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 d185378dex801.htm
EX-12.01 d185378dex1201.htm
EX-12.02 d185378dex1202.htm
EX-13.01 d185378dex1301.htm
EX-13.02 d185378dex1302.htm

Grana & Montero Earnings 2015-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d185378d20f.htm FORM 20-F Form 20-F
Table of Contents

U.S. 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

 

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

For the fiscal year ended December 31, 2015

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

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)

Claudia Drago Morante, Chief Legal and Corporate Affairs Officer

Tel. 011-51-1-213-6565

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

 

Name of each exchange on which registered

Common Shares, par value s./1.00 per share,

American Depositary Shares, each representing five

Common Shares

 

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, 2015   660,053,790 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 x

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 x

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 x   No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every interactive data filed required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 203.405 of this chapter) during the preceding 12 months (or for such other period that the Registrant was required to submit and post such files) Yes ¨   No ¨  Note: Not required for Registrant.

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

 

Large accelerated filer ¨    Accelerated filer x    Non-accelerated filer ¨

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 x

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 x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I INTRODUCTION      1   
      ITEM 1.  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     5   
      ITEM 2.  

OFFER STATISTICS AND EXPECTED TIMETABLE

     5   
      ITEM 3.  

KEY INFORMATION

     5   
            A.   Selected Financial Data      5   
            B.   Capitalization and Indebtedness      21   
            C.   Reasons for the Offer and Use of Proceeds      21   
            D.   Risk Factors      21   
      ITEM 4.  

INFORMATION ON THE COMPANY

     44   
            A.   History and Development of the Company      44   
            B.   Business Overview      46   
            C.   Organizational Structure      109   
            D.   Property, Plant and Equipment      112   
      ITEM 4A.  

UNRESOLVED STAFF COMMENTS

     113   
      ITEM 5.  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     113   
            A.   Operating Results      113   
            B.   Liquidity and Capital Resources      151   
            C.   Research and Development, Patents and Licenses      157   
            D.   Trend Information      158   
            E.   Off-Balance Sheet Arrangements      163   
            F.   Tabular Disclosure of Contractual Obligations      163   
            G.   Safe Harbor      163   
      ITEM 6.  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     163   
            A.   Directors and Senior Management      163   
            B.   Compensation      173   
            C.   Board Practices      174   
            D.   Employees      176   
            E.   Share Ownership      178   
      ITEM 7.  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     179   
            A.   Major Shareholders      179   
            B.   Related Party Transactions      180   
            C.   Interests of Experts and Counsel.      182   

 

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      ITEM 8.  

FINANCIAL INFORMATION

     182   

            A.

  Consolidated Statements and Other Financial Information.      182   

            B.

  Significant Changes.      184   

      ITEM 9.

 

THE OFFER AND LISTING

     184   

            A.

  Offer and Listing Details      184   

            B.

  Plan of Distribution      187   

            C.

  Markets      187   

            D.

  Selling Shareholders      189   

            E.

  Dilution      189   

            F.

  Expenses of the Issue      189   

      ITEM 10.

 

ADDITIONAL INFORMATION

     189   

            A.

  Share Capital      189   

            B.

  Memorandum and Articles of Association      190   

            C.

  Material Contracts      195   

            D.

  Exchange Controls      196   

            E.

  Taxation      196   

            F.

  Dividends and Paying Agents      201   

            G.

  Statement by Experts      201   

            H.

  Documents on Display      201   

            I.

  Subsidiary Information      202   

      ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     202   

      ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     203   

            A.

  Debt Securities      203   

            B.

  Warrants and Rights      203   

            C.

  Other Securities      203   

            D.

  American Depositary Shares      203   
PART II      216   

      ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     216   

      ITEM 14.

 

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

     216   

      ITEM 15.

 

CONTROLS AND PROCEDURES

     217   

            A.

  Disclosure Controls and Procedures      217   

            B.

  Management’s Annual Report on Internal Control Over Financial Reporting      217   

            C.

  Attestation Report of the Registered Public Accounting Firm      218   

            D.

  Changes in Internal Control Over Financial Reporting      218   

      ITEM 16.

 

[RESERVED]

     218   

      ITEM 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

     218   

 

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      ITEM 16B.

 

CODE OF BUSINESS CONDUCT AND ETHICS

     218   

      ITEM 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     219   

      ITEM 16D.

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     220   

      ITEM 16E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     220   

      ITEM 16F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     220   

      ITEM 16G.

 

CORPORATE GOVERNANCE

     220   

      ITEM 16H.

 

MINE SAFETY DISCLOSURE

     221   

      ITEM 17.

 

FINANCIAL STATEMENTS

     221   

      ITEM 18.

 

FINANCIAL STATEMENTS

     221   

      ITEM 19.

 

EXHIBITS

     222   

 

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PART I

INTRODUCTION

Certain Definition

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 and associated companies as follows: (i) in our Engineering and Construction (E&C) segment: GyM S.A. as “GyM”; Stracon GyM S.A. as “Stracon GyM”; Vial y Vives - DSD S.A. as “Vial y Vives - DSD”; GMI S.A. as “GMI”; Morelco S.A. 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”; Concesionaria Via Expresa Sur S.A. as “Via Expresa Sur”; GMP S.A. as “GMP”; Compañía Operadora de Gas del Amazonas (joint controlled) as “COGA”; Gasoducto Sur Peruano S.A. (investee) as “Gasoducto Sur Peruano”; (iii) in our Real Estate segment: Viva GyM S.A. as “Viva GyM”; Inmobiliaria Almonte S.A.C. as “Almonte”; and (iv) in our Technical Services segment, GMD S.A. as “GMD”; Concar S.A. as “Concar”; CAM Chile S.A. as “CAM”; Adexus S.A. as “Adexus”. We discuss COGA and Gasoducto Sur Peruano in our Infrastructure segment in this Annual Report, however, as a jointly controlled entity and an investee, respectively, their results are not presented within the Infrastructure segment in our financial statements.

The term “U.S. dollar” and the symbol “US$” refer to the legal currency of the United States; the term “nuevo 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.

Financial Information

Our consolidated financial statements included in this annual report have been prepared in nuevos soles and in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). Our annual consolidated financial statements for the years ended December 31, 2013, 2014 and 2015 have been audited by Gaveglio, Aparicio y Asociados S.C. de R.L., a member firm of PricewaterhouseCoopers in accordance with the standards of the Public Company Accounting Oversight Board (United States).

We manage our business in four segments: Engineering and Construction (E&C); Infrastructure; Real Estate; and Technical Services. For information on our results of operations per our business segments, see note 6 to our audited annual consolidated financial statements.

In this annual report, we present Adjusted 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 Adjusted 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 Adjusted EBITDA, among other measures, for internal planning and performance measurement purposes. Adjusted 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). Adjusted EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies. For our definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to the most directly comparable IFRS financial measure, see “Item 3.A. Key Information—Selected Financial Data—Non-GAAP Financial Measure and Reconciliation.”

We have translated some of the nuevos soles amounts contained in this annual report into U.S. dollars for convenience purposes only. Unless otherwise indicated or the context otherwise requires, the rate used to translate nuevos soles amounts to U.S. dollars was S/.3.413 to US$1.00, which was the exchange rate reported for December

 

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31, 2015 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 nuevos 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 nuevos 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 nuevos 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 nuevos 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. See “Item 3.A. Key Information—Selected Financial Data—Exchange Rates” for information regarding historical exchange rates of nuevos soles to U.S. dollars.

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, Infrastructure, Real Estate and Technical Services 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; (ii) our Energy line of business because: (a) its 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 dispatched; and (iii) COGA, which is not consolidated because it is jointly controlled. 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. 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.”

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 have not been audited or reviewed by any independent external engineers. For further information on these reserves estimates, see “Item 3.D. Key Information—Rights Relating 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, real estate and technical 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,

 

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we have not independently verified the data from third-party sources and our internal data has not been verified by any independent source. In addition, our director, Hugo Santa María Guzmán, is a partner in APOYO Consultoría, and Roberto Abusada Salah, a director of our subsidiaries GMD and GMP, is a director of the Peruvian Economy Institute. We paid Great Place to Work ® Institute (“Great Place to Work”), a human resources consulting, research and training firm, for our employees to participate in their market survey referenced in this annual report (Copyright © 2015 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;

 

    “m 2 “ 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 incident 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).

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

 

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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:

 

    global macroeconomic conditions, including commodity prices, and economic, political and social conditions in the markets in which we operate, particularly in Peru;

 

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

 

    the outcome of the second round of the presidential elections in Peru scheduled to take place on June 5, 2016, and any changes in governmental policies from the newly elected administration;

 

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

 

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

 

    our ability to continue to grow our operations, both in Peru and internationally;

 

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

 

    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;

 

    our ability to complete acquisitions on favorable terms or at all and to integrate acquired businesses and manage them effectively post-acquisition;

 

    performance under contracts, where a failure to meet schedules, cost estimates or performance targets on a timely basis could result in reduced profit margins or losses and impact our reputation;

 

    developments, some of which may be beyond our control, that affect our reputation in our markets, including a deterioration in our safety record;

 

    industry-specific operational risks, such as operator errors, mechanical failures and other accidents;

 

    availability and costs of energy, raw materials, equipment and labor;

 

    our ability to obtain financing on favorable terms;

 

    our ability to attract and retain qualified personnel;

 

    our ability to enter into joint operations, and rules involved in operating under joint operation or similar arrangements;

 

    our exposure to potential liability claims and contract disputes, including as a result of environmental damage alleged to have been caused by our operations;

 

    our and our clients’ compliance with environmental, health and safety laws and regulations, and changes in government policies and regulations in the countries in which we operate;

 

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    negotiations of claims with our clients of cost and schedule variances and change orders on major projects;

 

    delays in client payments, and increased financing costs for working capital resulting from those delays;

 

    volatility in global prices of oil and gas;

 

    the cyclical nature of some of our business segments;

 

    limitations on our ability to operate our concessions profitably, including changes in traffic patterns, and limitations on our ability to obtain new concessions;

 

    our ability to accurately estimate the costs of our projects;

 

    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 laws;

 

    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. 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.

 

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 — Financial Information,” “Item 5. Operations and Financial Review and Prospects” and our consolidated financial statements included in this annual report.

 

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The following selected financial data as of December 31, 2014 and 2015 and for the years ended December 31, 2013, 2014 and 2015 have been derived from our audited annual consolidated financial statements included in this annual report. The following selected financial data as of December 31, 2011, 2012 and 2013 and for the years ended December 31, 2011 and 2012 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, 2011, 2012, 2013, 2014 and 2015 have been audited by Gaveglio, Aparicio y Asociados S.C. de R.L., a member firm of PricewaterhouseCoopers, in accordance with the standards of the Public Company Accounting Oversight Board (United States).

 

     Year ended  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)     

(in millions

of US$)(2)

 

Income Statement Data: (1)

                 

Revenues

     4,241.3           5,231.9           5,967.5           7,008.7           7,832.4           2,294.9     

Cost of sales

     (3,609.5)          (4,519.8)          (4,963.4)          (6,057.1)          (7,129.6)          (2,089.0)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     631.7           712.1           1,004.1           951.6           702.8           205.9     

Administrative expenses

     (199.6)          (257.2)          (361.8)          (421.4)          (413.4)          (121.1)    

Other income and expenses(3)

     4.3           75.9           26.0           15.2           57.3           16.8     

Profit (losses) from sale of investments

     4.8              5.7           —           (8.3)           (2.4)    

Other (expenses) income, net

     (2.8)          (0.3)          (0.7)          (0.1)          —           —     

Gain from business combination(3)

     45.2           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     483.6           530.6           673.4           545.3           338.4           99.2     

Financial (expense) income, net(4)

     (6.2)          (10.3)          (112.4)          (91.4)          (138.7)          (40.6)    

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

     0.2           0.6           33.6           53.4           17.6           5.2     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit before income tax

     477.6           520.8           594.5           507.4           217.3           63.7     

Income tax

     (141.4)          (154.6)          (182.3)          (146.2)          (75.6)          (22.2)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net profit

     336.2           366.3           412.1           361.2           141.7           41.5     

Net profit attributable to controlling interest(5)

     289.1           290.0           320.0           299.7           88.2           25.8     

Net profit attributable to non-controlling interest(5)

     47.1           76.3           92.1           61.5           53.6           15.7     

 

 

(1) Includes the results of operations of CAM since February 2011, Vial y Vives since October 2012, DSD since August 2013 and Morelco since January 2015. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting our Results of Operations—Acquisitions”.

 

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(2) Calculated based on an exchange rate of S/.3.413 to US$1.00 as of December 31, 2015.

 

(3) In 2011, relates to gains recorded in connection with the CAM business acquisition as a result of the excess of the fair value of the assets and liabilities we acquired in the acquisition of a controlling interest in CAM over the consideration paid and, in 2012, 2013, 2014, and 2015 the reversal of provisions of CAM. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Acquisitions” and notes 28 and 32 to our audited annual consolidated financial statements.

 

(4) In 2013, 2014, and 2015 we had higher exchange losses due to the depreciation of the nuevo sol against the U.S. dollar and our higher U.S. dollar denominated liability.

 

(5) 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 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 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 and Associated Companies” and note 2.2 to our audited annual consolidated financial statements included in this annual report.

 

     As of December 31,  
             2011                      2012                      2013                      2014                      2015                      2015(1)          
Balance Sheet Data:    (in millions of S./)      (in millions of
US$)(1)
 

Total current assets

     2,502.3             3,017.2             3,903.5             4,623.9             5,253.6             1,539.3      

Cash and cash equivalents

     658.2             780.1             959.4             818.4             554.0             162.3      

Accounts receivables

     855.2             930.8             1,162.4             1,768.6             2,155.5             631.6      

Outstanding work in progress

     393.8             525.3             971.7             1,161.8             1,319.2             386.5      

Inventories(2)

     546.3             747.4             762.8             833.6             1,159.2             339.6      

Total non-current assets

     1,191.5             1,982.9             2,412.6             3,106.8             3,738.2             1,095.3      

Long-term accounts receivables(3)

     75.2             393.4             630.1             580.0             621.8             182.2      

Property, plant and equipment

     686.9             938.1             952.9             1,147.0             1,111.8             325.7      

Intangible assets(4)

     317.8             505.1             407.5             778.7             881.0             258.1      

Total current liabilities

     1,741.4             2,618.1             2,416.3             3,794.9             4,092.3             1,199.0      

Short-term borrowings

     231.0             452.8             486.1             1,425.5             1,228.0             359.8      

Accounts payables(5)

     1,313.6             1,995.2             1,762.1             2,268.4             2,779.6             814.4      

Total non-current liabilities

     499.3             598.8             703.1             762.1             1,716.5             502.9      

Long-term borrowings

     298.9             392.7             309.7             326.1             553.3             162.1      

Capital Stock(6)

     390.8             558.3             660.1             660.1             660.1             660.1      

Shareholders’ equity

     1,189.0             1,392.2             2,765.4             2,691.7             2,654.6             777.8      

Non-controlling interest

     264.1             391.0             431.3             482.5             528.5             154.8      

 

(1) Calculated based on an exchange rate of S/.3.413 to US$1.00 as of December 31, 2015.

 

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(2) 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.

 

(3) 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 10 to our audited annual consolidated financial statements included in this annual report.

 

(4) We recognize our investments in the construction of the highway of our Norvial concession as intangible assets. See note 2.16(c) to our audited annual consolidated financial statements included in this annual report.

 

(5) Includes S/.421.0 million, S/.848.1 million, S/.701.8 million, S/.684.3 million and S/.607.1 million in advance payments made by our clients as of December 31, 2011, 2012, 2013, 2014 and 2015 respectively, in connection with our E&C and 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 “—Technical Services” and note 21 to our audited annual consolidated financial statements included in this annual report.

 

(6) Reflects as of December 31, 2013, 2014 and 2015 our initial public offering of American Depositary Shares (“ADSs”) in the United States, which was consummated on July 29, 2013.

 

     As of and for the year ended December 31,  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)      (in millions of
US$)(2)
 

Other Data: (1)

                 

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

     674.3              800.9              1,030.7              911.9              778.4              228.1        

Gross margin

     14.9 %          13.6 %          16.8 %          13.6 %          9.0 %          9.0 %    

Adjusted EBITDA margin(4)

     15.6 %          14.8 %          17.3 %          13.0 %          9.9 %          9.9 %    

Outstanding shares(5)

     558,284              558,284              660,054              660,054              660,054              660,054        

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

     0.60              0.66              0.62              0.55              0.21              0.21        

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

     0.52              0.52              0.53              0.45              0.13              0.04        

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

     0.10              0.16              0.16              0.17              0.16              0.16        

Net debt(6)/ Adjusted EBITDA ratio

     (0.2)x           0.1x           (0.2)x            1.0x            2.6x            2.6x      

Backlog (in millions of US$)(7)

     2,493.9              4,165.9              3,935.0              3,765.4              13,781.0              4,037.8        

Backlog/revenues ratio (Unaudited)(7)

     1.7x            2.2x            1.9x            1.6x            2.0x            2.0x      

 

 

(1) Includes the results of operations of CAM since February 2011, Vial y Vives since October 2012, DSD since August 2013, and Morelco since January 2015. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting our Results of Operations—Acquisitions”.

 

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(2) Calculated based on an exchange rate of S/.3.413 to US$1.00 as of December 31, 2015.

 

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

 

(4) Reflects Adjusted EBITDA as a percentage of revenues.

 

(5) Reflects as of December 31, 2013, 2014, and 2015 our initial public offering of ADSs in the United States, which was consummated on July 29, 2013.

 

(6) Net debt is calculated as total borrowings (including current and non-current borrowings) less cash and cash equivalents.

 

(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; our Energy line of business; or our jointly controlled COGA venture. 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/.2.697 to US$1.00 as of December 31, 2011, S/.2.551 to US$1.00 as of December 31, 2012, S/.2.796 to US$1.00 as of December 31, 2013, S/.2.989 to US$1.00 as of December 31, 2014, and S/.3.413 to US$1.00 as of December 31, 2015. 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 6 to our audited annual consolidated financial statements included in this annual report.

 

1. Engineering & Construction

 

     Year ended December 31,  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)      (in millions
of US$,)(1)
 

Income Statement Data:

                 

Revenues

     2,784.2            3,524.6            4,075.3            5,035.7            5,841.6            1,711.6      

Cost of sales

     (2,454.9)           (3,116.6)           (3,515.2)           (4,500.3)           5,484.3            1,606.9      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     329.3            408.0            559.5            535.4            357.3            104.7      

Administrative expenses

     (104.4)           (159.8)           (217.9)           (258.6)           (289.1)           (84.7)     

Other income and expenses

     4.8            (1.9)           10.8            (9.8)           30.6            9.0      

Other (losses) gains, net

     (2.2)           1.3            —            —            —            —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     227.5            247.6            352.4            267.0            98.7            28.9      

Financial (expense) income, net

     5.3            19.7            (26.6)           (62.4)           (118.5)           (34.7)     
Share of the profit or loss in associates under the equity method of accounting      5.1            9.2            42.0            48.2            (2.2)           (0.6)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit before income tax

     237.9            276.4            367.7            252.8            (22.0)           (6.4)     

Income tax

     (71.5)           (87.9)           (111.2)           (59.3)           (29.4)           (8.6)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net profit

     166.4             188.5            256.5            193.6            (51.4)           (15.1)     

Net profit attributable to controlling interest

     153.1            165.1            211.6            164.1            (64.4)           (18.9)     

Net profit attributable to non-controlling interest

     13.3            23.4            44.9            29.5            12.9            3.8      

 

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     As of December 31,  
         2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)      (in millions of
US$)(1)
 

Balance Sheet Data:

                 

Total current assets

     1,252.9             1,547.4             1,858.0             2,676.6             3,202.0             938.2       

Cash and cash equivalents

     400.5             423.3             265.8             285.4             172.1             50.4       

Accounts receivables

     539.2             555.8             737.7             1,092.9             1,530.2             448.3       

Outstanding work in progress

     218.7             417.1             735.0             1,145.4             1,301.5             381.3       

Other current assets

     94.6             151.2             119.6             152.9             198.1             58.0       

Total non-current assets

     452.7             875.8             931.1             1,250.0             1,159.0             339.6       

Long-term accounts receivables

     2.3             11.3             —             6.2             0.1             —       

Property, plant and equipment

     329.6             539.0             534.1             651.2             606.2             177.6       

Other non-current assets

     120.7             325.6             397.0             592.6             552.2             161.8       

Total current liabilities

     1,114.6             1,587.0             1,633.6             2,500.2             2,846.3             834.0       

Short-term borrowings

     70.4             120.0             195.1             629.6             653.0             191.3       

Accounts payables(2)

     931.9             1,356.5             1,321.5             1,799.3             2,174.0             637.0       

Total non-current liabilities

     155.0             260.8             385.6             445.2             629.2             184.4       

Long-term borrowings

     136.6             180.9             127.1             144.1             376.0             110.2       

Other long-term liabilities

     18.4             80.0             258.5             301.1             253.2             74.2       

Shareholders’ equity

     406.3             472.11             622.9             817.8             720.7             211.2       

Non-controlling interest

     29.8             103.3             147.0             163.4             164.6             48.2       

 

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2. Infrastructure

 

     Year ended December 31,  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)      (in millions of
US$)(1)
 

Income Statement Data:

                 

Revenues

     404.2          524.5          681.0          884.8          1,023.1          299.8    

Cost of sales

     (258.0)         (351.8)         (494.2)         (639.2)         (830.0)         (243.2)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     146.2          172.6          186.8          245.6          193.1          56.6    

Administrative expenses

     (25.6)         (30.5)         (31.0)         (40.3)         (39.4)         (11.5)   

Other income and expenses

     (0.2)         (0.8)         (3.1)         (3.2)         1.5          0.4    

Profit from the sale of investments

     17.0         —            —            —            —            —      

Other (losses) gains, net

     (2.1)          (1.6)         0.3         —            —            —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     118.3          139.7          153.0          201.9          155.2          45.5    

Financial (expense) income, net

     (6.0)         (17.3)         (44.6)         (25.5)         (18.7)         (4.2)   

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

     0.2          —            1.6          —            0.1          —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit before income tax

     112.5          122.3          109.9          176.5          137.4          40.3    

Income tax

     (30.8)         (38.4)         (35.4)         (57.4)         (38.0)         (11.1)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net profit

     81.8          84.0          74.5          119.1          99.8          29.2    

Net profit attributable to controlling interest (4)

     68.2          66.7          59.9          102.2          77.0          22.6    

Net profit attributable to non-controlling interest (4)

     13.6          17.3          14.5          16.9          22.7          6.7    

 

     As of December 31,  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)     

(in millions of

US$)(1)

 

Balance Sheet Data:

                 

Total current assets

     302.4             319.1             376.9             426.8             505.6             148.1       

Cash and cash equivalents

     64.9             149.7             122.3             167.3             221.8             65.0       

Accounts receivables

     117.4             118.9             145.7             213.0             227.6             66.7       

Outstanding work in progress

     105.4             26.8             78.1             16.4             17.7             5.2       

Other current assets (5)

     14.7             23.8             30.8             30.0             38.6             11.3       

Total non-current assets

     466.0             826.8             1,082.6             1,260.0             1,468.3             430.2       

Long-term accounts receivables (3)

     41.0             349.3             603.9             602.3             670.7             196.5       

Property, plant and equipment

     192.5             211.3             201.5             209.5             200.6             58.8       

Other non-current assets

     232.4             266.2             277.3             412.2             597.0             174.9       

Total current liabilities

     129.5             486.0             892.9             1,034.7             354.7             103.9       

Short-term borrowings

     33.4             38.7             85.7             570.4             156.5             45.9       

Accounts payables

     75.7             439.3             781.2             450.0             153.8             45.1       

Total non-current liabilities

     134.2             190.5             108.1             120.3             982.7             287.9       

Long-term borrowings

     127.1             146.3             96.1             100.4             83.3             24.4       

Other long-term liabilities

     7.0             44.2             12.0             19.9             899.4             263.5       

Shareholders’ equity

     402.6             355.5             385.5             451.8             536.4             186.5       

Non-controlling interest (4)

     102.1             113.9             73.0             80.0             100.2             29.4       

 

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3. Real Estate

 

     Year ended December 31,  
     2011      2012      2013      2014      2015      2015  
     (in millions of S/.)     

(in millions of

US$)(1)

 

Income Statement Data:

                 

Revenues

     152.3          240.1          313.7          224.6          215.8          63.2    

Cost of sales

     (106.9)         (153.4)         (200.0)         (162.1)         (164.0)         (48.1)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     45.3          86.7          113.7          62.4          51.8          15.2    

Administrative expenses

     (10.1)         (17.4)         (21.0)         (21.1)         (20.5)         (5.7)   

Other income and expenses

     (0.4)         (1.7)         (0.7)         (0.8)         0.1          —      

Other (losses) gains, net

     —            —            (1.0)         —            —            —      

Profit from the sale of investments

     —            —            3.2          —            —            —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     34.9          67.6          94.2          40.5          33.0          9.7    

Financial (expense) income, net

     (0.5)         (2.3)         (13.8)         (14.7)         (10.9)         (2.7)   

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

     —            —            0.1          12.2          14.9          4.4    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit before income tax

     34.4          65.3          80.5          38.0          37.0          10.8    

Income tax

     (10.2)         (20.0)         (21.4)         (11.5)         (7.6)         (2.2)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net profit

     24.1          45.3          59.0          26.5          29.3          8.6    

Net profit attributable to controlling interest

     6.1          12.4          19.2          9.5          12.4          3.6    

Net profit attributable to non-controlling interest

     18.1          32.9          39.9          17.0          17.0          5.0    

 

12


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     As of December 31,  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)      (in millions of
US$)(1)
 

Balance Sheet Data:

                 

Total current assets

     450.7             636.0             672.6             760.8             1,109.3             325.0       

Cash and cash equivalents

     49.3             73.0             43.0             54.3             74.5             21.8       

Accounts receivables

     19.5             37.7             36.4             75.6             114.4             33.5       

Other current assets(4)

     381.9             525.3             593.2             631.0             920.4             269.7       

Total non-current assets

     46.1             71.4             76.5             117.4             91.7             26.9       

Long-term accounts receivables

     0.0             6.8             11.8             9.7             14.7             4.3       

Property, plant and equipment

     5.0             4.5             5.6             7.3             11.3             3.3       

Investment property

     36.5             36.0             36.9             36.2             34.7             10.2       

Other non-current assets

     4.5             24.2             22.1             64.1             30.9             9.1       

Total current liabilities

     197.5             263.6             217.6             266.6             555.1             162.6       

Short-term borrowings

     41.6             43.2             77.9             144.3             224.4             65.7       

Accounts payables

     146.7             211.8             136.6             121.1             330.7             96.9       

Total non-current liabilities

     96.4             62.6             97.8             138.9             159.6             46.8       

Long-term borrowings

     16.5             49.7             52.3             16.4             27.6             8.1       

Other long-term liabilities

     79.8             12.9             45.4             122.5             132.0             38.7       

Shareholders’ equity

     50.1             147.1             152.7             157.3             158.6             46.5       

Non-controlling interest(5)

     152.8             234.2             281.0             315.4             327.6             96.0       

 

13


Table of Contents
4. Technical Services

 

     Year ended December 31,  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)      (in millions of
US$)(1)
 

Income Statement Data:

                 

Revenues

     977.0           1,083.3           1,169.1           1,208.2           1,152.5           337.7     

Cost of sales

     (867.3)          (979.4)          (989.9)          (1,065.8)          (974.2)          (285.4)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     109.7           103.9           179.2           142.3           178.3           52.2     

Administrative expenses

     (72.1)          (105.4)          (132.5)          (122.5)          (114.9)          (33.7)    

Other income and expenses

     6.2           73.6           24.7           5.9           15.1           4.4     

Gain from business combination

     45.2           —            —            —            (8.3)          2.4     

Other (losses) gains, net

     0.4           —            —            (2.1)          —            —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     89.4           72.2           71.4           25.7           70.3           20.6     

Financial (expense) income, net

     (8.5)          (5.1)          (15.9)           (25.6)          (30.1)          (8.8)    

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

     —            —            1.1           0.6           0.1           —      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit before income tax

     80.9           67.1           56.6           0.7           40.8           12.0     

Income tax

     (19.8)          (5.6)          (16.7)          (5.8)          6.1           1.8     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net profit

     61.1           61.5           39.9           (5.1)          46.9           13.7     

Net profit attributable to controlling interest

     53.9           50.6           34.3           (5.3)          40.3           11.8     

Net profit attributable to non-controlling interest

     7.2           10.8           5.6           0.3           6.6           1.9     

 

14


Table of Contents
     As of December 31,  
             2011                      2012                      2013                      2014                      2015                      2015          
     (in millions of S/.)     

(in millions of

US$)(1)

 
Balance Sheet Data:         

Total current assets

     513.0             495.5             585.2             616.6             532.0             155.9       

Cash and cash equivalents

     73.4             85.3             46.5             134.7             60.2                 17.6       

Accounts receivables

     276.7             259.6             312.0             421.2             398.6             116.8       

Outstanding work in progress

     69.8             81.4             158.7             —               —               —         

Other current assets

     93.2             69.2             68.0             60.7             73.1             21.4       

Total non-current assets

     183.7             192.2             197.8             252.4             257.8             75.5       

Long-term accounts receivables

     30.1             24.3             12.3             4.9             0.1             0.0       

Property, plant and equipment

     96.8             109.3             114.1             166.3             170.7             50.0       

Other non-current assets

     56.8             58.7             71.5             80.3             86.6             25.4       

Total current liabilities

     412.4             489.4             475.0             434.7             411.7             120.6       

Short-term borrowings

     85.0             96.0             126.9             80.5             91.4             26.8       

Accounts payables

     275.5             354.2             339.6             339.9             299.5             87.8       

Total non-current liabilities

     168.5             74.4             160.1             216.1             180.0             52.7       

Long-term borrowings

     14.6             12.4             31.4             63.1             66.5             19.5       

Other long-term liabilities

     153.9             61.9             128.7             153.0             113.5             33.3       

Shareholders’ equity

     91.7             103.0             125.7             128.4             162.6             47.6       

Non-controlling interest

     24.1             20.9             22.2             89.8             35.5             10.4       

 

(1) Calculated based on an exchange rate of S/.3.413 to US$1.00 as of December 31, 2015.

 

(2) Includes advance payments, which reflects advance payments made by our clients in connection with our E&C and 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 “—Technical Services” and note 21 to our audited annual consolidated financial statements included in this annual report.

 

(3) 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 10 to our audited annual consolidated financial statements included in this annual report.

 

(4) 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.”

 

(5) Includes inventories, which includes investments for the purchase of land by our Real Estate segment. These investments in land are recorded at book value 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.

Non-GAAP Financial Measure and Reconciliation

In this annual report, we present Adjusted 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 Adjusted EBITDA as net profit plus: financial (expense) income, net; income tax; depreciation and amortization; and certain other adjustments described below.

Our Adjusted EBITDA includes the following other adjustments: (i) in our Infrastructure segment, in Mass Transit, we add back to net profit the components of our tariff for the Lima Metro that relate to the Peruvian government’s repayment of the amounts we invest to purchase trains and other infrastructure, since we do not amortize these investments, and the interest we charge the Peruvian government in connection with the amounts we invest for such purposes. For a description of the components of our tariff for the Lima Metro, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting our Results of

 

15


Table of Contents

Operations—Infrastructure;” and (ii) in our Real Estate segment, we add back to net profit the portion of our costs of sales related to our cost to purchase land, as we recognize land purchases as inventory and, accordingly, do not mark-to-market or depreciate the value of our land.

We present Adjusted 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 Adjusted EBITDA, among other measures, for internal planning and performance measurement purposes. Adjusted 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). Adjusted 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 Adjusted EBITDA on a consolidated basis.

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit(1)

     336.2            366.3            412.1            361.2            141.7            41.5      

Financial expense (income), net

     6.2            10.3            112.4            91.4            55.8            16.4      

Income tax

     141.4            154.6            182.3            146.2            75.6            22.2      

Depreciation and amortization

     178.2            244.5            259.1            260.0            306.4            89.8      

Other adjustments (described above)

     12.3            25.2            62.9            53.1            116.0            34.0      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     674.3            800.9            1,030.7            911.9            778.4            228.1      

The following tables set forth the reconciliation of our net profit to Adjusted EBITDA for each of our business segments and certain of our lines of business or subsidiaries within these segments.

 

1. Engineering & Construction

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit(1)

     166.4            188.5            256.5            193.6            (51.4)           (15.1)     

Financial expense (income), net

     (5.3)           (19.7)           26.6            62.4            44.0            12.9      

Income tax

     71.5            87.9            111.2            59.3            29.4            8.6      

Depreciation and amortization

     82.4            131.1            151.2            144.2            168.1            49.3      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(3)

     315.0            387.9            546.0            459.4            264.6            77.5      

 

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Table of Contents
2. Infrastructure

 

2.1 Full Segment

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     81.8            84.0            74.5            119.1            99.8            29.2      

Financial expense (income), net

     6.0            17.3            44.6            25.5            18.7            4.2      

Income tax

     30.8            38.4            35.4            57.4            37.6            11.0      

Depreciation and amortization

     57.6            67.9            64.0            70.5            85.2            25.0      

Other adjustments (described above)

     —              4.8            25.6            36.5            56.3            16.5      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     176.1            212.3            244.3            309.0            297.6            87.2      

 

2.2 All Toll Roads

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     21.4            29.4            40.5            43.0            53.5            15.7      

Financial expense (income), net

     5.9            5.2            4.4            9.5            4.0            1.0      

Income tax

     5.8            12.5            15.0            16.2            18.8            5.5      

Depreciation and amortization

     21.3            24.5            10.0            11.4            10.9            3.2      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     54.5            71.5            69.9            80.1            79.2            23.2      

 

2.2(a) Norvial

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     26.4            27.2            30.2            31.1            40.9            12.0      

Financial expense (income), net

     4.8            3.8            9.5            9.3            3.5            1.0      

Income tax

     7.8            11.6            10.3            10.9            13.6            4.0      

Depreciation and amortization

     21.1            24.2            9.8            11.0            10.8            3.2      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     60.1            66.7            59.6            62.3            68.9            20.2      

 

17


Table of Contents
2.3 Mass Transit

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)     

(in millions

of US$)(2)

 

Net profit(4)

     (8.5)           (11.0)           (13.1)           12.1            24.7            7.2      

Financial expense (income), net

     (1.9)           4.0            26.0            4.5            (3.0)           0.3      

Income tax

     (4.7)           (3.6)           (0.6)           (10.8)           (10.6)           (3.1)     

Depreciation and amortization

     0.1            0.5            0.6            0.9            0.0            0.0      

Other adjustments (described above)

     —              —              25.6            36.5            56.3            16.5      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     (15.0)           (10.2)           38.6            64.8            94.5            27.7      

 

2.1 Energy

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     69.1            63.4            45.0            62.7            20.2            5.9      

Financial expense (income), net

     1.9            1.8            14.3            11.4            9.8            2.9      

Income tax

     29.7            28.5            20.1            29.8            7.7            2.3      

Depreciation and amortization

     36.1            42.8            53.4            58.1            74.2            21.7      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     136.8            136.4            132.8            162.0            121.8            35.7      

 

3. Real Estate

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     24.1            45.3            59.0            26.5            29.3            8.6      

Financial expense (income), net

     0.5            2.3            13.8            14.7            (10.9)           2.7      

Income tax

     10.2            20.0            21.4            11.5            7.6            2.2      

Depreciation and amortization

     2.6            2.9            3.6            3.8            4.9            1.4      

Other adjustments (described above)

     12.3            20.4            37.3            16.4            59.7            17.5      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     49.8            90.9            135.2            73.0            98.0            28.7      


Table of Contents
4. Technical Services

 

4.1 Full Segment

 

     Year ended December 31,  
          2011                2012                2013                2014                2015                2015       
     (in millions
of S/.)
                                 (in millions
of US$)(2)
 

Net profit

     61.1            61.5            39.9            (5.1)            46.9            13.7      

Financial expense (income), net

     8.5            5.1            15.9            25.6            30.1            5.9      

Income tax

     19.8            5.6            16.7            5.8            6.1            1.8      

Depreciation and amortization

     32.2            39.4            37.2            37.2            42.3            12.4      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     121.6            111.6            109.6            63.5            113.3            33.2      

 

4.2        Concar

 

                 
     Year ended December 31,  
     2011      2012      2013      2014      2015      2015  
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     34.9            12.6            7.9            (26.5)            18.5            5.4      

Financial expense (income), net

     (0.5)            (0.6)            (0.1)            4.9            3.2            0.9      

Income tax

     15.2            6.2            4.6            (0.8)            11.4            3.3      

Depreciation and amortization

     4.0            5.1            5.6            7.1            5.3            1.6      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     53.6            23.2            18.0            (15.3)            39.2            11.5      

 

4.3        GMD

 

                 
     Year ended December 31,  
     2011      2012      2013      2014      2015      2015  
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     9.1            11.3            8.5            6.0            5.2            1.5      

Financial expense (income), net

     0.5            1.9            5.0            4.5            7.4            2.2      

Income tax

     4.8            5.3            5.8            5.3            3.1            0.9      

Depreciation and amortization

     17.2            15.9            15.4            18.6            22.4            6.6      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     31.6            34.5            34.8            34.4            38.9            11.4      

 

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4.4 CAM

 

     Year ended December 31,  
          2011(1)                2012                2013                2014                2015                2015       
     (in millions of S/.)      (in millions
of US$)(2)
 

Net profit

     17.1            37.5            23.5            15.5            23.2            6.8      

Financial expense (income), net

     8.5            3.8            11.0            16.2            9.6            2.8      

Income tax

     (0.2)           (5.9)           6.2            1.2            20.6            6.0      

Depreciation and amortization

     10.9            18.5            16.3            11.5            14.7            4.3      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

     36.4            53.9            56.9            44.4            35.2            10.3      

 

 

(1) Includes the results of operations of CAM since February 2011, Vial y Vives since October 2012, DSD since August 2013, and Morelco since January 2015. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Acquisitions”.

 

(2) Calculated based on an exchange rate of S/.3.413 to US$1.00 as of December 31, 2015.

 

(3) Our E&C segment Adjusted EBITDA includes S/.5.1 million, S/.9.2 million, S/.42.0 million, S/.48.2 million and S/.2.3 million in 2011, 2012, 2013, 2014 and 2015, respectively, which represents GyM’s 39.0% equity interest in Viva GyM’s net profit.

 

(4) In the second half of 2011, we incurred expenses during the pre-operational phase of the Lima Metro, a period during which we did not generate revenues. In 2012 and 2013, we generated losses as a result of the limited number of trains we initially operated. For more information on our Lima Metro, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Infrastructure.”

Exchange Rates

The Peruvian nuevo sol is freely traded in the exchange market. Current Peruvian regulations on foreign investment allow foreign equity holders of Peruvian companies to receive and repatriate 100% of the cash dividends distributed by these companies. Non-Peruvian equity holders are allowed to purchase foreign currency at free market currency rates through any member of the Peruvian banking system and transfer such foreign currency outside Peru without restriction. Peruvian law in the past, however, has imposed restrictions on the conversion of Peruvian currency and the transfer of funds abroad, and we cannot assure you that Peruvian law will continue to permit such payments, transfers, conversions or remittances without restrictions.

 

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The following table sets forth, for the periods indicated, certain information regarding the exchange rates for nuevos soles per U.S. dollar, as published by the SBS. The Federal Reserve Bank of New York does not report a noon buying rate for nuevos soles.

 

              High                        Low                    Average                Period end       

2011

     2.834                 2.694                 2.756                 2.697           

2012

     2.710                 2.551                 2.639                 2.551           

2013

     2.820                 2.541                 2.704                 2.796           

2014

     2.990                 2.761                 2.840                 2.989           

2015

     3.413                 2.983                 3.186                 3.413           

2015:

           

October

     3.288                 3.218                 3.247                 3.287           

November

     3.385                 3.287                 3.336                 3.376           

December

     3.413                 3.369                 3.385                 3.413           

2016:

           

January

     3.471                 3.413                 3.436                 3.471           

February

     3.538                 3.471                 3.506                 3.527           

March

     3.522                 3.328                 3.410                 3.328           

April (through April 21)

     3.403                 3.250                 3.313                 3.256           

 

B. Capitalization and Indebtedness

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

D. Risk Factors

Risks Related to Our Company

Global economic conditions could adversely affect our financial performance

The global financial crisis and ensuing global recession in 2008 and 2009 had a significant adverse effect on the development of large-scale infrastructure and real estate projects worldwide. More recently, global economic conditions, including slower growth in China, declines in global commodity, in particular oil and gas, prices, the appreciation of the U.S. dollar against foreign currencies, the withdrawal of investments from emerging markets and continued concerns about the U.S. and European economies, has generated economic uncertainty which could adversely affect private- and public-sector investments. Future 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, including our backlog, would decline, which may result

 

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in a decline in revenues and in under-utilization of our capacity. 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 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 may not be able to continue the historic growth of our business

We have experienced rapid growth in our operations in recent years and our strategy is to continue to grow our operations, including through international expansion. However, our growth rate has slowed recently and we may not be able to continue to grow our business at the same pace as in recent years, or at all. Our organic revenues (i.e., excluding the results of all acquisitions since 2011) grew at a CAGR of 13.2% from 2011 to 2015 (under IFRS). Our organic revenues grew 5.4% in 2015 from 2014. The pace at which we are able to grow our business could be adversely affected by numerous factors, some of which are beyond our control, including, among others, the slowdown in Peru’s recent rapid economic growth and the postponement in investment in infrastructure, as well as increased competition and our capacity to increase scale and manage growth in our company.

Growth can place significant demands on our management and operating structure, and too rapid growth may overwhelm our operating capacity. In addition, sustained growth will require us to recruit a large number of talented professionals and we cannot assure you that we will be able to hire sufficient engineers or other personnel with the expertise and experience we require. Nor can we assure you that as our company continues to grow we will be able to maintain our performance standards and corporate values across our entire organization. Failure to manage our growth effectively could adversely affect the quality of our products and services, which would have a material adverse effect on our business.

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 Peruvian government policies could affect our business

Our business is significantly affected by national, regional and municipal government policies and regulation, 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. The second round of presidential elections in Peru between Keiko Fujimori and Pedro Pablo Kuczynski is scheduled to take place on June 5, 2016. We cannot assure you who will be elected the new President of Peru, nor can we assure you the newly elected administration will maintain current government policies.

Social conflicts may disrupt infrastructure projects

Despite Peru’s ongoing economic growth and stabilization, high levels of poverty and unemployment and

 

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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, including in the departments of Cajamarca and Arequipa. 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.

New projects may require the prior approval of local indigenous communities

In September 2011, Peru enacted Law No. 29,785, regarding the Prior Consultation Right of Local Indigenous Communities, 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). This law establishes a prior consultation procedure (procedimiento de consulta previa) that the Peruvian government must carry out 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; upon completion of this prior consultation procedure, the Peruvian government retains the discretion to approve or reject the applicable legislative or administrative measure. We cannot assure you that these consultation procedures will not adversely affect new projects and concessions. Accordingly, our business and financial performance may be materially and adversely affected.

We may not be able to successfully expand outside of Peru

One of our key strategies is to continue to expand our operations outside of Peru, particularly in Chile and Colombia, and we expect that our international operations will become a more significant part of our consolidated business in future. 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. 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 strategy is 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. 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 backlog and our ratio of historical backlog to revenues may not be reliable indicators of future revenues or profit

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. 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 nuevos soles or other local currencies. As a result, any depreciation of local currency would diminish the amount of revenues eventually earned relative to backlog. Moreover, as of December 31, 2015, one client, Ecopetrol, concentrated 84.1% of Morelco’s backlog, and another client, Rio Alto, concentrated 58.7% of Stracon’s backlog. Additionally, as of such date, a 29% participation in the construction consortium of the Gasoducto del Sur Peruano project, constituted 25.3% of our backlog as of December 31, 2015. Finally, the amount of our backlog is not necessarily indicative of future revenues or profits related to the performance of the related contracts.

Our backlog may not grow at recent historic rates and may decline. We cannot assure you that we will be able to continue obtaining sufficient contracts in the future in number and magnitude to continue to grow our backlog. Additionally, the amount of new contracts signed can fluctuate significantly from period to period due to factors that are beyond our control.

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 economic 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. In particular, you should not assume that the ratio of our future E&C segment revenues for 2016 and 2017 to backlog as of December 31, 2015 that is currently expected to be realized in each of those years will be comparable to our historic ratios shown in “Item 4.B. Information on the Company—Business Overview—Backlog—E&C Backlog.”

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 (including, among others, our Chairman and our Chief Executive Officer). Members of our management team are not subject to long-term employment agreements or 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. The loss of the services of some of our senior management or members of our board of directors could have a material adverse effect on our business and financial performance. 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.

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.

 

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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 adopted a range of insurance, 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, 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, and 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, as well as our electricity networks services line of business, 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. 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.

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 of these inputs

 

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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 in particular have declined significantly recently, but we cannot assure you that oil prices will not increase 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 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 obtain financing on favorable terms

Our ability to undertake large investments (particularly in our Infrastructure and Real Estate segments) or consummate significant acquisitions will depend on the availability of equity and debt financing. We cannot assure you that we will be able to obtain new financings in the future on favorable terms or at all. Our ability to obtain financings will depend in part upon prevailing conditions in credit and capital markets, which are beyond our control. In 2008 and 2009, global markets suffered turmoil, which significantly constrained the availability of new financings. In addition, our ability to obtain new financing, or refinance existing debt, may at certain times be adversely affected by the cyclicality of our business, particularly our E&C segment, as has occurred in the past. Furthermore, in response to the ensuing global economic recession in 2009, many countries, in particular the United States as well as the countries where we operate, have maintained target interest rates at very low levels. However, more recently, the U.S. Federal Reserve has begun to increase target interest rates in the United States. Most emerging economies have been affected by this change in the U.S. monetary policy, resulting 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. If adequate funds are not available, or are not available on favorable terms, we may not be able to make future investments or take advantage of acquisitions or other opportunities.

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, principally the government, 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 once we have won awards in arbitration proceedings, particularly claims 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 joint operations 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 joint operation 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 joint operations or other strategic alliances, our ability to compete for new business may be adversely affected.

 

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

Joint operations 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; 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 joint operations or other strategic alliances where we are not the controlling party, we may have limited control over operation decisions and actions and the success of the joint operation or other strategic alliance will depend largely on the performance of our partners. These risks could adversely affect our ability to transact the business that is the subject of such joint operation 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 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 joint operation 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 much 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.

Debarment from participating in government bidding processes would have a material adverse effect on our business and financial performance

We would face debarment from participating in government bidding processes for one to three years if we were found to have violated certain provisions of the Peruvian State Contracting Law (Ley de Contrataciones del Estado). We 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, such a debarment would affect the ability of our entire company (including any of our subsidiaries), and not just the line of business where the alleged violation took place, to participate in government bids under the Peruvian State Contracting Law. In April 2013, Perupetro initiated an administrative proceeding against a subsidiary in our E&C segment, claiming that the subsidiary had submitted a bid to provide engineering services while not being in compliance with certain technical requirements. We lost the administrative proceeding as well as the first instance of the judicial proceeding we had initiated to contest such administrative proceeding. We appealed the adverse judgment and are currently in

 

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appeal proceedings. Although we believe that the likelihood of an adverse outcome in this proceeding is remote, an adverse outcome would affect that particular subsidiary’s participation in government bidding processes under the Peruvian State Contracting Law. Furthermore, in March 2014, the regional government of Cusco provided us with a notice that they had terminated one of Concar’s toll road operation and maintenance contracts, representing a backlog loss of US$48.4 million. We believe this termination is invalid, since we had previously terminated the contract due to a lack of payment and failure to provide access to the related road. All of these procedures remain pending as of the date of this annual report. A significant part of our revenues on a consolidated basis is derived from public sector contracts in Peru. As a result, if our company is debarred from participating in government bidding processes, our business and financial performance would be materially and adversely affected.

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 all applicable concessions, other similar contracts, laws and regulations in all material respects, 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 our concessions, similar contracts or these laws and regulations 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 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, which 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 against financial market risks

Our operations are exposed to financial market risks, such as risks related to exchange rates, commodity

 

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prices and, to a lesser extent, interest rates. Fluctuations in currency, commodity prices or interest rates could adversely affect our financial performance. We cannot assure you that derivative financial instruments 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 realize 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 and Technical Services segments, 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. In particular we cannot assure you that Enersis, from whom we acquired our electricity networks services line of business in 2011, will not reduce its use of our services. 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. This methodology allows us to recognize revenues ratably over the life of a contract, without regard to the timing of receipt of cash payments, by comparing the amount of the costs incurred to date against the total amount of costs expected to be incurred. The effect of revisions to estimated costs, and thus revenues, is recorded when the amounts are known and can be reasonably estimated. These revisions can occur at any time and could be material. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, 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, which may result in reductions or reversals of previously recorded profits.

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 are 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

 

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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 we have in the past 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 may have a material adverse effect on our financial performance

Our future success depends in part on our ability to select and purchase 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, which could have a material adverse effect on our business.

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 biding for a project or concession, the government may subsequently declare the process void for political, budgetary or other reasons and may withdraw 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 sixteen 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 are currently under way. 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.

We have made significant investments in the Gasoducto Sur Peruano project and we cannot assure you that the project will be completed as expected

We have made significant investments in the Gasoducto Sur Peruano project and we cannot assure you that the project will be completed as expected. In September 29, 2015 we acquired a 20% stake in Concesionaria Gasoducto Sur Peruano S.A. which represented an investment commitment of US$215 million. The other participants in this concessionaire are Odebrecht Latinvest with a 55% stake and Enagas with a 25% stake. Along with this acquisition we also acquired, via our E&C segment, a 29% participation in the construction consortium of the Gasoducto del Sur Peruano project which added an approximate US$ 1.0 billion to our backlog. Although we have invested and committed substantial amounts into this project, as we hold a minority position in the consortium, we cannot control the timings and deadlines of the project or the expenses incurred in its development or construction. Moreover, the Gasoducto Sur Peruano project may face financing challenges due to the recent criminal conviction by Brazilian courts of the ex-president and other former key executives of Odebrecht S.A., for charges of corruption, money laundering and criminal organization. Reputational concerns derived from such convictions and investigations could affect the availability of, or increase the cost of, financing for the Gasoducto Sur Peruano project.

Our reputation could be affected by our past and current consortia with Odebrecht’s affiliates in Peru.

We have participated in the past, and are currently participating, in consortia controlled and operated by Odebrecht affiliates in Peru. Our reputation may be affected due to the recent criminal convictions by Brazilian courts of the ex-president and other former executives of Odebrecht S.A. for charges of corruption, money laundering and criminal organization. In addition, according to news reports, the Peruvian congress has initiated an investigation into the dealings of Odebrecht’s affiliates in Peru. We cannot assure you that these investigations will not be broadened to include other entities relating to Odebrecht’s consortia in the country, including, among others, our subsidiary GyM. Although we have not received any notification of this investigation, news report indicate that the investigation includes the concessions for Interoceanica Norte and Interoceanica Sur highways, in which our subsidiary GyM held a minority non-operating participation in consortia led by Odebrecht affiliates from 2005 to 2011, when we sold our stakes. We cannot assure you that our reputation will not be affected by our consortia with Odebrecht.

 

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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. For example, between 2000 and 2003, there was a significant decline in activity in the Peruvian real estate and construction sectors, which consequently affected our and our competitors’ business and financial performance during that time. 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. The recent decline in prices for minerals or oil and gas (including the recent steep decline in global oil and gas prices) has had a significant impact on our clients’ exploration and production activities and, as a result, on their demand for our engineering and construction services. Such declines in investment have particularly affected our subsidiary Vial y Vives. 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. Further reductions in anticipated capital investments or available financing for large-scale projects could have a material adverse effect on our financial performance.

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 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

 

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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 as a result of 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 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 enhancement 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 enhancements. 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. Failure to provide performance bonds or credit enhancements on terms required by clients may result in our inability to compete for or win new projects.

 

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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 declined significantly in recent months, with the average Brent crude prices declining from US$111.65 in 2012, US$108.64 in 2013 and US$99.02 in 2014 to US$ 50.85 per barrel in 2015 and US$ 43.19 per barrel on April 21, 2016. 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. Actual future 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.

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; 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 revoke the agreement for certain reasons set forth in the relevant documentation contract and in applicable legislation, including the failure to comply with any contractual terms (including the concessionaire’s default on debt) or applicable law. Moreover, the relevant governmental authority

 

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may terminate and/or repossess a concession at any time, if, in accordance with applicable law, it 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 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. Moreover, 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. Our inability to bid for or obtain new concessions may adversely affect our business and financial performance.

Our contract with Petroperú S.A. (“Petroperú”) for fuel storage at the South terminal is currently scheduled to expire in August 2017, with a new public biding expected to take place at the end of 2016 or the beginning of 2017. 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, in particular the concession for the Via Expresa Javier Prado. A contract for the Via Expresa Javier Prado was approved by the City of Lima´s Council in November 2013 and was submitted to the Peruvian Ministry of Economy and Finance, which requested additional studies related to traffic volumes prior to approving the project. Such studies are currently being prepared. We cannot assure you that the Ministry will approve the contract under the current terms or at all. We may not be able to negotiate contracts terms that are favorable to us or at all. In addition, these projects may suffer long delays or suspension as a result of political considerations or other factors.

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

 

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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; and restrictions on real estate development imposed by local, regional and national laws and regulations. The occurrence 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. If real estate prices decline significantly, our business and financial performance could be materially and adversely affected.

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, local authorities are responsible for issuing most of the licenses that are required during the development stage, including zoning, demolition and construction licenses, among others. Currently, we have approximately 16 real estate projects in various stages of development. We have not yet initiated the administrative processes before the appropriate authorities, or such procedures are pending approval, for two of these developments, including our Project Espacio (formerly Cuartel San Martín), a multi-use development project, as they are still in the early stages of development. A denial or an extended delay by applicable administrative authorities may render land unsuitable for development or delay the completion of planned projects, increase our costs and adversely affect our business and financial performance. Scarcity of financing and/or an increase in interest rates could decrease the demand for real estate properties

The scarcity of financing and/or an increase in interest rates 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 2015, approximately 98% of our residential units was sold to purchasers who received government subsidies to finance the purchase 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, as well as an increase of our own financing costs, which may 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 and to do so 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 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.

 

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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 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, 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 and insurance sectors, INDECOPI has made determinations against real estate developers that in effect altered their contractual arrangements with purchasers, including one determination against Viva GyM which we are currently challenging in the judicial system. Moreover, some purchasers of our real estate have recently filed complaints against us before INDECOPI and/or made claims in the media with the objective of obtaining not only compensation for alleged deficiencies in housing construction but also improved terms from those that they originally agreed to, which may have a negative impact on our real estate business. An increase in consumer complaints and consumer protective measures, particularly those that alter contractual terms, if we are not able to counter these claims, may affect our ability to enforce our contracts under existing terms, which may have a negative impact on our real estate business.

Additional Risks Related to our Technical Services Business

Our engagements with clients may not be profitable or may be terminated or not renewed

The pricing and other terms of many of our client contracts in our technical services business necessarily require us to make estimates and assumptions at the time we enter into these contracts that could differ from actual results. These estimates reflect our best judgments regarding the nature of the engagement and our expected costs to provide the contracted services. Because of the competitive nature of the markets in which we operate, particularly in IT services, the risks related to errors in these estimates are heightened. Any increased or unexpected costs of unanticipated delays or complications in connection with the performance of these engagements, including delays caused by factors outside our control, could make these contracts less profitable or not profitable, which would have an adverse effect on our profit margin. Our exposure to this risk increases generally in proportion to the scope of services provided under a contract.

In addition, the success of our technical services business is dependent on our ability to retain our clients. In our electricity networks services line of business in particular, Enersis, from whom we acquired control of the business in 2011 remains a key client; however, we cannot assure you that they will continue to use our services in the future. Also, in our IT services business in particular, we may lose clients due to their conversion to in-house service providers. We are also vulnerable to reduced volumes from our clients due to business downturns or for other reasons, which can reduce the scope and price of services we provide. A contract termination by a major client could cause us to experience a higher than expected number of unassigned employees, which would affect our profitability until we are able to reduce or reallocate our personnel. We may not be able to replace any client that elects to terminate or not renew its contract with us, and the termination or non-renewal of a significant number of our agreements, or of our most important contracts, may adversely affect our business and financial performance. In addition, non-compliance on a contract with a public-sector client may lead to debarment from participating in government bidding processes and, consequently, inability to contract with other public-sector clients, not just for the line of business where the alleged violation took place, but also for all of our other businesses.

 

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We may not be successful in obtaining new government contracts

We compete to provide services to the Peruvian government, and some of our competitors may have greater financial and other resources or particular expertise pertinent to a specific contract. In addition, we may not be able to obtain additional government service contracts if the government decides not to award additional public-sector road contracts or, to a lesser extent, contracts for the provision of IT and electrical networks services, due to budget constraints, policy changes or otherwise. Our inability to obtain new government contracts may adversely affect our business and financial performance.

We face risks related to the delivery of products and services by our suppliers

In the course of our IT services and electricity networks services, we depend on technology providers that may commit errors or omissions related to the delivery or the quality of equipment, services or products that are essential to our business. A significant error or failure to deliver such equipment, products or services made by one of our suppliers, particularly in our IT services business where we may have an exclusive arrangement with a specific supplier for a client, may adversely affect our business and financial performance.

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

We rely on encryption, authentication technology and firewalls to provide security for confidential information, including personal data, transmitted to and by us over the internet. A breach of our network security measures could result in the misappropriation of proprietary or personal information or cause interruptions in our IT services or operations, could damage our reputation and harm our ability to deliver services to our clients. This may result in client dissatisfaction and a loss of business. Our security measures may be inadequate to prevent security breaches, and we may be required to expand 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 IT services, or third-party products we offer our clients, 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.

Risks Relating 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, 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 business-friendly and open-market policies that stimulate economic growth and social stability.

 

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Political developments in Peru following the presidential election could adversely affect the Peruvian economy

The second round of presidential elections in Peru between Keiko Fujimori and Pedro Pablo Kuczynski is scheduled to take place on June 5, 2016. We cannot assure you who will be elected the new President of Peru. Nor can we assure you that the newly elected administration will maintain current government policies. Each of the presidential candidates have announced significant economic and policy reforms. The impact that these measures and any future measures taken by the newly elected administration will have on the Peruvian economy cannot be predicted. Political uncertainty in Peru relating to the measures to be taken by the new administration in respect of the Peruvian economy could lead to volatility in the market prices of securities of Peruvian companies, including ours.

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

Fluctuations in the value of the nuevo sol relative to the U.S. dollar could adversely affect Peru’s economy. In addition, fluctuations in the value of the nuevo sol to the U.S. dollar can materially adversely affect our results of operations. In 2015, 56.8% and 43.2% of our revenues were denominated in nuevos soles and U.S. dollars, respectively, whereas 72.7% and 27.3% of our costs of sales were denominated in nuevos soles and U.S. dollars, respectively. In the past the exchange rate between the nuevo sol and the U.S. dollar has fluctuated significantly. We cannot assure you that the value of nuevo 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.

In addition, although Peruvian law currently imposes no restrictions on the ability to convert nuevos soles to foreign currency and transfer foreign currency outside of the country, 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 4.7% in 2011, 2.6% in 2012, 2.9% in 2013, 3.2% in 2014 and 4.4% in 2015, 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

 

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tax and tax code have recently been approved, but we are unable to estimate the impacts that these reforms may have on 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 will not occur, or that if there is such a resurgence, it will not disrupt the economy of Peru and our business.

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. For example, the Peruvian economy was adversely affected by the political and economic events that occurred in several emerging economies in the 1990s, including in Mexico in 1994, the Asian crisis in 1997, the economic crisis in Russia in 1998, the Brazilian currency devaluation in 1999 and the Argentine crisis in 2001, which affected the market value of securities issued by companies from markets throughout Latin America. In addition, Peru’s economy continues to be affected by events in the economies of its major regional partners and in developed economies that are trading partners or that affect the global economy. The 2008-2009 global economic recession, principally driven by the subprime mortgage market in the United States, substantially affected the international financial system, including Peru’s securities market and economy. More recently, global economic conditions, including slower growth in China, declines in global commodity, in particular oil and gas, prices, the appreciation of the U.S. dollar against foreign currencies, the withdrawal of investments from emerging markets and continued concerns about the U.S. and European economies, has generated economic uncertainty which may reduce the confidence of foreign investors, causing volatility in the securities markets and affecting the ability of companies to obtain financing globally. 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.

 

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Risks relating to Chile, Colombia and other Latin American Countries

We face risks relating 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.

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. More recently, tax and other governmental reforms in Chile have led to concerns about potential negative effects on the Chilean economy, and the decline in global oil prices has also led to concerns about potential negative effects on the Colombian economy.

Risks Relating to 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; 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 debt securities or securities convertible into our common shares. In the event of a public or private debt financing, or the financing through the issuance of securities convertible into our common shares, such additional funds may be obtained with the exclusion of the preemptive rights of our shareholders, including the investors in our common shares, 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

Our directors and senior management, directly and indirectly, own approximately 32.28% of our common shares as of December 31, 2015, and our Chairman owns, directly and indirectly, 17.81% 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

 

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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 twenty-five 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.

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 attribute 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 nuevos 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

 

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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.

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 evaluation of our internal control over financial reporting as of December 31, 2015, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our internal control over financial reporting was not effective at the reasonable assurance level due to a control deficiency that constituted a material weakness, as a result of inadequate controls over segregation of duties in certain activities within four of our subsidiaries, namely, Survial, GMP, GYM Ferrovias and Vial y Vives. In particular, certain persons at such subsidiaries had access to conduct conflicting accounting operations, which would be against our accounting policies. The internal controls we had in place to detect these conflicts in our segregation of duties failed, because we failed to gather all of the applicable information, as a consequence of the process of information gathering being conducted manually. 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 implementing certain measures to address this material weakness, such as the review of employee access to our accounting systems and the deployment of IT tools in order to improve controls over segregation of duties, especially regarding activities that are conducted manually.

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.

Any failure to maintain controls, 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 as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our ADSs.

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 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 corporate governance

 

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standards. Under New York Stock Exchange 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 New York Stock Exchange corporate governance requirements.

For example, the New York Stock Exchange listing standards provide that the board of directors of a U.S. listed company must have a majority of independent directors at the time the 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 New York Stock Exchange 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, New York Stock Exchange 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 New York Stock Exchange’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, our officers and directors or our 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 our 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.

Judgments of Peruvian courts with respect to our common shares will be payable only in nuevos 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 nuevos soles. Under Peruvian exchange control limitations, an obligation in Peru to pay amounts denominated in a currency other than nuevos 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.

 

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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 and the New York Stock Exchange since 2013. Set forth below are key highlights in our company’s history:

 

    Graña y Montero traces its origins to its predecessor company GRAMONVEL, founded 83 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 1968, José Graña Miró Quesada joined GyM S.A., and eventually became its chief executive officer in 1982, instilling our core corporate values of quality, professionalism, reliability and efficiency.

 

    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, currently Viva GyM.

 

    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, the 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.

 

    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.

 

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    In 2011, Graña y Montero acquired 75.0% of CAM, a leading company in the electricity sector based in Chile, and formerly part of the Latin American power generation and distribution company Enersis.

 

    In 2012, we began operating the Lima Metro.

 

    In July 2013, we listed our company on the New York Stock Exchange.

 

    In 2012 and 2013, Graña y Montero 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”), with our subsidiary GyM Chile SpA holding a 82.0% interest in Vial y Vives - DSD.

 

    In January 2014, we acquired 1.04% of Transportadora de Gas Natural del Peru. With that acquisition, we hold an interest of 1.64% in that company. In December 2014, we formalized an agreement with Enagas International, S.L. (“Enagas”) and Canada Pension Plan Investment Board (“CPPIB”) whereby we acquired 51% of Tecgas N.V. (“Tecgas”), the current operator of Transportadora de Gas del Perú and owner of 100% of the shares of Compañía Operadora de Gas del Amazonas (“COGA”). Enagas International, S.L. acquired 30% of Tecgas and CPPIB maintained a 19% participation.

 

    In March 2014, we acquired control of Coasin Instalaciones Ltda. (“Coasin”) for an amount of US$2.1 million.

 

    In September 2014, our subsidiary Norvial established its first bond program for a maximum amount of S/. 380 million or its equivalent in US dollars. Norvial undertook its first and second issuances under this program for amounts of S/. 80 million and S./285 million, respectively, in July 2015.

 

    In October 2014, our subsidiary GyM S.A. acquired 13.5% of Stracon GyM. With that acquisition, our subsidiary GyM S.A. holds an interest of 87.6% in Stracon GyM S.A.

 

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

 

    In December 2014, we acquired 51% of Compañía Operadora de Gas del Amazonas (“COGA”) for an amount of US$25.5 million (S/. 75.8 million).

 

    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.

 

    In August 2015, we acquired 44% of Adexus S.A., an information technology firm in Chile, for an approximate value of US$ 13.8 million(S/. 44.1 million).

 

    In January 2016 we acquired an additional 8% stake in Adexus for an approximate value of US$ 2.5 million.

 

    In September 2015, our subsidiary Negocios de Gas S.A. acquired a 20% participation in the equity of Gasoducto Sur Peruano S.A., the concessionaire for the development of Peru’s southern gas pipeline project. Our subsidiary GyM S.A. also participates with a 29% stake in the construction consortium for this project, which represented approximately US$1.0 billion of our backlog as of December 31, 2015.

 

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    In December 2015, our subsidiary GMP suscribed a medium term financing for up to US$100 million due in 12 years in order to finance our obligations regarding the Callao and North Terminals, in the Terminales del Perú operations.

 

    In December 2015, we subscribed a medium term loan credit agreement for up to US$200 million with affiliates of Credit Suisse Securities (USA) LLC, the proceeds of which are destined to finance our participation in Gasoducto Sur Peruano.

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.

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 Prospect— Liquidity and Capital Resources—Capital Expenditures.”

 

B. Business Overview

Overview

We are the largest engineering and construction company in Peru as measured by revenues during 2015, and the largest publicly-traded engineering and construction company in Latin America as measured by market capitalization as of December 31, 2015, with strong complementary businesses in infrastructure, real estate and technical services.

With more than 80 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 earned a reputation for operational excellence in our markets. We have developed a highly-experienced management team, a talented pool of more than 3,600 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 New York Stock Exchange since 2013, we also abide by the highest corporate governance standards in Peru.

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), real estate development, and the provision of technical services primarily to infrastructure-related assets. 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.

As a result of our performance in Peru, we have been requested by clients to undertake the engineering and construction of large and complex projects outside our home market, such as the Pueblo Viejo gold mine for Barrick Gold in the Dominican Republic. 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 February 2011, we acquired a controlling interest in Compañía Americana de Multiservicios (CAM), which is headquartered in Chile and provides technical services to power utility companies in Chile, Peru, Colombia and Brazil. In October 2012, we acquired a

 

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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. We expect to continue to selectively undertake projects and pursue acquisitions and strategic alliances in Latin America to further expand our company outside Peru, with a particular focus on Chile and Colombia.

The tables below show our backlog, revenues and Adjusted EBITDA from 2011 to 2015.

            Backlog (in millions of S/.)                 Revenues (in millions of S/.)         Adjusted EBITDA (in millions of S/.)

 

LOGO

During 2015, we generated revenues of S/.7,832.4 million (US$ 2,294.9 million), Adjusted EBITDA of S/.778.4 million (US$228.1 million), and net profit of S/.141.7 million (US$41.5 million) including net profit attributable to controlling interest of S/.88.2 million (US$25.8 million). From 2011 through 2015, our revenues and Adjusted EBITDA grew at a compounded annual growth rate (CAGR) of 16.6% (12.6% excluding acquisitions) and of 4.1% (3.1% excluding acquisitions), respectively. From 2014 through 2015, our revenues grew 11.8% (3.1% excluding acquisitions) and our Adjusted EBITDA declined 14.6% (7.8% excluding acquisitions).

Our Strengths

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

Leader in fast-growing markets

We are the largest engineering and construction company in Peru as measured by revenues during 2015, and the largest publicly-traded engineering and construction company in Latin America as measured by market capitalization as of December 31, 2015. Peru is undergoing a period of unparalleled development, with over 4.8% average annual real GDP growth between 2009 and 2015 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, reputation, 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, the largest apartment building developer in Peru, and a leading IT company in Peru.

We believe we are well-positioned to leverage our platform in the Peruvian market to continue to grow our business in other countries in Latin America, primarily Chile and Colombia. Throughout our history, we have undertaken complex E&C projects in the region and have recently completed acquisitions in Chile and Colombia. Moreover, we believe we are one of the leading mining E&C companies in Latin America.

Long-standing track record and reputation for operational excellence

During our more than 80-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 reputation for operational excellence, and were named among the top ten most admired companies in Peru through a survey conducted by PwC in 2012, 2013, 2014 and 2015. In addition, Merco ranked us seventh out of 100 companies with the best reputations in Peru in 2012, 2013, 2014 and 2015. We believe that our track record and the reputation we have earned in our markets 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.

 

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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 Technical Services 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.

Growth and profitability with strong financial position

Our operations have grown over the last several years, with our consolidated revenues and Adjusted EBITDA growing at CAGR of 16.6% (12.6% excluding acquisitions) and 3.8% (3.1% excluding acquisitions) from 2011 to 2015, respectively. During 2015, we continued to grow in revenues but our adjusted EBITDA declined. We have achieved this growth with low levels of indebtedness, relying mainly on cash flow from operations to fund our growth. As of December 31, 2015, our net debt to Adjusted EBITDA ratio was 2.6x, with net debt of S/.(2,021.4) million (US$(592.3) million). In 2015, we achieved an Adjusted EBITDA margin (i.e., Adjusted EBITDA as a percentage of revenues) of 10.0%.

Robust backlog and significant additional potential projects

We have a robust backlog which amounted to US$4,486.0 million as of December 31, 2015. We believe that our backlog, which as of December 31, 2015 represented approximately 2.0x our related 2015 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. Approximately, 80.7% of our backlog as of December 31, 2015 is comprised of contracts with the private sector, strategically targeted to our key end-markets, such as mining, infrastructure, power, energy and real estate. In addition to our backlog, we also have significant potential projects in our pipeline. We have already been awarded a concession for the Via Expresa Javier Prado project, for which we are currently in the contract negotiation stage. We are also in the process of obtaining the necessary licenses to begin construction of our Project Espacio (formerly Cuartel San Martín), a large multi-use real estate development. 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 1984, we created a new IT business division, which grew and evolved through the years to become the second largest IT company in Peru. Additionally, we also have successfully acquired and integrated new businesses. In February 2011, we acquired a controlling interest in CAM, our electricity services business headquartered in Santiago, Chile, and have integrated its operations and personnel into our company, while improving its operational performance. 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

 

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related to oil refineries, pulp and paper, power plants and mining plants. More recently, 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. In addition, on September 29, 2015 we acquired a 20% stake in Concesionaria Gasoducto Sur Peruano S.A. which represented an investment commitment of US$ 215 million. Along with this acquisition we also acquired, via our E&C segment, a 29% participation in the construction consortium of the Gasoducto del Sur Peruano project, which represented 25.3% of our backlog as of December 31, 2015. 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 as we continue to expand our operations in Latin America.

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

Our senior management team has an average tenure within our company of approximately 20 years. Euromoney recognized us in March 2014 as the best managed company in Latin America, the first time a Peruvian company has received this recognition, and in 2015 the best managed company in the construction and cement sectors in Latin America. For the third consecutive year, we were recognized by PWC as one of the ten most admired companies in Peru, with an outstanding ranking in the corporate governance category. Also, we received an award from LatinFinance magazine for being the corporate with the best equity market strategy, as well as the Andean corporate with the best capital markets strategy, as part of the 2014 LatinFinance Best Corporates survey. In addition, for the third year (2014, 2010, 2009) we were granted the “Llave de la BVL” award by the Lima Stock Exchange for good corporate governance as well as for the liquidity of our shares. 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 3,600 engineers. We also have access to a network of approximately 156,000 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 been listed on the Lima Stock Exchange since 1997 and the New York Stock Exchange since 2013. We abide by the highest corporate governance standards in Peru, and we are one of only 15 companies in Latin America, and one of only three in Peru, that form part of the Company’s Circle, which recognizes companies for their high corporate governance standards and is sponsored by the International Finance Corporation (IFC), the Organization for Economic Co-operation and Development (OECD) and the Global Corporate Governance Forum. In addition, we won the best corporate governance award in the South American construction sector granted by the Ethical Boardroom Corporate Governance Awards; and we were named both a Leading Company in Sustainability and a Leading Company in Corporate Governance by Alas20, a Latin America-wide organization that evaluates and qualifies sustainability and corporate governance matters in the region. In 2015, we came in tenth place in the ranking of most responsible companies and the ranking of the companies with best corporate governance, both by Merco Reputación, a Spanish consulting company that prepares corporate governance rankings, and which processes are verified and audited by KPMG. We won the first place for social responsibility and sustainable development among companies in the Employees category, in the Perú 2021 awards organized by Asociación Perú 2021, a Peruvian non profit which is a member of the World Business Council for Sustainable Development and PUCP (Pontificia Universidad Católica del Perú). In addition, we were placed 9th in the ranking of the 100 best companies to work in Peru, according to the Merco People reputation monitor and we were named Best Managed Company in the Latin American Cement and Construction Sector by Euromoney.

We have developed a strong corporate culture based on principles of high-quality, professionalism, reliability and efficiency. 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 2015, we had an accident incidence rate of 0.39, calculated over 127,379,277 hours worked.

 

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Our Strategies

Our vision is to be “the most reliable engineering services company in Latin America.” Our key strategies to achieve this vision include the following:

Be the contractor of choice for large-scale and complex projects in Peru and other key Latin American markets

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, such as Bechtel and Fluor, 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.

Further expand our infrastructure-related businesses to increase activity across our business segments and generate more stable cash flows

We plan to continue to expand our infrastructure-related businesses to capitalize on private and public investments in Peru, including in toll roads, airports, ports, railroads, hospitals, water utility companies, and other power and oil and gas infrastructure assets. In addition to providing more recurring and predictable cash flows, our Infrastructure segment generates additional business opportunities for our E&C and Technical Services segments.

Maintain highly capitalized balance sheet

We seek to maintain a prudent and sustainable capital structure and a strong financial position to allow us to capitalize on additional business opportunities as they arise. We intend to remain financially disciplined by limiting substantially all our debt incurrence to identified projects with repayment sources.

Selectively pursue international opportunities, focusing on Chile and Colombia

We intend to leverage the capabilities and experience we have in Peru, particularly providing engineering and construction services to the mining, oil and gas and infrastructure end-markets, to continue evaluating and selectively pursuing opportunities in other markets. We expect to focus our efforts primarily on Chile and Colombia, which we believe offer attractive opportunities in these end-markets. We intend to evaluate other international opportunities on a case-by-case basis.

Continue fostering our core corporate values throughout the organization

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. In 2012, the Inter-American Federation of the Construction Industry recognized us for our corporate strategy and promotion of citizenship with the Latin American Social Responsibility award. In addition, in 2014, KPMG ranked us eleventh among the 100 most responsible companies and with the best corporate governance in Peru, and the firm Merco, with the support of KPMG, placed us seventh in the ranking of the 100 Peruvian companies with the best reputation. In 2015 Alas20 named us Leading Company in Sustainability and Leading Company in Corporate Governance and Merco Reputación ranked us tenth place in the 2015 ranking of most responsible companies and with best corporate governance. 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 80-year track record and is the largest player in Peru as measured by revenues during 2015, according to our estimates based on Peru: The Top 10,000 Companies 2015, undertaking a

 

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broad range of activities relating to: engineering; civil construction; electromechanic construction; building construction; and contract mining. 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 2015 revenues by end-market.

2015 E&C Revenues by End-Market

 

LOGO

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 decided to expand 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 2015, approximately US$460 million of our E&C revenues were derived from international projects outside of Peru.

The acquisition of Vial y Vives - DSD 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—Peru has projected investment flows of approximately US$41 billion between 2016 and 2021 and Chile as projected investment flows of approximately US$45 billion between 2015 and 2019, according to the Lima Chamber of Commerce and Cochilco, respectively—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.

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

 

     As of and for the year ended December 31,  
             2013                      2014                      2015(1)                       2015(1)           
     (in millions of S/., except as indicated)      (in millions of
US$)(2)
 

Revenues

     4,075.3                5,035.7                5,841.6                1,711.6           

Net profit

     256.5                193.6                (51.4)                (15.1)           

Net profit attributable to controlling interest

     211.6                164.1                (64.4)                (18.9)           

Adjusted EBITDA

     546.0                459.4                264.5                77.5           

Adjusted EBITDA margin

     13.4%             9.1%             4.5%             4.5%       

Backlog (in millions of US$)(3)

     3,044.0                2,835.3                3,129.4                3,129.4           

Backlog/revenues ratio(3)

 

     2.1x              1.7x              1.8x              1.8x         

 

(1) Includes results from our Morelco acquisition beginning in January 2015.

 

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(2) Calculated based on an exchange rate of S/.3.413 to US$1.00 as of December 31, 2015.

 

(3) 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. In the third quarter of 2015 we added US$ 1,067 million in backlog from our 29% participation in the engineering procurement and construction contract for the southern gas pipeline project of Gasoducto Sur Peruano.

Principal Engineering and Construction Activities

The following chart sets forth our 2015 revenues by E&C activity.

2015 E&C Revenues by Activities

 

LOGO

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.

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.

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.

 

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Contract Mining

Our contract mining activities consist of mine planning, development, construction works, operation (including earthworks, blasting, loading and hauling ore) and mine closure.

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 1960, the Cañón del Pato hydroelectric power plant, the second largest hydroelectric plant in Peru in terms of installed capacity;

 

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

 

    in 1969, the Cuajone mining project, the largest copper mine and smelter complex in the world at that time and, in 1997, the Ilo smelter and refinery for Southern Copper Corporation;

 

    in 1974, the Sheraton Hotel in Lima, and, in 1995, the Sheraton Hotel in Santiago, Chile;

 

    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 1998, the Mantaro-Socobaya 605 km transmission line, which connected the country’s electrical grids;

 

    in 2000, the Marriot Hotel in Lima;

 

    in 2002, began providing open pit mining services, which are ongoing, to Brocal;

 

    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 San Cristobal concentrator plant in Bolivia;

 

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    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, currently the tallest building in Peru;

 

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

 

    in 2010, the Bayóvar plant for Vale;

 

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

 

    in 2011, 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 2013, the Huanza hydroelectric plant for Compañía de Minas Buenaventura;

 

    in 2013, the leaching pad La Quinua for the Yanacocha mine;

 

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

 

    in 2014, construction of a natural gas distribution network for Contugas, providing access to natural gas for five districts south of Lima;