for sale. The market price of our ADSs could decline significantly if we or our significant shareholders sell securities in our company or the market perceives that we or our significant shareholders intend to do so.

We may raise additional capital in the future through the issuance of equity securities, which may result in dilution of the interests of our shareholders

We may need to raise additional capital and may opt for obtaining such capital through the public or private placement of common shares, debt securities or debt securities convertible into our common shares. In such event we may seek to obtain financing through the exclusion of the preemptive rights of our shareholders, which may dilute the percentage interests of investors in our common shares.

No shareholder or group of shareholders holds a majority of our common shares

No shareholder or group of shareholders currently owns a majority of our common shares. In addition, there is no shareholders’ agreement among any of our significant shareholders. Accordingly, no shareholder or group of shareholders may on its own determine the outcome of substantially all matters submitted for a vote to our shareholders. In addition, a new investor or group of investors may in the future seek to acquire a significant stake in, or control of, our company, subject to compliance with Peruvian tender offer requirements which require that a tender offer be made to all shareholders upon, among other matters, acquisition of 25%, 50% and 60% of our voting rights. If a new investor or group of investors acquires a significant stake in, or control of, our company, we cannot assure you that such investor or group of investors will not seek to change how our business is managed.

Holders of ADSs may be unable to exercise voting rights with respect to our common shares underlying the ADSs at our shareholders’ meetings

As a holder of ADSs representing common shares being held by the depositary in your name, you may exercise voting rights with respect to the common shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. Holders of our common shares will receive notice of shareholders’ meetings through publication of a notice 25 days in advance, in accordance with Peruvian law, in the official gazette in Peru, a Peruvian newspaper of general circulation and the website of the Peruvian Securities Commission, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders will not receive notice directly from us. Instead, pursuant to the deposit agreement, we will notify the depositary, who will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given. To exercise their voting rights, ADS holders must instruct the depositary how to exercise the voting rights for the common shares which underlie their ADSs. Due to these additional procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of our common shares.

 

 

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Holders of ADSs also may not receive voting materials in time to instruct the depositary to vote the common shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADS or for the manner of carrying out such instructions, unless such failure can be attributed to gross negligence, bad faith or willful misconduct on the part of the depositary or its agents. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the underlying common shares are not voted as requested.

Our shareholders’ ability to receive cash dividends may be limited

Our shareholders’ ability to receive cash dividends may be limited by the ability of the depositary to convert cash dividends paid in soles into U.S. dollars. Under the terms of our deposit agreement with the depositary for the ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the common shares underlying the ADSs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If this conversion is not possible or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADR holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the dividend distribution.

Holders of ADSs may be unable to exercise preemptive or accretion rights with respect to the common shares underlying their ADSs

Under Peruvian corporate law, if we issue new common shares as part of a capital increase, unless otherwise agreed to by holders of 40% of our subscribed voting common shares and, provided that such capital increase does not favor, directly or indirectly, certain shareholders to the detriment of others, our shareholders will generally have the right to subscribe to a proportional number of common shares of the class held by them to maintain their existing ownership percentage, which is known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed common shares at the end of a preemptive rights offering, on a pro rata basis, which is known as accretion rights. You may not be able to exercise the preemptive or accretion rights relating to common shares underlying your ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the common shares relating to these preemptive and accretion rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, you may receive only the net proceeds from the sale of your preemptive and accretion rights by the depositary or, if the preemptive and accretion rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of our ADSs may suffer dilution of their interest in our company upon future capital increases.

We are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement without the prior consent of the ADS holders

We are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement without the prior consent of the ADS holders. Any change related to an increase in deposits or charges for book-entry securities services or any modification that might hinder the rights of the ADS holders will be effective within 30 days after the ADS holders have received notice of such change or modification and such holders will have no right to any compensation whatsoever.

Peru has different corporate disclosure and accounting standards than those you may be familiar with in the United States

Financial reporting and securities disclosure requirements in Peru differ in certain significant respects from those required in the United States. There are also material differences among IFRS, Peruvian GAAP and U.S. GAAP. Accordingly, the information about us available to you will not be the same as the information available to holders of

 

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shares issued by a U.S. company. In addition, the Peruvian Securities Market Law, which governs open or publicly listed companies, such as us, imposes disclosure requirements that are more limited than those in the U.S. in certain important respects. Although Peruvian law imposes restrictions on insider trading and price manipulation, applicable Peruvian laws are different from those in the United States, and the Peruvian securities markets are not as highly regulated and supervised as the U.S. securities markets.

Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the New York Stock Exchange, which may limit the protections afforded to investors

We are a foreign private issuer within the meaning of the New York Stock Exchange (“NYSE”) corporate governance standards. Under NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange. We currently follow certain Peruvian practices concerning corporate governance and intend to continue to do so. Accordingly, holders of our ADSs will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

For example, the NYSE listing standards provide that the board of directors of a U.S. listed company must have a majority of independent directors at the time our company ceases to be a “controlled company.” Under Peruvian corporate governance practices, a Peruvian company is not required to have a majority of independent members on its board of directors. The listing standards for the NYSE also require that U.S. listed companies, at the time they cease to be “controlled companies,” have a nominating/corporate governance committee and a compensation committee (in addition to an audit committee). Each of these committees must consist solely of independent directors and must have a written charter that addresses certain matters specified in the listing standards. Under Peruvian law, a Peruvian company may, but is not required to, form special governance committees, which may be composed partially or entirely of non-independent directors. In addition, NYSE rules require the independent non-executive directors of U.S. listed companies to meet on a regular basis without management being present. There is no similar requirement under Peruvian law.

The NYSE’s listing standards also require U.S. listed companies to adopt and disclose corporate governance guidelines. In July 2002, the Peruvian Securities Commission and a committee comprised of regulatory agencies and associations prepared and published a list of suggested non-mandatory corporate governance guidelines called the “Principles of Good Governance for Peruvian Companies.” Although we have implemented these measures, we are not legally required to comply with the corporate governance guidelines, only disclose whether or not we are in compliance.

Minority shareholders in Peru are not afforded equivalent protections as minority shareholders in other jurisdictions and investors may face difficulties in commencing judicial and arbitration proceedings against our company or the controlling shareholder

Our company is organized and existing under the laws of Peru. Accordingly, investors may face difficulties in serving process on our company, officers and directors or significant shareholders in the United States of certain other jurisdictions, and in enforcing decisions granted by courts located in other jurisdictions against our company, our officers and directors or significant shareholders that are based on securities laws of jurisdictions other than Peru.

In Peru, there are no proceedings to file class action suits or shareholder derivative actions with respect to issues arising between minority shareholders and an issuer, its controlling shareholders or directors and officers. Furthermore, the procedural requirements to file actions by shareholders differ from those of other jurisdictions, such as in the United States. As a result, it may be more difficult for our minority shareholders to enforce their rights against us, our directors, officers or significant shareholders as compared to the shareholders of a U.S. company. The deposit agreement provides that the depositary has no obligation to commence or become involved in any judicial proceedings and any other legal actions relating to the ADSs or the deposit agreement, either on behalf of the ADS holders or on behalf of any other person.

 

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Judgments of Peruvian courts with respect to our common shares will be payable only in soles

If proceedings are brought in the courts of Peru seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other than soles. Under Peruvian exchange control limitations, an obligation in Peru to pay amounts denominated in a currency other than soles may be satisfied in Peruvian currency only at the exchange rate, as determined by the Peruvian Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Peruvian investors with full compensation for any claim arising out of or related to our obligations under the ADSs.

If securities or industry analysts publish unfavorable research about our business or if they cease to follow our business, the price and trading volume of the ADSs could decline

The trading market for the ADSs will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades the ADSs or publishes unfavorable research about our business, the price of the ADSs would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for the ADSs could decrease, which could cause the price and trading volume of the ADSs to decline.

 

ITEM 4.

INFORMATION ON THE COMPANY

 

A.

History and Development of the Company

Graña y Montero has been operating in Peru since 1933 and it is listed on the Lima Stock Exchange since 1997. Set forth below are key highlights in our company’s history:

 

   

Graña y Montero traces its origins to its predecessor company GRAMONVEL, founded more than 85 years ago by, and named after, engineers Alejandro Graña Garland, Carlos Montero Bernales and Carlos Graña Elizalde. We began primarily as a construction company.

 

   

We expanded our operations internationally in 1943 with our contract to build a Nestle factory in Venezuela.

 

   

In 1948, we began one of our largest projects since our founding—the construction of the city of Talara for the International Petroleum Company, which was completed in 1957.

 

   

In 1949, GRAMONVEL merged with Morris y Montero to form Graña y Montero Contratistas Generales S.A. (now GyM S.A., our construction subsidiary), expanding its service offerings and increasing its capacity to undertake large-scale infrastructure projects.

 

   

In 1983, we began a diversification strategy by developing complementary lines of business. In 1984, we founded GMP, our oil and gas subsidiary. In 1985, we partnered with Sonda S.A. (a Chilean IT services company) to form GMD, our IT services subsidiary. Beginning in 1987, we founded our real estate development business, which currently operates under Viva GyM, which was incorporated in 2008.

 

   

In 1996, we reorganized our subsidiaries and founded Graña y Montero, which became the principal shareholder of all our subsidiaries. In 1997, we listed our company on the Lima Stock Exchange.

 

   

In 1998, our company built Larcomar, a landmark shopping center in Lima that has become a popular tourist destination, which we sold in 2010.

 

   

In 2003, 2006 and 2007, we were awarded the concessions for the construction, operation and maintenance of the Norvial, Canchaque and Survial toll roads, respectively.

 

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In 2007, we also developed the first large-scale affordable housing project in Lima, consisting of 3,400 apartment units and located in the district of El Agustino.

 

   

In 2012, we began operating the Lima Metro.

 

   

In July 2013, we listed our company on the NYSE.

 

   

In 2012 and 2013, we acquired 74.0% and 6.4%, respectively, of Ingeniería y Construcción Vial y Vives S.A. (“Vial y Vives”), an engineering and construction company specializing in the Chilean mining sector. In August 2013, we acquired 86.0% of DSD Construcciones y Montajes S.A. (“DSD Construcciones y Montajes”), a Chilean engineering and construction company specialized in providing services to the energy, oil and gas, cellulose and mining sectors in Chile and Latin America. In July 2014, our subsidiary Vial y Vives merged with DSD Construcciones y Montajes to form Vial y Vives-DSD S.A. (“Vial y Vives-DSD”), through our subsidiary GyM Chile SpA, we hold an 86.2% interest in Vial y Vives-DSD. As of the date of this annual report, we hold a 94.5% interest in Vial y Vives-DSD.

 

   

In December 2014, our subsidiary GyM S.A. acquired 70% of the share capital of Morelco S.A.S. (“Morelco”), a Colombian engineering and construction company specialized in the oil and gas and other energy sectors.

 

   

In April 2015, GMP started operations of its hydrocarbon extraction services in Blocks III and IV for Perupetro, in the provinces of Talara and Paita in northern Peru.

Graña y Montero, S.A.A. was incorporated in 1996 and is a publicly-held corporation (sociedad anónima abierta) organized under the laws of Peru. Our principal executive office is located at Avenida Paseo de la República 4667, Lima 34, Peru, and our main telephone number is +511-213-6565. Our website address is www.granaymontero.com.pe. Information contained on, or accessible through, our website is not incorporated in this annual report, and you should not consider any such information part of this annual report. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

For information on our organizational structure, see “Item 4.C. Information on the Company – Organizational Structure.”

For information on our capital expenditures and divestitures, see “Item 5.B. Operating and Financial Review and Prospects— Liquidity and Capital Resources—Capital Expenditures.”

For information on the availability of filings we make electronically with the SEC, see “Item 10H. Additional Information—Documents on Display.”

 

B.

Business Overview

Overview

We are the largest engineering and construction company in Peru as measured by revenues during 2019, and one of the largest publicly-traded engineering and construction companies in Latin America as measured by market capitalization as of December 31, 2019, with strong complementary businesses in infrastructure and real estate.

With more than 85 years of operations, we have a long track record of successfully completing the engineering and construction of many of Peru’s landmark private- and public-sector infrastructure projects, such as the Lima International Airport and the Peru LNG gas liquefaction plant, and we believe we have a track record of operational excellence in our markets. We have developed a highly-experienced management team, a talented pool of more than 1,900 engineers and a skilled work force that share our core corporate values of quality, professionalism, reliability and efficiency. As a company listed on the Lima Stock Exchange since 1997 and the NYSE since 2013, we also endeavor to meet the highest corporate governance standards in Peru.

 

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Beginning in the mid-1980s, we leveraged our engineering and construction expertise into complementary lines of business, such as the development, ownership, operation and maintenance of infrastructure assets (including the Lima Metro, Peru’s only urban railway system), as well as real estate development. We believe our business mix creates significant opportunities across our lines of business, generates more stable revenues and earnings on a consolidated basis, and provides additional financial stability to our company.

Through the successful execution of those projects, we have developed operational experience in other Latin American countries. We have further expanded our activities in other key markets of the region through the acquisition of businesses with solid positions in those markets. In October 2012, we acquired a controlling interest in Vial y Vives, an engineering and construction company specializing in the Chilean mining sector, and in August 2013, we acquired a controlling interest in DSD Construcciones y Montajes, a Chilean engineering and construction company specialized in providing services to the energy, oil and gas, cellulose and mining sectors in Chile and Latin America. In December 2014, we acquired a controlling interest in Morelco, an engineering and construction company specialized in the Colombian oil and gas and other energy sectors.

The tables below show our backlog, revenues and EBITDA from 2015 to 2019.

 

LOGO

During 2019, we generated revenues of S/4,085.0 million (US$1,231.5 million), EBITDA of -S/159.0 million (-US$47.9 million), and net loss of S/838.6 million (US$252.8 million) including net loss attributable to controlling interest of S/884.7 million (US$266.7 million).

Our Strengths

We believe our company’s strengths provide us with significant competitive advantages. Our principal strengths include the following:

Leader in growing markets

We are the largest engineering and construction company in Peru as measured by revenues during 2019, and one of the largest publicly-traded engineering and construction companies in Latin America as measured by market capitalization as of December 31, 2019. Prior to the impact of the COVID-19 pandemic, Peru has been undergoing a period of development, with over 4.0% average annual real GDP growth between 2010 and 2019 and significant private and public investments in the mining, power, oil and gas, transportation, real estate and other infrastructure sectors. We have completed some of the most complex and large-scale infrastructure projects in the country, and we believe we are an integral part of Peru’s ongoing transformation with projects that contribute to the overall economic development of the country. We believe our expertise, track record, scale and operational capabilities in Peru position us to take advantage of the country’s favorable economic conditions and growth opportunities. We believe we are also a significant infrastructure concessionaire in Peru and a large apartment building developer in Peru.

 

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Long-standing track record for operational excellence

During our more than 85-year history, we have focused on the successful and on-time execution of complex projects, through our “deliver before deadline” and “lean construction” initiatives. Our extensive experience has allowed us to gain deep market knowledge and expertise, which help us better serve our clients and manage risks in our contractual arrangements. We believe we have a track record of operational excellence. We believe that our track record of operational excellence are key factors in winning new and repeat business, as well as in partnering with strategic industry players and attracting top talent to our company.

Complementary lines of business which generate more stable cash flows and create additional business opportunities across our segments

We have expanded our company by developing complementary lines of business, many of which have become leaders in their respective markets. These lines of business create significant business opportunities across our segments, enabling us to capture a greater share of infrastructure spending, and also generate cost synergies. One example is Norvial, a toll road concession operated within our Infrastructure segment. In addition to managing the concession, we used our E&C segment to design and construct the expansion of the highway and, once constructed, we are now using our Infrastructure segment to operate and maintain the highway. In addition to increasing our levels of consolidated activity, many of these lines of business enable us to achieve more stable cash flows through medium and long-term client service contracts and concessions, which counter in part the cyclicality of the engineering and construction business.

Significant backlog

Our backlog amounted to US$1,396.4 million as of December 31, 2019. We believe that our backlog, which as of December 31, 2019 represented approximately 1.13x of our related 2019 revenues, provides visibility as to our potential for growth in the coming years, although backlog may not always be an accurate indicator of future revenues. See “Item 3.D. Key Information—Risk Factors—Risks Related to our Company—Our backlog and our ratio of historical backlog to revenues may not be reliable indicators of future revenues or profit.” Moreover, we believe our backlog is strategically targeted to our key end-markets such as mining, infrastructure, power, energy and real estate. Approximately 72.8% of our backlog across our segments as of December 31, 2019 is comprised of contracts with the private sector. Furthermore, we continuously evaluate bidding on contracts arising from the significant ongoing private and public investments in Latin America.

Proven ability to create and grow businesses organically and through acquisitions

We have proven our ability to extend our engineering and construction capabilities into complementary lines of business in a diverse range of industries, some of which began as innovative start-ups in response to client needs. For example, in October 2012, we acquired Vial y Vives, an engineering and construction company specializing in the Chilean mining sector which complements our leading E&C practice in the mining sector. In August 2013, we acquired a controlling interest in DSD Construcciones y Montajes, a Chilean engineering and construction company whose main focus is electromechanical works and assemblies in construction projects related to oil refineries, pulp and paper, power plants and mining plants. In December 2014, we acquired a controlling interest in Morelco, an engineering and construction company specialized in the Colombian oil and gas and other energy sectors. We believe that our proven ability to create new businesses, develop businesses organically and acquire and successfully integrate new businesses into our platform is a key competitive advantage to expand our operations in Latin America.

Highly experienced management, talented engineers and skilled workforce, with shared core corporate values

We motivate our management through performance-based compensation, which align their interests with those of our shareholders. In addition, through our efforts to attract, train and retain our workforce, we have built a talented team of employees, including more than 1,900 engineers. We also have access to a network of approximately 132,000 manual laborers throughout Peru that can supplement our workforce when required by our construction pipeline. Thanks to our extensive and talented team, we have the capability and scale to undertake large and complex projects in Peru and elsewhere.

We have developed a strong corporate culture based on principles of high quality, professionalism, reliability and efficiency, as well as compliance and risk management. We safeguard the health and safety of our collaborators and of all the persons participating in our operations and services. To that end, we provide safe work conditions, we manage risks in a timely manner and we promote a culture of prevention, starting from the leadership and commitment of our senior management. In 2019, we had an accident incidence rate of 0.25, calculated over 200,000 hours worked.

 

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Our Strategies

In response to the impact of our association with Odebrecht in certain projects in Peru and the termination of the GSP pipeline concession, we continue to implement a strategic action plan, as described in “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments (2017—2020).”

Our vision is to be “the most reliable engineering services company in Latin America.” Our key long-term strategies to achieve this vision include being the contractor of choice for large-scale and complex projects in Peru and other key Latin American markets, and continuing to foster our corporate values throughout the organization.

We intend to enhance our position as a contractor of choice for large-scale and complex infrastructure projects in Peru and other key Latin American markets, by (i) utilizing the scale, expertise and market knowledge we have accumulated during our more than 80-year operating history to strengthen and expand our E&C segment; (ii) maintaining and further developing our long-standing client relationships based on our ongoing pursuit of operational excellence; (iii) continuing to strategically partner with global industry leaders, with complementary capabilities for specific projects that we undertake; and (iv) leveraging our expertise in the mining sector with a view to becoming the premier mining services provider throughout Latin America.

We will continue to instill our core corporate values throughout our organization, while also transmitting these values to surrounding communities. We will continue to attract and develop our human capital through various training, mentorship and reward programs in order to maintain our position as the best company in Peru to learn and work in the engineering and construction field. We also seek to promote social welfare by fostering relationships with the communities that surround our areas of operation. We strive to promote our corporate values to strengthen our organization and improve our performance as well as to have a positive impact on the markets where we operate.

Engineering and Construction

Our E&C segment has a more than 85-year track record and is the largest engineering and construction company in Peru as measured by revenues during 2019, undertaking a broad range of activities relating to: engineering; civil construction; electromechanic construction and building construction. We provide E&C services for a diverse range of end-markets, focusing on the mining, power, oil and gas, transportation, real estate and other infrastructure sectors. The following chart sets forth our 2019 revenues by end-market.

 

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2019 E&C Revenues by End-Market

 

LOGO

 

In our E&C segment, we mainly undertake private-sector projects, particularly projects with a high degree of complexity, which enable us to develop innovative and tailor-made solutions to our clients. We provide our clients with an integral service offering by leveraging our various areas of expertise and engaging in virtually all aspects of project execution, thereby capturing a larger share of investment projects.

In 1999, we began adopting the “lean construction” philosophy as a pillar in our design and construction projects. “Lean construction” aims to create value for customers by better understanding and considering clients’ needs to improve project design, functionality and cost optimization. “Lean construction” also provides techniques and tools that significantly reduce construction waste by improving planning reliability, process design, coordination and collaboration.

Although we primarily undertake engineering and construction projects in Peru, our clients often ask us to undertake the engineering and construction of large and complex projects in other countries, such as Mexico, the Dominican Republic, Bolivia, Panama and Chile. As a result, we have developed extensive experience executing projects throughout Latin America. To further capitalize on our capabilities and expertise, we have expanded our activities into other key markets, such as Chile and Colombia, which have been benefitting from high levels of investment and are aligned with our areas of strategic focus. In 2019, approximately US$190 million (S/630 million) of our E&C revenues were derived from international projects outside of Peru.

The acquisition of two companies, Vial y Vives and DSD, which were later merged, has solidified our presence in Chile. While we have been undertaking projects in Chile since 1995, such as the construction of the transmission line and crusher of the Caserones mine for SCM Minera Lumina Copiapo, we believe we will benefit from the established and long-lasting presence in the country of both Vial y Vives and DSD Construcciones y Montajes. Moreover, through the acquisition in December 2014 of Morelco, an engineering and construction company focused on the oil and gas and other energy sectors, we established our presence in the Colombian market.

Given the prevalence of mining operations in our principal markets, we have significant expertise with respect to specialized engineering and construction services for the mining sector. As a result, we believe we are one of the leading mining construction companies in Latin America and we leverage this expertise both within our principal markets as well as to selectively undertake complex projects across the region.

 

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The table below sets forth selected financial information for our E&C business segment.

 

     As of and for the year ended December 31,  
     2017     2018     2019     2019  
     (in millions of S/, except as indicated)    

(in millions of

US$)(1)

 

Revenues

     2,331.9       1,960.9       2,797.3       843.3  

Net profit

     12.4       (85.4     (140.6     (42.4

Net profit (loss) attributable to controlling

     12.1       (86.9     (137.1     (41.3

EBITDA

     120.0       19.2       2.9       0.9  

EBITDA margin

     5.1     1.0     0.1     —    

Backlog (in millions of US$)(2)

     772.5       782.6       —         910.1  

Backlog/revenues ratio(2)

     1.1x       1.3x       —         1.08x  

 

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

(2)

For more information on our backlog, see “—Backlog.” Backlog is calculated as of the last day of the applicable year. Revenues are calculated for such year and converted into U.S. dollars based on the exchange rate published by the SBS on December 31 of the corresponding year.

Principal Engineering and Construction Activities

The following chart sets forth our 2019 revenues by E&C activity.

2019 E&C Revenues by Activities

 

LOGO

Civil Construction

Our civil construction activities focus on infrastructure projects, including earthworks, the construction of roads, highways, transportation facilities (e.g., mass transit systems such as the Lima Metro), dams, hydroelectric plants, water supply and sewage projects, excavation, structural concrete construction and tunneling. Our civil construction projects are generally large and complex, requiring the use of large construction equipment and sophisticated managerial and engineering techniques.

Electromechanic Construction

Our electromechanic construction activities include the construction and assembly of concentrator plants, pipelines, transmission lines, gas and oil networks, and substations, predominantly for energy projects and industrial plants.

 

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Engineering Services

Our engineering activities consist of a broad range of services relating to engineering, supervision, geometrics and environmental consultancy, including pre-investment studies, pre-feasibility studies, process design, project development, supervision of executive designs and construction management, including construction site reviews.

Building Construction

Through our building construction activities, we respond to the demands of the Peruvian real estate market with a focus on the construction of hotels, affordable housing projects, residential buildings, office buildings, shopping centers, and industrial plants.

Other Services

The other services we provide include procurement services, maintenance of plants and industrial facilities and rental of construction equipment.

Major Projects

We have played an active role in the development of the infrastructure sector in Peru, as well as other countries in Latin America, including the construction of roads, hotels, hospitals, shopping centers, housing developments, concentrator plants, hydroelectric power plants, thermal power plants and transmission lines as well as water supply and sewage projects, irrigation projects and dam building, among others. Throughout our history, we have participated, on our own or through minority or majority interests in joint operations, in a diverse range of landmark projects, including the following:

 

   

in 1948, Talara city in northern Peru for the International Petroleum Company, consisting of 2,000 homes, schools, churches, a movie theater and airport;

 

   

in 1950, a 430 km stretch of the Panamericana Sur highway;

 

   

in 1952, the Rebagliati hospital, the largest public hospital in Peru;

 

   

in 1961, the Jorge Chavez International Airport, Peru’s first international airport, located in Lima;

 

   

in 1988, the Chavimochic irrigation project, the most significant irrigation project in Peru;

 

   

in 1992, the Four Seasons Hotel in Mexico City, Mexico;

 

   

in 1995, the U.S. Embassy in Peru;

 

   

in 2004, the Ralco hydroelectric power plant in Chile;

 

   

in 2004, the gas fractionation plant and, in 2008, its expansion for Consorcio Camisea, Camisea project, the largest energy project in Peru’s history;

 

   

in 2005, the Cerro Verde mine concentrator plant for Phelps Dodge; in 2008, the Cerro Corona concentrator plant for GoldFields;

 

   

in 2008, the Parque Agustino real estate development project, the first major affordable housing project in Peru, which consists of 3,400 units;

 

   

in 2009, the Westin Lima Hotel, one of the tallest buildings in Peru;

 

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in 2010, the Melchorita liquefaction plant for Peru LNG, Camisea project;

 

   

in 2010, the Gran Teatro Nacional, the most modern theater in Peru;

 

   

in 2011, the Pueblo Viejo Mine concentrator plant for Barrick Gold Corp. in the Dominican Republic;

 

   

in 2011, the first stretch of Line One of the Lima Metro for the Peruvian Ministry of Transport and Communications;

 

   

in 2012, for project manager Bechtel, the Antapaccay copper concentrator developed by Xstrata Copper, the world’s fourth largest copper producer;

 

   

in 2013, expansion of the plant for Cementos Lima, the largest cement producer in Peru;

 

   

in 2014, the second stretch of Line One of the Lima Metro for the Peruvian Ministry of Transport and Communications;

 

   

in 2014, construction of the Nueva Fuerabamba city, an integral real estate development project for the population surrounding the Las Bambas mining project;

 

   

in 2014, construction of a primary crusher for Mina Caserones, developed by Minera Lumina Copiapo, which is expected to have a daily production capacity of 144,230 tonnes;

 

   

in 2015, construction of a copper concentrator plant for the Las Bambas mining project, managed by Bechtel and developed by Xstrata Copper;

 

   

in 2015, expansion of the process plant for the Cerro Verde mine, one of the biggest concentrator plants in Latin America;

 

   

in 2015, engineering, procurement and construction of Guyana Goldfields’ Aurora gold project in Guyana, with the scope of works including a 1.75 Mt/a processing plant, power station and integration management;

 

   

in 2015, design, engineering, procurement and construction of a new stock pile and 10,000 conveyor belts for the Escondida Mine, managed by Bechtel;

 

   

in 2016, engineering, procurement and construction of the 510 MW Cerro del Águila S.A. hydroelectric plant for IC Power, which represents approximately 10% of Peru’s installed generation capacity;

 

   

in 2016, engineering, procurement and construction of La Chira, a waste water treatment plant for the city of Lima for which we also have the concession through a joint operation with Acciona Agua;

 

   

in 2016, engineering, procurement and construction of a concentrator plant for the La Inmaculada silver and gold project, developed by Hochschild Mining, with a daily processing capacity of 3,500 tonnes;

 

   

in 2017, prefabrication of certain products for the modernization of the Talara refinery in Peru;

 

   

in 2017, various urban and industrial projects in the Lurín district of Lima, Peru, including moving earth for a road platform, a secondary network for potable waters and sewage, and electrical distribution networks;

 

   

in 2017, construction of a 20-story residential building on the Pezet Avenue of Lima;

 

   

in 2017, construction of a pavilion at the Universidad del Pacifico, Peru;

 

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in 2017, construction of a multi-use hall at the Universidad ESAN in Peru;

 

   

in 2018, construction and rehabilitation of an expressway known as Línea Amarilla for Vinci;

 

   

in 2018, construction and design of the Talbot project, a luxury business complex consisting of offices and a hotel with state-of-the-art technology in Lima;

 

   

in 2018, execution of civil works and assembly of structures for the wet area of the Toquepala mine in Southern Peru;

 

   

in 2019, execution of civil works in the Quellaveco mine for AngloAmerican in Peru;

 

   

in 2019, civil works for a modernization project in the Aceros Arequipa plant for Aceros Arequipa Corporation in Peru;

 

   

in 2019, rehabilitation of the runway of the Ayacucho airport;

 

   

in 2019, structural reinforcement project in Plaza del Sol office building in Lima;

 

   

in 2019, construction and rehabilitation of a highway that crosses Lima, Huacho and Pativilca;

 

   

in 2019, ball mill stator replacement in Antamina, located in Ancash, Peru; and

 

   

in 2019, construction of a new water recirculation system and implementation of the north branch for the transfer of tailings in Antofagasta, Chile.

We currently have a diversified portfolio of ongoing projects, on our own or through majority or minority interests in joint operations, in a wide range of sectors in Peru and the other countries where we operate, including the following:

 

   

construction of a hospital for cancer patients in Lima, Peru, which is scheduled to be completed in the first half of 2020;

 

   

construction of the Vistamar hotel with two buildings in Miraflores, which is scheduled to be completed in October 2020;

 

   

construction of a luxury Ibis Hotel in San Isidro with 9 floors and 2 basements, which is scheduled to be completed in August 2020;

 

   

execution of electromechanical and civil works in the construction of the Mina Justa mine for Marcobre, which is scheduled to be completed in August 2020;

 

   

assembly of mechanical and electrical equipment for the modernization project in the Aceros Arequipa plant for Aceros Arequipa Corporation in Peru, which is scheduled to be completed in October 2020;

 

   

construction of tunnels to transport thick mineral and mineral waste in Moquegua, Peru, which is scheduled to be completed in September 2020;

 

   

crushing and transport of material in Minera Spence in Chile, which is scheduled to be completed in June 2020;

 

   

construction of a hotel in Lince, Peru, which is scheduled to be completed in April 2021;

 

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execution of complementary works for the auxiliary units of the Talara refinery for Cobra Perú (three contracts), which is scheduled to be completed during the first half of 2021;

 

   

construction of the Concentrator plant in Moquegua, Perú, which is scheduled to be completed in July 2021;

 

   

pebble grinding and crushing construction of the Quebrada Blanca 2 concentrator for Minera Teck Quebrada Blanca in Chile, which is scheduled to be completed in May 2021; and

 

   

electromechanical civil assembly of the water treatment plant, cooling towers, turbogenerators and evaporators for the map project for Celulosa Arauco Constitución in Chile, which is scheduled to be completed June 2021.

Clients

We believe that we have developed long-term relationships with many clients as a result of our performance over the years and are focused on the successful and on-time execution of complex projects, through our “deliver before deadline” and “lean construction” initiatives. Our extensive experience of operational excellence has allowed us to gain deep market knowledge and expertise, which help us better serve our clients. The principal clients of our E&C segment include renowned domestic and multinational mining, power, oil and gas, transportation and infrastructure development companies, such as AngloAmerican, Southern Peru, Cobra Perú, Marcobre and Corporación Aceros Arequipa, Compañía Minera TECK Quebrada Blanca S.A., Minera Spence S.A., ENAP Refinerías and Minera Escondida LTDA, among others.

Project Selection and Bidding

We win new engineering and construction contracts through private and public bidding processes or direct negotiation, from a variety of sources, including potential client requests, proposals from existing or former clients, opportunities sought by our commercial team and from requests by the Peruvian government. Approximately 99.9%, 82.5% and 97.3% of our 2019, 2018 and 2017 revenues in our E&C segment, respectively, came from private-sector contracts. The Peruvian government and its agencies typically award construction contracts through a public bidding process conducted in accordance with the Peruvian State Contracting Law (Ley de Contrataciones del Estado). In the private sector, in addition to obtaining new projects, another important source of revenue involves increases in the scope of work to be performed in connection with already existing projects. These arrangements are typically negotiated directly with the client, often during the course of the work we are already performing for that client.

We have a designated team that oversees the management of project proposals and a commercial team that reviews and evaluates potential projects in order to estimate costs. We also have a business development committee, which makes decisions about whether or not to apply for projects. In considering whether to bid for a potential project, we principally consider the following factors: competition and the probability of being awarded the project; project size; the client; our experience undertaking similar projects; and the availability of resources, including human resources. As part of the project selection process, our commercial team performs a detailed cost analysis utilizing sophisticated software we developed to assist in determining whether the project is viable and cost-effective. If we choose to pursue a project, a budget leader is assigned to prepare the offer that is eventually presented to our potential client.

Despite the budgeting risks generally associated with engineering and construction contracts, our management believes that our experience generally allows us to estimate our project costs accurately. Our project management teams also periodically review project budgets for inconsistencies between budgeted and actual costs in order to recover for cost variations through contract renegotiation. Budgeting risks are also mitigated through advance payments. Considering that we receive advance payments for most of our E&C contracts, our E&C projects typically do not require significant working capital investment. Our E&C segment secures financing primarily to purchase machinery and equipment for our construction services.

 

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We are required, in the majority of our construction contracts, to provide a performance bond to guarantee project performance and completion, which remain in effect for the contract’s duration. We are also required to provide performance bonds to secure any advance payments provided to us by our clients. These bonds are periodically reduced during the project’s execution in accordance with project advancement. After the expiration of the contract term, we are typically required to provide an additional performance bond that remains valid for one year.

Contracts

We principally enter into four types of engineering and construction contracts:

 

   

Cost-plus fee contracts. The contract price is based upon actual costs incurred for time and materials plus a fee, which may be a percentage of the costs incurred or a pre-determined fee. Sometimes, cost-plus fee contracts include a target price, and a contractual arrangement that determines our responsibility in the event the total cost of the project exceeds the target price or the benefit we receive if the total contract price results in cost savings. Cost-plus fee contracts tend to involve the least budgeting risk for us.

 

   

Unit price contracts. The contract price is based upon a price per unit (i.e., variable quantities of work priced at defined unit rates). Each line item of the project budget, such as cubic meter of earth excavated or cubic meter of concrete poured, has a defined price, but the quantities of the units may vary. Our bid price reflects our estimate of the costs that we expect to incur for each work unit. These contracts typically include an “escalation” clause which is essentially an adjustment mechanism to account for Peruvian inflation.

 

   

Lump-sum contracts. The contract price is fixed. Our bid is meant to cover all costs and include a profit. The principal risk in these types of contracts are errors in calculating our costs, including those of raw materials; miscalculation of the number of units or workers needed to complete the project; unanticipated technical complexities; or other unexpected events or circumstances that may increase our costs.

 

   

Engineering, procurement and construction (EPC) contracts. EPC contracts, known as “single source” or “turn-key” contracts, are also lump-sum contracts. Pursuant to EPC contracts, we provide a broad range of basic and detailed engineering services, including preparation of the technical project specifications, detailed drawings and construction specifications; technical studies; and identification of lists of materials and equipment necessary for the project. These contracts, which we utilize predominantly for our mining contracts, require a high-level of expertise and generally involve the most budgetary risks for us.

For further information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations.”

Raw Materials

The principal inputs we use in our E&C segment are, among others, fuel, cement and steel. These and the other products we require in our E&C segment may be subject to the availability of raw materials, such as oil and iron, and commodity pricing fluctuations, which we monitor on a regular basis. We typically aim to enter into master supply agreements for a period of six months to one year. Although we obtain the majority of our inputs needs in Peru, we believe we have access to numerous global supply sources. The availability of these inputs, however, may vary significantly from year to year due to various factors including client demand, producer capacity, market conditions, transport costs and specific material shortages, and we may incur additional costs in obtaining them.

We purchase and lease the equipment we require for our E&C segment business from several local and international suppliers, currently with no significant concentration with any particular suppliers. While we do not have difficulty obtaining the equipment we need, we may face difficulties finding skilled personnel who are able to operate certain equipment and machinery.

 

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Competition

We generally compete with some of the largest contractors in Peru and the other countries where we operate. Because the E&C sector is highly competitive, the markets served by our business generally require substantial resources and highly-skilled and experienced technical personnel. The principal competitors of our E&C segment include local companies such as Besalco S.A., Cosapi S.A., San Martín Contratistas Generales, ICCGSA, JJC Contratistas Generales S.A., and international companies such as Techint S.A.C., SSK Montajes e Instalaciones S.A.C., Skanska del Perú S.A., Mota-Engil Peru S.A., Salfacorp S.A., OHL, Acciona, Astaldi, Grupo FCC, Ismocol, Termotecnica, Masa, Thiess and Redpath, among others. For certain projects, due to the size of the project, expertise required and other factors, we may choose to partner with our competitors, including the aforementioned companies.

Competition for our E&C segment is driven by performance, skill and project execution capabilities for completing complex projects in a safe, timely and cost-efficient manner, as well as price.

Infrastructure

We are an important toll road concessionaire in Peru, operating three toll roads. Moreover, we are the concessionaire for the Lima Metro, the largest mass-transit rail system in Peru, and a waste water treatment plant. Additionally, we operate ten multiple fuel storage facilities, four producing oil fields under long-term government contracts and we own a gas processing plant. Also, we provide services to maintain and operate different infrastructure projects.

The table below sets forth selected financial information for our Infrastructure business segment.

 

     As of and for the year ended December 31,  
     2017     2018     2019     2019  
    

(in millions of S/, except as

indicated)

   

(in millions of

US$)(1)

 

Revenues

     1,447.9       1,883.3       1,587.3       478.5  

Net profit

     129.3       184.0       112.1       33.8  

Net profit attributable to controlling

     103.8       152.3       81.3       24.5  

EBITDA

     300.9       411.5       355.5       107.2  

EBITDA margin

     20.8     21.8     22.4     —    

Backlog (in millions of US$)(2)

     544.8       520.8       —         553.9  

Backlog/revenues ratio(2)

     1.2x       0.9x       —         1.16x  

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

(2)

For more information on our backlog, see “—Backlog.” Does not include our Norvial toll road concession or our Energy line of business and our jointly. Backlog is calculated as of the last day of the applicable year. Revenues are calculated for such year and converted into U.S. dollars based on the exchange rate published by the SBS on December 31 of the corresponding year. Includes revenues only for businesses included in backlog.

Our strategy is to pursue concessions with the potential to generate business opportunities across our organization. Once we obtain a concession, our goal is to be involved virtually in all aspects of project execution through the participation of our different business segments, from the design and construction to the operation and maintenance of the infrastructure asset.

Through our Infrastructure segment we participate in a number of joint operations with the objective of bidding for government concessions or other long-term contracts. When bidding, we occasionally look for partners to reduce our risks and achieve the level of expertise needed to meet the demands of each particular project.

 

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The following table shows selected information about our current concessions and long-term contracts as of December 31, 2019.

 

Project

  Year
Granted
    Initiated
Operations
    Expiration    

Characteristics

  % Owned
by Us
    Status  

Toll Roads:

           

Norvial(1)

    2003       2003       2028     183 km     67.0     Operating  

Survial

    2007       2008       2032     750 km     99.9     Operating  

Canchaque

    2006       2010       2025     78 km     99.9     Operating  

Mass Transit:

           

Lima Metro

    2011       2012       2041     33.1 km     75.0     Operating  

Water Treatment:

           

La Chira

    2010       2016       2037     Avg. treatment capacity of 6.3 m3/sec (expected)     50.0     Operating  

Energy:

           

Oil Production (2)

Block I

    1995       1995       2021     Avg. daily production of 727 bbl (2018)     100.0     Operating  

Block V

    1993       1993       2023     Avg. daily production of 107 bbl (2018)     100.0     Operating  

Block III

    2015       2015       2045     Avg. daily production of 712 bbl (2018)     100.0     Operating  

Block IV

    2015       2015       2045     Avg. daily production of 1,898 bbl (2018)     100.0     Operating  

Gas Processing(3)

    2006       2006       N/A     Avg. daily processing capacity of 44 MMcf (2018)     100.0     Operating  

North and Central Fuel Terminals

    2014       2014       2034     Aggregate storage capacity of 2.2 MMbbl     50.0     Operating  

 

(1)

In June 2018, the company transferred economic rights over 48.8% of the share capital of Norvial to Inversiones en Autopistas S.A. by transferring its Class B shares. Our company continues to possess 67% of voting rights of Norvial and an economic interest of 18.2% of Norvial’s share capital. JJC Contratistas Generales S.A. owns the remaining 33.0%.

(2)

Percentages owned in Energy reflect GMP’s ownership. We own 95% of GMP.

(3)

We own a gas processing plant and have a long-term delivery and gas processing contract with Enel Generación Piura S.A., which is in force until November 2023.

A consortium including the company held a concession to operate the South Fuel Terminal beginning in 1997. The terminal had an aggregate storage capacity of 1.4 MMbbl, 50.0%. The concession was terminated on November 2, 2019, and the concession reverted to Petroperú.

Additionally, the Chavimochic concession was awarded in 2013 for the design, construction, operation and maintenance of major hydraulic works in northern Peru. Affiliates of Odebrecht own 73.5% of the Chavimochic consortium, with the remaining 26.5% stake held by us. The second phase of the hydraulic works project has not begun as a result of the government’s failure to deliver the required lands for the project. Chavimochic is currently in discussions with the government in relation to the future of the project.

On November 11, 2013, we entered into a memorandum of understanding with Canada Pension Plan Investment Board (“CPPIB”), to create an alliance regarding a partnership to invest in infrastructure projects in Latin America, mainly Peru, Chile and Colombia. This alliance was non-exclusive and investments were determined on a case-by-case basis. In December 2014, we undertook our first large investment with CPPIB, by formalizing an agreement with Enagas (as defined below) and CPPIB whereby we acquired 51% of Tecgas and owner of 100% of the shares of COGA, the operator of TGP, while Enagas acquired 30% and CPPIB maintained 19% of the participation. On April 24, 2017, we sold our interest in COGA.

 

 

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On September 29, 2015, we entered into a memorandum of understanding with Odebrecht Latinvest to participate with a 20% stake in the shareholder equity of Concesionaria Gasoducto Sur Peruano S.A., for an amount of US$215 million (S/722.4 million). On November 2, 2015, we acquired this 20% stake in GSP through a capital increase. The other shareholders are Odebrecht Latinvest with a 55% stake and Enagas with a 25% stake. Concesionaria Gasoducto Sur Peruano S.A. was responsible for the design, financing, construction and operation of the southern gas pipeline, a project which would bring natural gas to the southern region of Peru, particularly to the provinces of Cuzco, Arequipa, Puno and Moquegua. The GSP gas pipeline concession was terminated by the Peruvian Ministry of Energy and Mines on January 24, 2017. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments (2017—2020)—Termination of the Gasoducto Sur Peruano Concession.”

Principal Infrastructure Lines of Business

Toll Roads

Peru’s economic development is underpinned by a strong government commitment to infrastructure investment, with a particular focus on improving the country’s road system through the award of new concessions to the private sector. We believe this commitment offers significant opportunities to our Infrastructure segment. The following map shows the location of the Red Vial 5 road in Peru.

 

LOGO

Our Infrastructure segment currently has three toll road concessions through our subsidiaries Norvial, Survial and Canchaque. All three toll roads are currently in operation and we have the authorizations, permits and licenses necessary to fulfill our obligations under each concession, including releases of rights of way. All of our toll road concessions have utilized the construction services of our E&C segment and the roads are currently operated and maintained by our subsidiary Concar. The table below sets forth selected financial information relating to our toll roads.

 

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     For the year ended December 31,  
     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Revenues

     263.8       280.8       326.3       98.4  

EBITDA

     91.1       102.3       77.4       23.3  

EBITDA margin

     34.5     36.4     23.7     23.7

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

The charts below set forth the breakdown of our revenues and EBITDA from our toll road concessions for 2019. The charts below set forth the breakdown of our revenues and EBITDA from our toll road concessions for 2019.

 

LOGO

Norvial

Under our Norvial concession, we operate and maintain part of the only major highway that connects Lima to the northwest of Peru. This 183-km road, known as Red Vial 5, runs from the cities of Ancón to Pativilca and has three toll stations. The concession was awarded to Norvial in 2003 for a 25-year term. In June 2018, the company transferred economic rights over 48.8% of the share capital of Norvial to Inversiones en Autopistas S.A. by transferring its Class B shares. Our company continues to possess 67% of voting rights of Norvial and an economic interest of 18.2% of Norvial’s share capital. Additionally, JJC Contratistas Generales S.A. owns 16.8% and Inversiones en Infraestructura Perú S.A.C. owns 16.2%.

Norvial’s revenue derives from the collection of tolls. For the Norvial toll road, the toll rate is set out in the Norvial concession agreement and adjusted in accordance with a contractual formula that takes into account the sol/U.S. dollar exchange rate and Peruvian and U.S. inflation. We are required to transfer 5.5% of our monthly toll revenue to the Peruvian Ministry of Transport and Communications and pay a 1% regulatory fee to the Peruvian Supervisory Agency for Investment in Public Transportation Infrastructure.

Our obligations under the concession include expanding the already existing road by, among other things, adding two additional lanes. The first stage of construction was completed in 2008, and the second stage commenced in the second quarter of 2014 and was completed by the end of 2019. The capital investment for the second stage was US$96 million (S/319.2 million).

Unlike other toll roads in Peru, Norvial charges toll fees in both directions. Our road is highly transited both by heavy vehicles, primarily for the purpose of transporting goods, and also by passenger vehicles, which typically use the road to access tourist destinations. In June 2018, we signed an investment agreement with BCI Perú to monetize future dividends of Norvial. The amount of the transaction was US$42.3 million, the proceeds of which were applied to the reduction of indebtedness related to GSP. Recent Peruvian legislation in response to the ongoing COVID-19 pandemic has prohibited certain toll collections. The Peruvian executive branch has initiated an action to declare government prohibitions on collecting tolls unconstitutional, and the company is evaluating its legal options in respect of the same. The following table sets forth average daily traffic volume and average toll fees charged for vehicle equivalents in respect to the Norvial toll road concession for 2017, 2018 and 2019.

 

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     For the year ended December 31,  
     2017      2018      2019  

Average daily traffic by vehicle equivalents(1)

     24.965        26.095        26.835  

Average toll fee charged for vehicle equivalents (in S/)

     14.76        15.22        15.45  

 

(1)

Each automobile is counted as one equivalent vehicle and commercial vehicles (such as trucks or buses) represent the number of equivalent vehicles equal to the ratio between the toll rate applicable to commercial vehicles and that which is applicable to one automobile.

The table below sets forth selected financial information relating to Norvial.

 

     For the year ended December 31,  
     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Revenues

     149.5       163.1       272.7       82.2  

Net profit

     49.4       17.2       17.3       5.2  

EBITDA

     81.4       87.8       94.2       28.4  

EBITDA margin

     54.5     53.8     34.5      

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

Survial

Under our Survial concession, we operate and maintain a 750 km road from the San Juan de Marcona port to Urcos, Peru, which is connected to an interoceanic road that runs up to the Peruvian-Brazilian border. The road has five toll stations and three weigh stations. The concession was awarded to Survial in 2007 for a 25-year term. We own 99.9% of Survial. The following map shows the location of the road in Peru.

 

LOGO

Our obligations under the concession include the construction of the road, which was completed in 2010.

Our revenue from this concession consists of an annual fee paid to Survial by the Peruvian Ministry of Transport and Communications in consideration for the operation and maintenance of the road, which fee can vary depending on the amount of maintenance required due to road damages. In 2017, 2018 and 2019, the fee amounted to US$28.4 million (S/92.2 million), US$8.4 million (S/28.3 million) and US$9.8 million (S/32.4 million), respectively. Our revenue in this concession does not depend on traffic volume.

 

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Additional revenues of the concession are generated from the execution of additional works, work we perform as a result of catastrophic events and emergency maintenance. These revenues are billed when approval is received from the grantor and/or the regulator of the work in progress. In 2017, 2018 and 2019, the additional revenues amounted to US$1.0 million (S/0.2 million), US$15.9 million (S/53.8 million) and US$2.0 million (S/6.6 million), respectively.

Canchaque

Under our Canchaque concession, we operate and maintain a 78 km road from the towns of Buenos Aires to Canchaque, in Peru. The road has one toll station. The concession was awarded to Canchaque in 2006 for a 15- year term. We own 99.96% of Canchaque. Our obligations under the concession include the construction of the road, which was completed in 2009. Our revenue from this concession consists of an annual fee paid by the Peruvian Ministry of Transport and Communications in consideration for the operation and maintenance of the road, which fee can vary depending on the amount of road maintenance required due to road wear and tear. In 2017, 2018 and 2019, the fee amounted to US$5.1 million (S/16.6 million), US$7.8 million (S/26.2 million) and US$2.7 million (S/8.8 million), respectively. Our revenue in this concession does not depend on traffic volume.

Additional revenues of the concession are generated from the execution of additional works, work we perform as a result of catastrophic events and emergency maintenance. These revenues are billed when approval is received from the grantor and/or the regulator of the work in progress. In 2017, 2018 and 2019, the additional revenues amounted to US$0.33 million (S/1.1 million), US$1.8 million (S/6.0 million) and US$1.1 million (S/3.7 million), respectively.

Additional Toll Road Projects

We continuously evaluate infrastructure projects and strategically present public-private partnership proposals and participate in bidding processes for road concessions. In 2012 we were awarded, and in 2013 we signed the contract for, a 40-year concession for the 4.6 km Vía Expresa Sur, one of the main roads in Lima, which crosses the city from north to south. The road is intended to connect downtown Lima to Panamericana Sur, a highway that runs from Ecuador to Chile. Our estimate of the total investment under the concession, as submitted in our bid, was approximately US$200 million (S/.672 million). Such investment is intended to be made during the construction phase, which was originally to be completed in 2018. Our revenue would derive from the collection of a toll fee upon completion of the construction. The concession was expected to generate a minimum annual revenue of US$18 million (S/.60.5 million) during the first two years of the concession term, US$19.6 million (S/.65.9 million) for the third year. If in a particular year, our annual revenue would be lower than the minimum guaranteed, the government would compensate us for the difference, up to an amount not to exceed US$10 million (S/.33.6 million). The beginning of the construction phase remains subject to expropriation by the government of the land necessary for the construction of the road.

In June of 2017, we signed Initial and Additional Acts of Suspension of the Concession with the Municipality of Lima to freeze the responsibilities of the government, on the one hand, and the concessionaire, on the other hand, with respect to the concession. The concessionaire continues to act as custodian of certain assets of which it had taken possession and continues to maintain certain performance guaranties in connection with the concession. The government and the concessionaire had agreed to meet and coordinate aspects of the project, with the goal of resuming operations. However, we received a letter from the Municipality of Lima in which the Municipality communicated its desire to cease discussions to relaunch the project. We cannot assure you that this concession contract will be resumed.

Mass Transit

In 2011, we were awarded a 30-year concession for the operation of Line One of the Lima Metro, Peru’s only urban railway system. The concession was awarded to our subsidiary GyM Ferrovías, in which we hold a 75% ownership interest, with the other 25% being held by Ferrovías S.A.C. Our obligations under the contract include:

 

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(i) the operation and maintenance of the five trains provided by the government; (ii) the acquisition of 19 new trains on behalf of the Peruvian government, which will be the legal owner of such trains; (iii) the operation and maintenance of the 19 new trains (24 trains in the aggregate); and (iv) the design and construction of the railway maintenance and repair yard, which was built by our E&C segment. The construction of the second stretch of Line One was completed in July 2014, and started operations on July 25, 2014.

We entered into the fourth addendum to the Lima Metro concession contract on July 11, 2016, in order to expand the transportation capacity of Line One. In accordance with the fourth addendum, the expansion project involves: (i) the purchase of 20 new trains with five-car from Alstom; (ii) the purchase of 39 new cars from Alstom, to be coupled with the 19 existing Alstom trains and the 20 new Alstom trains, resulting in a consolidated fleet of 39 Alstom trains with a six-car configuration; and (iii) the expansion and improvement of the existing infrastructure, including revamping and improvement of five stations, improvements in the electrical systems, a new access route to the maintenance workshop and new switches on the main track. The construction of the expansion of the infrastructure was carried out by our E&C segment and completed by the end of 2018, with the additional trains and rail cars delivered by the end of 2019.

As compensation for the investments of the expansion project, we are entitled to receive from the Ministry of Transportation and Communication, an advance payment of 30% of each investment component as well as the balance of 70% of each investment component compensated through an annual payment for complementary investments (pago annual por inversiones complementarias), which represents the unconditional and irrevocable right to receive a series of 56 quarterly payments from the Ministry of Transportation and Communication. In 2016 we received the advance payment of the trains and cars, and in the third quarter of 2017 we received the advance payment corresponding to the infrastructure expansion.

 

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The construction of the first and second stretches of Line One was carried out by our E&C segment. The operation and maintenance of the trains is carried out by our subsidiary Concar. The map below shows the route of Line One.

 

LOGO

As of December 31, 2019, GyM Ferrovías had spent a total of S/18.2 million (US$5.5 million) in capital expenditures in connection with the Lima Metro.

Our revenue from this concession consists of a quarterly fee that we receive from the Ministry of Transport and Communications based on the kilometers travelled per train and adjusted for inflation, with the fee per kilometer, the number of trains required to be in operation and the number of kilometers that we are required to travel established by the terms of the concession. Our revenues do not depend on passenger traffic volume.

As of December 31, 2019, we operated 44 trains (including four backup trains), which we expect to enable us to travel 4,811,779.65 kilometers per year. The average frequency of the trains is 3 to 6 minutes, depending on the schedule and the fee per kilometer traveled is, for our original 24 trains, S/81.43, and for our 20 newer trains, S/53.19.

 

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Pursuant to the concession, we must comply with certain requirements in the operation of the trains. According to the concession, at least 95% of our trains must be running and available for use and not less than 85% of our trains that are available for use must arrive to destination on scheduled time. The table below shows our monthly average results during 2019.

 

LOGO

 

LOGO

Water Treatment

In 2010, we were awarded a 25-year concession for the construction, operation and maintenance of La Chira waste water treatment plant in the south of Lima. The project is aimed at addressing Lima’s environmental problems caused by sewage discharged directly into the sea. We hold a 50% share in this concession and our partner Acciona Agua holds the remaining 50%. The plant began operations in June 2016.

 

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La Chira’s total investment in the concession was S/250 million (US$74.4 million). La Chira is entitled to collect (i) an annual payment for the investment made in the construction of the project for an amount of S/24.2 million (approximately US$7.1 million), and (ii) and annual payment for the operation and maintenance of the project for an amount of S/6.8 million. These fees are paid by Sedapal S.A., the public utility company responsible for the supervision of the water service in Lima, for a period of 25 years. We funded our construction costs related to La Chira through the sale of government certificates to financial institutions, and, as a result, will not receive future cash flows from item (i). See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Infrastructure.” A joint operation in which our E&C segment participates is undertaking the construction of the waste water treatment plant.

Energy

We currently operate three energy businesses within our Infrastructure segment: Exploration and Production; Natural Gas; and Transport and Distribution. We operate and extract oil from four onshore fields (Block I, Block III, Block IV and Block V) located in the provinces of Talara and Paita in northern Peru. We have two long-term hydrocarbon extraction service contracts with Perupetro, the Peruvian entity responsible for the administration and supervision of all exploration and production contracts in Peru, under which we operate two oil producing fields, Blocks I and V. In addition, we have two long-term license contracts with Perupetro, a state-owned oil and gas company, for two other blocks, Block III and IV, which started operations in April 2015; oil production from these blocks is sold to Petroperú. During 2019, the oil production of our four blocks was approximately 3,654 bbl per day. We also own and operate a natural gas processing plant located in northern Peru, which processes and fractions natural gas liquids and delivers dry gas to a gas-fired power generation company under a long-term processing and fractionation agreement. In addition, we are a 50% partner in Terminales del Perú, a consortium which has a contract with Petroperú to operate and maintain five fuel storage terminals until 2034.

In addition, we are a 50% partner in Oil Tanking Andina Services S.A.C. (“OTAS”). This subsidiary operates a fuel terminal named Terminal Marino Pisco Camisea under a contract subscribed with Pluspetrol to operate an export terminal for gasoline, diesel, propane and butane. Additionally, through OTAS, we are also a 25% partner in Logística Químicos del Sur S.A. (“LQS”), which operates the Terminal de Químicos de Matarani and which dispatched 53,656 tonnes of sodium hydrosulfide for international mining companies in 2018.

The table below sets forth selected financial information relating to our Energy line of business.

 

     For the year ended December 31,  
     2017     2018     2019     2019  
     (in millions of S/)    

(in millions of

US$)(1)

 

Revenues

     436.9       560.5       552.6       166.6  

Net Profit

     38.1       65.0       52.8       15.9  

EBITDA

     142.1       178.9       180.8       54.5  

EBITDA margin

     32.5     31.9     32.7     —    

 

(1)

Calculated based on an exchange rate of S/3.317 to US$1.00 as of December 31, 2019.

 

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The pie charts below set forth the breakdown of our revenues and EBITDA from our Energy line of business for 2019.

 

                    Revenues                                                                                            EBITDA

 

 

LOGO

Oil and Gas Production

We operate and extract oil from four mature fields (Blocks I, III, IV and V) located in the provinces of Talara and Paita in northern Peru. Two of these fields, Blocks I and V, are operated under long-term service contracts under which we provide hydrocarbon extraction services to Perupetro. Hydrocarbons extracted from these two blocks belong to Perupetro, which in turn pays us, once a month, a variable fee per barrel of extracted hydrocarbons. This extraction fee is based on a basket of international crude prices and the level of production. The other two fields, Blocks III and IV, are operated under long-term license contracts with Perupetro. The hydrocarbons extracted are owned by our subsidiary GMP, which in turn pays royalties, on a fortnightly basis, to Perupetro, based on the average prices of three international crude oil prices: Fortis, Suez Blend and Oman Blend crudes. Our activities are focused on proved reserves development and production and are conducted in mature oil fields, which have been producing oil for over 100 years in the case of Block I, over 95 years in the case of Block III, over 95 years in the case of Block IV, and over 50 years in the case of Block V. We believe our activities in these fields bear limited exploration risk.

The following table shows selected information about our fields.

 

Property

   Basin      GMP’s
Ownership
    Expiration      Developed
Acres
     Undeveloped
Acres
 

Block I

     Talara        100     2021        25,154        4,110  

Block III

     Talara        100     2045        7,475        80,986  

Block IV

     Talara        100     2045        8,400        64,550  

Block V

     Talara        100     2023        6,320        2,220  

Block I:

We operate and extract oil and natural gas from Block I under a 20-year hydrocarbon extraction service contract with Perupetro, which was extended for an additional 10-year term and expires in December 2021. Average daily production during 2019 was 647 barrels of crude oil. We operate 219 wells using various oil extraction systems and operate a network of production batteries and pipelines to collect, measure and deliver oil in fiscalization point close to the Talara refinery. The field is located in the province of Talara, department of Piura, in northern Peru, approximately five miles from the Talara refinery, the second largest refinery in the country. Block I is the oldest oil producing field in Peru and has been producing oil since around 1890.

Block III:

We operate and extract oil and natural gas from Block III under a 30-year license agreement with Perupetro, which expires in April 2045. Average daily production during 2019 was 724 barrels of crude oil. We operate 166 wells using various oil extraction systems and operate a network of production batteries and pipelines to collect, measure and deliver oil in a fiscalization point close to the Talara refinery, which purchases the oil according to a contract based on an average price of three international crude oil prices: Fortis Blend, Suez Blend and Oman crudes, as adjusted by certain factors. The field is located between the provinces of Talara and Paita, department of Piura, in northern Peru, approximately 21 miles from the Talara refinery.

 

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Block IV:

We operate and extract oil and natural gas from Block IV under a 30-year license agreement with Perupetro, which expires in April 2045. Average daily production during 2019 was 2,594 barrels of crude oil. We operate 319 wells using various oil extraction systems and operate a network of production batteries and two pipelines to collect, measure and deliver oil in a fiscalization point close to the Talara refinery, which purchases the oil according to a contract based on an average price of three international crude oil prices: Fortis Blend, Suez Blend and Oman crudes, adjusted for costs related to hydrocarbon transportation. The field is located in the province of Talara, department of Piura, in northern Peru, approximately 21 miles from the Talara refinery.

Block V:

We operate and extract oil and natural gas from Block V under a 20-year hydrocarbon extraction service contract with Perupetro, which was extended for an additional 10-year term and expires in October 2023. Average daily production during 2019 in this field was 105 barrels of crude oil. We operate 40 wells in this field using various oil extraction systems. The Block V field is located in the province of Los Órganos, department of Piura, Peru, close to the border with Ecuador. Block V has been producing oil since the 1950s.

The map below shows the geographic location of our oil producing blocks in northern Peru.

 

LOGO

For Block I and Block V, we are entitled to a variable fee paid by Perupetro, which is based on the level of production of each field and a price formula that is based on an average price of three international crude oil prices: Fortis blend, Suez blend and Oman crudes, and a discount over this price of approximately of 72% per barrel. For Block III and Block IV, we pay royalties to Perupetro based on an average price of three international crude oil prices: Fortis blend, Suez blend and Oman crudes. The royalties paid to Perupetro were US$18.79 per barrel during 2017, US$23.17 per barrel during 2018 and US$21.13 per barrel during 2019.

During 2017, 2018 and 2019, we received an average revenue (for all blocks) of US$49.19, US$52.38 and US$53.90, respectively, per barrel of extracted oil, which was equivalent to approximately 91.84%, 73.72% and 86.11%, respectively, of average Brent crude oil prices in the same years. We are not committed to provide a fixed volume of oil or natural gas under our four contracts.

 

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We produce natural gas as a byproduct of the production of crude oil (an average of 4.8 MMcf per day during 2019). In Block I, we provide natural gas to ENEL (formerly EEPSA) under a “take or pay” contract (an average of 3 MMcf per day during 2019), and we pay to Perupetro a fee which varies depending on market conditions. The additional volume of natural gas extracted is sent to our Pariñas plant to be processed and commercialized as liquid natural gas. In Block V, we reinject the natural gas produced back into the wells. In Block III, we use part of the produced gas as fuel to operate wells equipment (pumping units) and we are looking for a market to sell the excess. In Block IV, we also use a certain volume of gas as fuel, and the residual volume since November 2019 is also sent to our Pariñas plant to be processed and commercialized as liquid natural gas. Our revenues for the sale of natural gas are not material relative to our oil production revenues.

Estimated Proved Reserves:

The following table sets forth estimated proved crude oil and natural gas reserves in Blocks I, III, IV and V as of December 31, 2019. We have only included estimates of proved and have not included any estimates of probable and possible reserves.

 

     Crude Oil
(Mbbl)
     Natural Gas
(MMcf)
     Crude Oil
Equivalents
(MBoe)
 
Block I:         

Proved developed producing

     467.10        4,045.7        1,186.3  

Proved developed non—producing

     38.2        —          38.2  

Proved undeveloped

     —          —          —    

Total proved reserves

     505.3        4,045.7        1,224.5  
Block III:         

Proved developed producing

     2,593.9        —          2,593.9  

Proved developed non—producing

     22.4        —          22.4  

Proved undeveloped

     11,467.4        —          11,467.4  

Total proved reserves

     14,083.7        —          14,083.7  
Block IV:         

Proved developed producing

     6,963.9        10,641.0        8,855.6  

Proved developed non—producing

     126.6        194.0        161.1  

Proved undeveloped

     6873.1        10,835.0        8,799.3  

Total proved reserves

     13,963.6        23,424.3        17,816.0  
Block V:         

Proved developed producing

     1,391.1        —          1,391.1  

Proved developed non—producing

     —          —          —    

Proved undeveloped

     —          —          —    

Total proved reserves

     1,391.1        —          1,391.1  
Total:         

Proved developed producing

     11,415.9        14,686.7        14,027.0  

Proved developed non—producing

     187.2        194.0        221.7  

Proved undeveloped

     18,340.6        12,589.3        20,578.6  

Total proved reserves

     29,943.7        27,470.0        34,827.3  

Proved reserves are those quantities of oil and natural gas which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. To achieve reasonable certainty, we employed methodologies that have been demonstrated to yield results with consistency and repeatability. The methodologies and economic data used in the estimation of the proved reserves in the fields include, but are not limited to, well logs, geologic maps and available down hole and production data, seismic data, and well test data.

 

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Reserve amounts were based on the 12-month unweighted arithmetic average of the first-day-of-the-month Brent crude price for each month in the period January through December 2019, which, pursuant to our contractual agreements, resulted in average oil and gas prices of US$63.11 per barrel and US$4.29 MMcf, respectively, that for the purpose of reserve amount estimation were assumed to remain constant.

Proved undeveloped reserves in the fields as of December 31, 2019 were 20,579 Mboe, consisting of 18,341 MBbl of crude oil and 2,238 Mboe (12,589 MMcf) of natural gas. We estimate that during 2019: proved undeveloped reserves increased by 549 Mboe of crude oil; approximately 759 Mboe of proved undeveloped reserves of crude oil were converted into proved developed reserves; and natural gas reserves decreased 209 Mboe (1,177 MMcf). Capital expenditures made during 2019, for both drilling activities and workovers, to convert undeveloped reserves to proved developed reserves, amounted to approximately US$24.4 million (S/80.9 million).

The principal changes in proved undeveloped reserves during 2019 were:

 

   

Crude oil reserves: proved undeveloped crude oil reserves increased 759 Mbbl during 2019, as follows:

 

   

an increase of 1,023 MBbl due to a drilling campaign in Block IV;

 

   

a decrease of 264 MBbl due to a revision of type curve in Block III; and

 

   

Associated natural gas reserves increased 209 Mboe (1,177 MMcf) during 2019 due to the adjustment of the oil-gas ratio (GOR).

For changes in proved developed and undeveloped reserves from December 31, 2018 to December 31, 2019, see supplementary data (unaudited) annexed to our audited annual consolidated financial statements included in this annual report.

Qualifications of Technical Persons and Internal Controls Over Reserves Estimation Process:

The reserves estimates shown in this annual report have been prepared internally by our engineers in accordance with the definitions and guidelines of the SEC. Our reserves are estimated at the property level and compiled by our engineering staff. Our engineering staff interacts with our internal staff of operations engineers and geoscience professionals and with accounting employees to obtain the necessary data for the reserves estimation process. Our reservoir engineers and geoscience professionals have worked to ensure the integrity, accuracy and timeliness of the data, methods and assumptions used in the preparation of the reserves estimates. Mr. Luis Huaranga and Javier Portuguez are our Reservoir Engineers. The reserves estimate report was submitted to our Committee of Reserves, which is formed by Mr. Anthony Alfaro (Exploration and Production Manager), Mr. Iván Miranda (Exploration and Production Technical Manager), Mr. Jose Pisconte Lomas (Chief of Geology), and Mr. Manuel Gomez (Chief of Reservoir Engineering). Mr. Huaranga holds a Petroleum Engineering degree from Universidad Nacional de Ingeniería in Lima, Peru and has 23 years of experience, developed as a reservoir engineer at Pluspetrol, Petrobras, and Repsol. He has been working for GMP since September 2016. Mr. Portuguez holds a Petroleum Engineering degree from Universidad Nacional de Ingeniería in Lima, Peru and has 26 years of experience, developed as a production and reservoir engineer at Mercantile and Interoil Peru. Mr. Gomez holds a Petroleum Engineering degree from Universidad Nacional de Ingeniería in Lima, Peru and has 12 years of experience, most of it as drilling, completion, stimulation, and reservoir eng