INTRODUCTION
Certain Definitions
All references to “we,” “us,” “our,” “our company,” “the group” and “Graña y Montero” in this annual report are to Graña y Montero S.A.A., a publicly-held corporation ( sociedad anónima abierta ) organized under the laws of Peru. In this annual report, we refer to our principal subsidiaries, joint operations, joint ventures and associated companies as follows: (i) in our Engineering and Construction (E&C) segment: GyM S.A. as “GyM”; 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.S. as “Morelco”; (ii) in our Infrastructure segment: Norvial S.A. as “Norvial”; Survial S.A. as “Survial”; Concesión Canchaque S.A. as “Canchaque”; GyM Ferrovías S.A. as “GyM Ferrovías”; Concesionaria La Chira S.A. as “La Chira”; GMP S.A. as “GMP”; Gasoducto Sur Peruano S.A. (investee) as “GSP”; Concesionaria Chavimochic S.A.C. (investee) as “Chavimochic”; (iii) in our Real Estate segment: Viva GyM S.A. as “Viva GyM”; Inmobiliaria Almonte S.A.C. as “Almonte” and Concar S.A. as “Concar”; and (iv) in our Technical Services segment, CAM Chile S.A. as “CAM”; Adexus S.A. as “Adexus.” We discuss GSP and Chavimochic in our Infrastructure segment in this annual report, however, as investees, their results are not presented within the Infrastructure segment in our consolidated financial statements. For more information on our subsidiaries, joint operations, joint ventures or associated companies, see notes 6a, 6c and 16 to our audited annual consolidated financial statements included in this annual report.
The GSP gas pipeline concession was terminated on January 24, 2017, and, as a result, we recognized impairments with respect to our investment in GSP and our participation in the related construction consortium (Consorcio Constructor Ductos del Sur). Both GSP and Consorcio Constructor Ductos del Sur are in the process of being liquidated. Additionally, on April 24, 2017 we sold our interest in Compañía Operadora de Gas del Amazonas (“COGA”), and on June 6, 2017, we sold our interest in GMD S.A. (“GMD”). On April 11, 2018, we sold our interest in Stracon GyM. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
The term “U.S. dollar” and the symbol “US$” refer to the legal currency of the United States; the term “sol” and the symbol “S/.” refer to the legal currency of Peru; the term “Chilean peso” and the symbol “CLP” refer to the legal currency of Chile; and the term “Colombian peso” and the symbol “COP” refer to the legal currency of Colombia.
Financial Information
Our consolidated financial statements included in this annual report have been prepared in soles and in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). Our annual consolidated financial statements for the years ended December 31, 2015, 2016 and 2017 have been audited by Moore Stephens in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our annual consolidated financial statements for the years ended December 31, 2013 and 2014 have been audited by Gaveglio, Aparicio y Asociados S.C. de R.L., a member firm of PricewaterhouseCoopers. For more information, see “Item 16.F. Change in Registrant’s Certifying Accountant.”
Our consolidated financial statements for the year ended December 31, 2015 included in this annual report were restated in our annual report on Form 20-F for the fiscal year ended December 31, 2016. The previously issued consolidated financial statements of the company for the 2015 fiscal year (and the related audit opinion) included in the company’s annual report on Form 20-F for the year ended December 31, 2015 should not be relied upon. The restatement of the 2015 fiscal year resulted in certain significant changes to the company’s consolidated financial statements. For more information, see note 2.30 to our audited annual consolidated financial statements for the year ended December 31, 2016 included in our annual report on Form 20-F for the 2016 fiscal year.
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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 7 to our audited annual consolidated financial statements included in this annual report. Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results.
We have requested that the staff of the U.S. Securities and Exchange Commission (the “SEC”) grant relief from the financial statement filing requirements of Rule 3.09 of Regulation S-X pursuant to Section 2430 of the Division of Corporation Finance Financial Reporting Manual, with respect to our investment in GSP. We have requested this relief because we believe the burden of producing financial statements of GSP as of and for the years ended December 31, 2015, 2016 and 2017 would outweigh their limited utility to the company’s investors. In particular, such financial statements would not provide additional material information to our investors that is not already included in our own audited annual consolidated financial statements included in this annual report. The SEC has not yet granted this request for relief, and we are in ongoing discussions with SEC regarding this matter. For more information on GSP, see notes 5(e), 5(f) and 16 of our audited annual consolidated financial statements included in this annual report.
On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well.
Non-IFRS Data
In this annual report, we present EBITDA, a non-GAAP financial measure. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable IFRS measure. We present EBITDA because we believe it provides readers with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons on a consistent basis. Furthermore, we regularly present EBITDA in our filings with the Lima Stock Exchange in Peru. Our management uses EBITDA, among other measures, for internal planning and performance measurement purposes. We believe that EBITDA is useful in evaluating our operating performance compared to other companies operating in our sectors because the calculation of EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending, which items may vary for different companies for reasons unrelated to overall operating performance. EBITDA should not be construed as an alternative to net profit or operating profit, as an indicator of operating performance, as an alternative to cash flow provided by operating activities or as a measure of liquidity (in each case, as determined in accordance with IFRS). EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies. For our definition of EBITDA and a reconciliation of EBITDA to the most directly comparable IFRS financial measure, see “Item 3.A. Key Information—Selected Financial Data—Non-GAAP Financial Measure and Reconciliation.”
Currency Translations
Our consolidated financial statements are prepared in soles. For a description of our translation of amounts in currencies other than soles in our consolidated financial statements, see note 2.4 to our audited annual consolidated financial statements included in this annual report.
We have translated some of the soles amounts contained in this annual report into U.S. dollars and some U.S. dollars amounts contained in this annual report into soles, for convenience purposes only. Unless otherwise indicated or the context otherwise requires, the rate used to translate soles amounts to U.S. dollars and U.S. dollars amounts into soles was S/.3.245 to US$1.00, which was the exchange rate reported for December 31, 2017 by the Peruvian Superintendency of Banks, Insurance and Private Pension Fund Administrators (Superintendencia de Banca, Seguros y AFPs, or “SBS”). We present our backlog in U.S. dollars. For contracts denominated in soles or other local currencies, amounts have been converted into U.S. dollars based on the exchange rate published by the SBS on December 31 of the corresponding year. When we present our ratios of backlog and revenues in this annual report, we similarly convert our revenues, which are reported in soles, into U.S. dollars based on the exchange rate reported for December 31 of the corresponding year. For conversions of macroeconomic indicators (particularly in “Item 5.D. Operating and Financial Review and Prospects—Trend Information” in this annual report), average annual exchange rates for the currencies of each of the countries addressed are used. The Federal Reserve Bank of New York does not report a noon buying rate for soles. The U.S. dollar equivalent information presented in this annual report is provided solely for convenience of the reader and should not be construed as implying that the soles or other currency amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate. See “Item 3.A. Key Information—Selected Financial Data—Exchange Rates” for information regarding historical exchange rates of soles to U.S. dollars.
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Rounding
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be arithmetic aggregations of the figures that precede them.
Backlog
This annual report includes our backlog for our Engineering and Construction, 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) our revenues from hydrocarbon extraction services are dependent on the amounts of oil and gas we produce and market prices, which fluctuate significantly; (b) our revenues from our gas processing plant are dependent on the amount of gas we process and market prices for natural gas liquids, which fluctuate significantly; and (c) our revenues from our fuel storage terminal operation partially depend on the volume of fuel dispatched; and (iii) COGA, which is not consolidated because it was jointly controlled, and which we sold on April 24, 2017. 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.”
The GSP gas pipeline concession was terminated on January 24, 2017, which had a significant impact on our backlog for our E&C and our consolidated backlog. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
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, 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 former director, Hugo Santa María Guzmán, is a partner in APOYO Consultoría, and Roberto Abusada Salah, a director of the company, is a director of the Peruvian Economy Institute. We paid Great Place to Work ® Institute, a human resources consulting, research and training firm, for our employees to participate in their market survey referenced in this annual report (Copyright © 2017 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.
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Measurements and Other Data
In this annual report, we use the following measurements:
| • | “m” means one meter, which equals approximately 3.28084 feet; |
| • | “m2” means one square meter, which equals approximately 10.7630 square feet; |
| • | “km” means one kilometer, which equals approximately 0.621371 miles; |
| • | “hectare” means one hectare, which equals approximately 2.47105 acres; |
| • | “tonne” means one metric ton, which equals approximately 2,204.6 pounds; |
| • | “bbl” or barrel of oil means one stock tank barrel, which is equivalent to approximately 0.15898 cubic meters; |
| • | “boe” means one barrel of oil equivalent, which equals approximately 160.2167 cubic meters, determined using the ratio of 5,658 cubic feet of natural gas to one barrel of oil; |
| • | “cf” means one cubic foot; |
| • | “M,” when used before bbl, boe or cf, means one thousand bbl, boe and cf, respectively; |
| • | “MM,” when used before bbl, boe or cf, means one million bbl, boe and cf, respectively; |
| • | “MW” means one megawatt, which equals one million watts; and |
| • | “Gwh” means one gigawatt hour, which equals one billion watt hours. |
In this annual report, we use the term accident 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 other similar expressions. Any or all of our forward-looking statements in this annual report may turn out to be inaccurate. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including, among others:
| • | the impact on our business reputation from our association with Odebrecht S.A. (“Odebrecht”) affiliates in Peru; |
| • | the potential effects of investigations of our company and certain of our former directors and executive officers, or any future investigations, regarding corruption or other illegal acts; |
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| • | uncertainty with regards to the timing and amount of the government payment we are entitled to receive in connection with the termination of the GSP pipeline concession; |
| • | defaults under our debt instruments arising from certain financial covenants and our failure to deliver the company’s audited consolidated financial statements for the 2016 and 2017 fiscal years on time; |
| • | our ability to consummate asset sales on favorable terms on a timely basis, or at all; |
| • | the potential impact of the class action civil suit against the company and certain of our former directors and our former and current executive officers; |
| • | our ability to successfully appeal the suspension of trading and eventual delisting of our American depositary shares (“ADSs”) on the New York Stock Exchange (“NYSE”); |
| • | global macroeconomic conditions, including commodity prices; |
| • | economic, political and social conditions in the markets in which we operate, particularly in Peru, including the resignation of former President Pedro Pablo Kuczynski in March 2018 following corruption allegations; |
| • | political conflicts and deadlocks in Peru between the Peruvian Congress and the executive branch; |
| • | 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; |
| • | social conflicts in Peru that disrupt infrastructure projects, particularly in the mining sector; |
| • | interest rate fluctuation, inflation and devaluation or appreciation of the sol in relation to the U.S. dollar (or other currencies in which we receive revenue); |
| • | our backlog may not be a reliable indicator of future revenues or profit; |
| • | the 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; |
| • | 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, including our ability to obtain performance bonds and similar financings; required in the ordinary course of our business; |
| • | our ability to attract and retain qualified personnel; |
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| • | 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; |
| • | 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.
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| ITEM 3. | KEY INFORMATION |
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 audited annual consolidated financial statements included in this annual report.
The following selected financial data as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 have been derived from our audited annual consolidated financial statements included in this annual report. The following selected financial data as of December 31, 2013, 2014 and 2015 and for the years ended December 31, 2013 and 2014 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, 2015, 2016 and 2017 have been audited by Moore Stephens in accordance with the standards of the Public Company Accounting Oversight Board (United States). For more information, see “Item 16.F. Change in Registrant’s Certifying Accountant.” Our consolidated financial statements for the year ended December 31, 2015 included in this annual report were restated in our annual report on Form 20-F for the fiscal year ended December 31, 2016. The previously issued consolidated financial statements of the company for the 2015 fiscal year (and the related audit opinion) included in the company’s annual report on Form 20-F for the year ended December 31, 2015 should not be relied upon. On June 6, 2017, we sold our 89.19% interest in our former subsidiary GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our financial statements for the years ended December 31, 2015 and 2016 included in this annual report to show GMD as a discontinued operation for those years as well. We have not reclassified GMD for the fiscal years 2013 and 2014, due to the immaterial amount of the difference.
| (1) | Includes the results of operations of DSD since August 2013, Morelco since January 2015 and Adexus which began consolidating in August 2016. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting our Results of Operations—Acquisitions.” Additionally includes the results of Stracon, although we sold our interest in Stracon on April 11, 2018. |
| (2) | We have not reclassified our financial information included in this annual report for the years ended December 31, 2013 and 2014 to show GMD as a discontinued operation, due to the immaterial amount of the difference. |
| (3) | For the effects on our results of operations for 2016 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and notes 5(e), 5(f), and 16 to our audited annual consolidated financial statements included in this annual report. In particular, we recognized an impairment to our investment in GSP of S/.593.1 million in 2016, which is recorded in Share of the profit and loss obtained from associates and joint ventures under the equity method of accounting. |
| (4) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (5) | Reflects exchange losses due to the depreciation of the sol against the U.S. dollar and our U.S. dollar denominated liabilities. For more information, see note 28 to our audited annual consolidated financial statements included in this annual report. |
| (6) | We consolidate the results of our subsidiaries in our financial statements and we reflect the profit corresponding to the minority interests in our subsidiaries under “net profit attributable to non-controlling interests” in our income statement. With respect to our joint operations, we recognize in our consolidated financial statements the revenue and expenses, including our share of any asset, liability, revenue or expense we hold jointly with partners. We reflect the results of our associated companies under the equity method of accounting in our consolidated financial statements under the line item “share of the profit and loss in associates” in our income statement. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Acquisitions,” “—General—Accounting for Subsidiaries, Joint Operations, Joint Ventures and Associated Companies” and note 2.2 to our audited annual consolidated financial statements included in this annual report. |
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| As of December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 (1) | 2017 | 2017 | |||||||||||||||||||
| Balance Sheet Data: | (in millions of S/.) |
(in millions of
US$) (2) |
||||||||||||||||||||||
|
Total current assets |
3,903.5 | 4,623.9 | 5,200.4 | 4,328.7 | 3,891.9 | 1,199.4 | ||||||||||||||||||
|
Cash and cash equivalents |
959.4 | 818.4 | 554.0 | 607.0 | 626.2 | 193.0 | ||||||||||||||||||
|
Accounts receivables |
1,162.4 | 1,768.6 | 2,143.3 | 1,862.5 | 1,858.9 | 572.9 | ||||||||||||||||||
|
Outstanding work in progress |
971.7 | 1,161.8 | 1,278.2 | 680.9 | 584.8 | 180.2 | ||||||||||||||||||
|
Inventories (3) |
762.8 | 833.6 | 1,159.2 | 1,104.3 | 770.7 | 237.5 | ||||||||||||||||||
|
Total non-current assets |
2,412.6 | 3,106.8 | 3,699.6 | 4,718.0 | 4,775.7 | 1,471.7 | ||||||||||||||||||
|
Long-term accounts receivables (4) |
591.9 | 580.0 | 621.8 | 667.5 | 848.6 | 261.5 | ||||||||||||||||||
|
Investments in associates and joint ventures |
88.0 | 229.6 | 637.0 | 389.8 | 268.7 | 82.8 | ||||||||||||||||||
|
Property, plant and equipment |
952.9 | 1,147.0 | 1,111.8 | 1,113.6 | 865.7 | 266.8 | ||||||||||||||||||
|
Intangible assets (5) |
480.9 | 778.7 | 878.3 | 960.3 | 940.1 | 289.7 | ||||||||||||||||||
|
Total current liabilities |
2,416.3 | 3,794.9 | 4,092.3 | 4,537.0 | 3,549.2 | 1,093.7 | ||||||||||||||||||
|
Short-term borrowings |
486.1 | 1,425.5 | 1,265.1 | 2,007.1 | 1,093.4 | 336.9 | ||||||||||||||||||
|
Accounts payables (6) (7) |
1,762.1 | 2,151.4 | 2,779.6 | 2,453.1 | 2,356.7 | 726.3 | ||||||||||||||||||
|
Total non-current liabilities |
703.1 | 762.1 | 1,725.8 | 2,019.9 | 2,529.4 | 779.5 | ||||||||||||||||||
|
Long-term borrowings |
309.7 | 326.1 | 1,310.3 | 1,341.0 | 1,544.2 | 475.9 | ||||||||||||||||||
|
Capital stock |
660.1 | 660.1 | 660.1 | 660.1 | 660.1 | 203.4 | ||||||||||||||||||
|
Shareholders’ equity |
2,765.4 | 2,691.7 | 2,558.8 | 1,980.4 | 2,123.3 | 654.3 | ||||||||||||||||||
|
Non-controlling interest |
431.3 | 482.5 | 523.1 | 509.3 | 465.7 | 143.5 | ||||||||||||||||||
| (1) | For the effects on our financial condition as of December 31, 2016 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and notes 5(e), 5(f) and 26 to our audited annual consolidated financial statements included in this annual report. |
| (2) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (3) | 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 15 to our audited annual consolidated financial statements included in this annual report. |
| (4) | Includes payments required to be made by the Peruvian government for the amounts we invest to purchase trains and other infrastructure for the Lima Metro. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—General—Infrastructure” and note 11 to our audited annual consolidated financial statements included in this annual report. |
| (5) | We recognize our investments in the construction of the highway of our Norvial concession as intangible assets. See note 18(c) to our audited annual consolidated financial statements included in this annual report. |
| (6) | Includes S/.701.8 million, S/.684.3 million, S/.607.1 million, S/.810.8 million and S/.726.3 million in advance payments made by our clients as of December 31, 2013, 2014, 2015, 2016 and 2017, 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 22 to our audited annual consolidated financial statements included in this annual report. |
| (7) | Includes our US$15.6 million payable to Chubb Insurance Company (US$52.5 million as of December 31, 2016 and US$15.6 million as of December 31, 2017) relating to the termination of the GSP gas pipeline concession. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and “—Liquidity and Capital Resources—Indebtedness.” |
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| As of and for the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 (2) | 2017 | 2017 | |||||||||||||||||||
|
(in millions of S/.) |
(in millions of US$) (3) |
|||||||||||||||||||||||
|
Other Data: (1) |
||||||||||||||||||||||||
|
EBITDA (4) (in millions of S/. or US$) |
966.1 | 858.8 | 579.2 | (93.6 | ) | 785.1 | 241.9 | |||||||||||||||||
|
Gross margin |
16.8 | % | 13.6 | % | 8.1 | % | 9.0 | % | 11.1 | % | 11.1 | % | ||||||||||||
|
EBITDA margin (5) |
16.2 | % | 12.3 | % | 7.6 | % | (1.5 | )% | 12.9 | % | 12.9 | % | ||||||||||||
|
Outstanding shares (thousands) |
660,054 | 660,054 | 660,054 | 660,054 | 660,054 | 660,054 | ||||||||||||||||||
|
Profit per share (in S/.or US$) |
0.62 | 0.55 | 0.08 | (0.68 | ) | 0.31 | 0.10 | |||||||||||||||||
|
Profit attributable to controlling interest per share (in S/.or US$) |
0.48 | 0.45 | 0.01 | (0.77 | ) | 0.23 | 0.07 | |||||||||||||||||
|
Dividend per share (in S/.or US$) (6) |
0.17 | 0.16 | 0.05 | — | — | — | ||||||||||||||||||
|
Net debt (7) / EBITDA ratio |
(0.2 | )x | 1.1x | 3.5x | (29.3 | ) | 2.6 | 2.6 | ||||||||||||||||
|
Backlog (in millions of US$) (Unaudited) (8) |
3,935.0 | 3,765.4 | 3,918.4 | 3,011.6 | 2,388.4 | 2,388.4 | ||||||||||||||||||
|
Backlog/revenues ratio (Unaudited) (8) |
1.9x | 1.6x | 1.9x | 1.8x | 1.3x | 1.3x | ||||||||||||||||||
| (1) | Includes the results of operations of DSD since August 2013, Morelco since January 2015 and Adexus which began consolidating in August 2016. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting our Results of Operations—Acquisitions.” Additionally includes the results of Stracon, although we sold our interest in Stracon on April 11, 2018. |
| (2) | For the effects on our results of operations and backlog for 2016 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and notes 5(e), 5(f) and 16 to our audited annual consolidated financial statements included in this annual report. |
| (3) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (4) | For further information on the definition of EBITDA, see “—Non-GAAP Financial Measure and Reconciliation.” |
| (5) | Reflects EBITDA as a percentage of revenues. |
| (6) | Payment of dividends for the year’s profit. |
| (7) | Net debt is calculated as total borrowings (including current and non-current borrowings) less cash and cash equivalents. |
| (8) | 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 (which we sold on April 24, 2017). 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/.2.796 to US$1.00 as of December 31, 2013, S/.2.989 to US$1.00 as of December 31, 2014, S/.3.413 to US$1.00 as of December 31, 2015, S/.3.36 to US$1.00 as of December 31, 2016 and S/.3.245 to US$1.00 as of December 31, 2017. Includes revenues only for businesses included in our backlog. |
The following tables set forth summary financial data for each of our business segments. For more information on the results of operations of our segments, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations” and note 7 to our audited annual consolidated financial statements included in this annual report. The effects of the termination of the GSP gas pipeline concession on our results of operations and financial condition for 2016 are reflected in Corporate (the Parent Company Operations) and, with respect to the related construction consortium (Consorcio Constructor Ductos del Sur), in our E&C segment.
Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results.
1. Engineering & Construction
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
|
(in millions of S/.) |
(in millions of US$) (1) |
|||||||||||||||||||||||
|
Income Statement Data: |
||||||||||||||||||||||||
|
Revenues |
4,075.3 | 5,035.7 | 5,829.4 | 4,159.5 | 3,353.2 | 1,033.3 | ||||||||||||||||||
|
Cost of sales |
(3,515.7 | ) | (4,500.3 | ) | 5,516.7 | (3,934.9 | ) | (3,062.9 | ) | (943.9 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Gross profit |
559.5 | 535.4 | 312.8 | 224.6 | 290.3 | 89.5 | ||||||||||||||||||
9
Table of Contents
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
|
(in millions of S/.) |
(in millions of US$) (1) |
|||||||||||||||||||||||
|
Administrative expenses |
(217.9 | ) | (258.6 | ) | (289.1 | ) | (258.6 | ) | (231.0 | ) | (71.2 | ) | ||||||||||||
|
Other income and (expenses), net |
10.8 | (9.8 | ) | 30.8 | (9.2 | ) | (42.7 | ) | (13.2 | ) | ||||||||||||||
|
Other (losses) gains, net |
— | — | (0.2 | ) | — | 25.8 | 8.0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Operating profit |
352.4 | 267.0 | 54.2 | (43.2 | ) | 42.4 | 13.1 | |||||||||||||||||
|
Financial (expense) income, net |
(26.6 | ) | (62.4 | ) | (118.5 | ) | (53.9 | ) | (43.4 | ) | (13.4 | ) | ||||||||||||
|
Share of the profit or loss in associates under the equity method of accounting |
42.0 | 48.2 | (2.2 | ) | 16.5 | 30.6 | 9.4 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Profit (loss) before income tax |
367.7 | 252.8 | (66.5 | ) | (80.6 | ) | 29.6 | 9.1 | ||||||||||||||||
|
Income tax |
(111.2 | ) | (59.3 | ) | (55.4 | ) | (12.8 | ) | (17.14 | ) | (5.3 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Net profit (loss) |
256.5 | 193.6 | (121.8 | ) | (93.4 | ) | 12.5 | 3.9 | ||||||||||||||||
|
Net profit attributable to controlling interest |
211.6 | 164.1 | (131.2 | ) | (87.7 | ) | 12.1 | 3.7 | ||||||||||||||||
|
Net profit (loss) attributable to non-controlling interest |
44.9 | 29.5 | 9.3 | (5.7 | ) | 0.3 | 0.1 | |||||||||||||||||
| As of December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
|
(in millions of S/.) |
(in millions of US$) (1) |
|||||||||||||||||||||||
|
Balance Sheet Data: |
||||||||||||||||||||||||
|
Total current assets |
1,858.0 | 2,676.6 | 3,157.1 | 1,910.9 | 1,949.0 | 600.6 | ||||||||||||||||||
|
Cash and cash equivalents |
265.8 | 285.4 | 172.1 | 93.5 | 184.4 | 56.8 | ||||||||||||||||||
|
Accounts receivables |
737.7 | 1,092.9 | 1,526.4 | 1,060.5 | 1,117.0 | 344.2 | ||||||||||||||||||
|
Outstanding work in progress |
735.0 | 1,145.4 | 1,260.5 | 648.9 | 578.7 | 178.3 | ||||||||||||||||||
|
Other current assets |
119.6 | 152.9 | 198.1 | 108.0 | 68.9 | 21.2 | ||||||||||||||||||
|
Total non-current assets |
931.1 | 1,250.0 | 1,118.4 | 1,328.0 | 1,382.3 | 426.0 | ||||||||||||||||||
|
Long-term accounts receivables |
— | 6.2 | 0.5 | 42.7 | 333.5 | 102.8 | ||||||||||||||||||
|
Property, plant and equipment |
534.1 | 651.2 | 606.2 | 592.2 | 509.7 | 157.1 | ||||||||||||||||||
|
Other non-current assets |
397.0 | 592.6 | 511.7 | 521.4 | 480.1 | 148.0 | ||||||||||||||||||
|
Total current liabilities |
1,633.6 | 2,500.2 | 2,846.3 | 2,101.5 | 2,189.6 | 674.8 | ||||||||||||||||||
|
Short-term borrowings |
195.1 | 629.6 | 653.0 | 582.3 | 592.0 | 182.4 | ||||||||||||||||||
|
Accounts payables (2) |
1,321.5 | 1,701.9 | 2,174.0 | 1,482.1 | 1,561.6 | 481.2 | ||||||||||||||||||
|
Total non-current liabilities |
385.6 | 445.2 | 629.2 | 471.8 | 546.3 | 168.4 | ||||||||||||||||||
|
Long-term borrowings |
127.1 | 144.1 | 376.0 | 246.3 | 127.8 | 39.4 | ||||||||||||||||||
|
Other long-term liabilities |
258.5 | 301.1 | 253.3 | 225.5 | 418.6 | 129.0 | ||||||||||||||||||
|
Shareholders’ equity |
622.9 | 817.8 | 639.2 | 551.7 | 487.9 | 150.4 | ||||||||||||||||||
|
Non-controlling interest |
147.0 | 163.4 | 160.8 | 113.9 | 107.5 | 33.1 | ||||||||||||||||||
2. Infrastructure
10
Table of Contents
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of
US$) (1) |
|||||||||||||||||||||||
|
Balance Sheet Data: |
||||||||||||||||||||||||
|
Total current assets |
651.8 | 614.1 | 639.3 | 806.5 | 923.3 | 284.5 | ||||||||||||||||||
|
Cash and cash equivalents |
142.5 | 173.4 | 240.3 | 303.9 | 331.1 | 102.0 | ||||||||||||||||||
|
Accounts receivables |
286.1 | 378.8 | 331.9 | 409.2 | 535.0 | 164.9 | ||||||||||||||||||
|
Outstanding work in progress |
172.6 | 16.4 | 17.7 | 32.1 | — | — | ||||||||||||||||||
|
Other current assets |
50.6 | 45.6 | 49.5 | 61.3 | 57.2 | 17.6 | ||||||||||||||||||
|
Total non-current assets |
1,111.1 | 1,297.9 | 1,514.4 | 1,801.6 | 2,098.4 | 646.7 | ||||||||||||||||||
|
Long-term accounts receivables (3) |
603.9 | 602.3 | 670.7 | 930.2 | 1,164.0 | 358.7 | ||||||||||||||||||
|
Property, plant and equipment |
226.4 | 236.3 | 225.4 | 200.2 | 190.4 | 58.7 | ||||||||||||||||||
|
Other non-current assets |
279.8 | 412.8 | 536.1 | 623.5 | 676.9 | 208.6 | ||||||||||||||||||
|
Total current liabilities |
1,094.2 | 1,180.4 | 458.4 | 407.2 | 580.2 | 178.8 | ||||||||||||||||||
|
Short-term borrowings |
140.4 | 588.8 | 197.2 | 85.1 | 86.2 | 26.6 | ||||||||||||||||||
|
Accounts payables |
934.6 | 568.3 | 241.3 | 261.5 | 486.2 | 149.8 | ||||||||||||||||||
|
Total non-current liabilities |
163.6 | 154.5 | 1,010.3 | 1,444.7 | 1,585.9 | 488.7 | ||||||||||||||||||
|
Long-term borrowings |
99.6 | 103.3 | 842.5 | 1,004.6 | 1,014.4 | 312.6 | ||||||||||||||||||
|
Other long-term liabilities |
63.9 | 51.1 | 167.8 | 440.1 | 571.4 | 176.1 | ||||||||||||||||||
|
Shareholders’ equity |
434.2 | 497.1 | 586.2 | 643.3 | 729.5 | 224.8 | ||||||||||||||||||
|
Non-controlling interest |
70.9 | 80.0 | 98.8 | 112.9 | 126.1 | 38.9 | ||||||||||||||||||
3. Real Estate
| As of December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
|
(in millions of S/.) |
(in millions of
US$) (3) |
|||||||||||||||||||||||
|
Balance Sheet Data: |
||||||||||||||||||||||||
|
Total current assets |
672.6 | 760.8 | 1,109.3 | 1,117.1 | 884.6 | 272.6 | ||||||||||||||||||
|
Cash and cash equivalents |
43.0 | 54.3 | 74.5 | 58.9 | 85.2 | 26.3 | ||||||||||||||||||
|
Accounts receivables |
36.4 | 75.6 | 114.4 | 111.2 | 155.3 | 47.9 | ||||||||||||||||||
|
Outstanding work in progress |
593.2 | 631.0 | 920.4 | 947.0 | 644.1 | 198.5 | ||||||||||||||||||
|
Other current assets (5) |
76.5 | 117.4 | 91.7 | 113.6 | 78.5 | 24.2 | ||||||||||||||||||
|
Total non-current assets |
11.8 | 9.7 | 14.7 | 17.9 | 9.8 | 3.0 | ||||||||||||||||||
|
Long-term accounts receivables (3) |
5.6 | 7.3 | 11.3 | 13.0 | 11.6 | 3.6 | ||||||||||||||||||
|
Property, plant and equipment |
36.9 | 36.2 | 34.7 | 49.4 | 45.7 | 14.1 | ||||||||||||||||||
|
Other non-current assets |
22.1 | 64.1 | 30.9 | 33.3 | 11.3 | 3.5 | ||||||||||||||||||
|
Total current liabilities |
217.6 | 266.6 | 555.1 | 515.8 | 352.1 | 108.5 | ||||||||||||||||||
|
Short-term borrowings |
77.9 | 144.3 | 224.4 | 206.5 | 162.0 | 49.9 | ||||||||||||||||||
|
Accounts payables |
136.6 | 120.1 | 330.7 | 291.2 | 144.8 | 44.6 | ||||||||||||||||||
|
Total non-current liabilities |
97.8 | 138.9 | 159.6 | 104.2 | 44.1 | 13.6 | ||||||||||||||||||
|
Long-term borrowings |
52.3 | 16.4 | 27.6 | 16.5 | 12.0 | 3.7 | ||||||||||||||||||
|
Other long-term liabilities |
45.4 | 122.5 | 132.0 | 87.6 | 32.1 | 9.9 | ||||||||||||||||||
|
Shareholders’ equity |
152.7 | 157.3 | 158.6 | 234.4 | 217.3 | 67.0 | ||||||||||||||||||
|
Non-controlling interest (4) |
281.0 | 315.4 | 327.6 | 376.3 | 349.6 | 107.7 | ||||||||||||||||||
11
Table of Contents
4. Technical Services
| (1) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (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 22 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 11 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 15 to our audited annual consolidated financial statements included in this annual report. |
| (6) | We have not reclassified our financial information included in this annual report for the years ended December 31, 2013 and 2014 to show GMD as a discontinued operation, due to the immaterial amount of the difference. |
12
Table of Contents
Non-GAAP Financial Measure and Reconciliation
In this annual report, we present EBITDA, a non-GAAP financial measure. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable IFRS measure. We define EBITDA as net profit plus: financial (expense) income, net; income tax; and depreciation and amortization.
We present EBITDA because we believe it provides readers with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons on a consistent basis. Furthermore, we regularly present EBITDA in our filings with the Lima Stock Exchange in Peru. Our management uses EBITDA, among other measures, for internal planning and performance measurement purposes. We believe that EBITDA is useful in evaluating our operating performance compared to that of other companies operating in our sectors because the calculation of EBITDA and EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending, which items may vary for different companies for reasons unrelated to overall operating performance. EBITDA should not be construed as an alternative to net profit or operating profit, as an indicator of operating performance, as an alternative to cash flow provided by operating activities or as a measure of liquidity (in each case, as determined in accordance with IFRS). EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies. The following table sets forth the reconciliation of our net profit to EBITDA on a consolidated basis.
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 (1) | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of
US$) (2) |
|||||||||||||||||||||||
|
Net profit (loss) (3) |
412.1 | 361.2 | 46.4 | (463.6 | ) | 205.7 | 63.4 | |||||||||||||||||
|
Financial expense |
583.5 | 460.1 | 590.2 | 977.0 | 515.9 | 159.0 | ||||||||||||||||||
|
Financial income |
(471.0 | ) | (368.8 | ) | (459.8 | ) | (776.0 | ) | (345.9 | ) | (106.6 | ) | ||||||||||||
|
Income tax |
182.3 | 146.2 | 95.9 | (119.3 | ) | 123.0 | 37.9 | |||||||||||||||||
|
Depreciation and amortization |
259.1 | 260.0 | 306.4 | 288.3 | 286.4 | 88.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
967.2 | 858.8 | 579.2 | 93.6 | 785.1 | 241.9 | ||||||||||||||||||
The following table is the reconciliation of the EBITDA for our four segments, Parent company operations and elimination:
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 (1) | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of
US$) (2) |
|||||||||||||||||||||||
|
Engineering and construction |
545.5 | 459.5 | 220.1 | 106.1 | 194.3 | 59.9 | ||||||||||||||||||
|
Infrastructure |
236.6 | 257.2 | 272.2 | 237.8 | 300.9 | 92.7 | ||||||||||||||||||
|
Real state |
97.9 | 56.5 | 52.8 | 121.4 | 177.3 | 54.6 | ||||||||||||||||||
|
Technical services |
91.7 | 78.8 | 35.1 | 39.8 | 36.8 | 11.3 | ||||||||||||||||||
|
Parent company operations |
309.1 | 252.3 | (35.6 | ) | (1,026.4 | ) | 216.7 | 66.8 | ||||||||||||||||
|
Eliminations intercompany |
(314.7 | ) | (245.4 | ) | 34.6 | 427.8 | (140.9 | ) | (43.4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA (5) |
967.2 | 858.8 | 579.2 | (93.6 | ) | 785.1 | 241.9 | |||||||||||||||||
The following tables set forth the reconciliation of our net profit to EBITDA for each of our business segments and certain of our lines of business or subsidiaries within these segments. The effects of the termination of the GSP gas pipeline concession on our results of operations and financial condition for 2016 are reflected in Corporate (the Parent Company Operations) and, with respect to the related construction consortium (Consorcio Constructor Ductos del Sur), in our E&C segment. Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results. For more information, see note 7 to our audited annual consolidated financial statements included in this annual report.
13
Table of Contents
1. Engineering & Construction
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 (1) | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit (loss) (3) |
256.5 | 193.6 | (121.8 | ) | (93.4 | ) | 12.4 | 3.8 | ||||||||||||||||
|
Financial expense |
318.4 | 256.9 | 433.3 | 560.1 | 218.1 | 67.2 | ||||||||||||||||||
|
Financial income |
(291.8 | ) | (194.5 | ) | (314.8 | ) | (506.2 | ) | (174.7 | ) | (53.8 | ) | ||||||||||||
|
Income tax |
111.2 | 59.3 | 55.4 | 12.8 | 17.1 | 5.3 | ||||||||||||||||||
|
Depreciation and amortization |
151.2 | 144.2 | 168.1 | 132.8 | 121.4 | 37.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
545.5 | 459.5 | 220.1 | 106.1 | 194.2 | 59.9 | ||||||||||||||||||
| 2. Infrastructure | ||||||||||||||||||||||||
| 2.1 Full Segment | ||||||||||||||||||||||||
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 (1) | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit |
82.4 | 92.6 | 112.4 | 98.3 | 129.3 | 39.8 | ||||||||||||||||||
|
Financial expense |
117.5 | 101.6 | 78.2 | 101.7 | 62.6 | 19.3 | ||||||||||||||||||
|
Financial income |
(72.9 | ) | (71.2 | ) | (55.3 | ) | (92.0 | ) | (43.1 | ) | (13.3 | ) | ||||||||||||
|
Income tax |
40.0 | 56.6 | 46.5 | 39.9 | 55.2 | 17.0 | ||||||||||||||||||
|
Depreciation and amortization |
69.7 | 77.6 | 90.5 | 90.0 | 96.9 | 29.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
236.7 | 257.2 | 272.3 | 237.8 | 300.9 | 92.7 | ||||||||||||||||||
| 2.2(a) All Toll Roads | ||||||||||||||||||||||||
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit |
40.4 | 43.0 | 53.5 | 44.9 | 55.0 | 16.9 | ||||||||||||||||||
|
Financial expense |
22.4 | 19.0 | 10.8 | 14.9 | 7.7 | 2.4 | ||||||||||||||||||
|
Financial income |
(18.0 | ) | (9.5 | ) | (14.8 | ) | (9.6 | ) | (3.5 | ) | (1.1 | ) | ||||||||||||
|
Income tax |
15.0 | 16.2 | 18.8 | 15.5 | 20.9 | 6.4 | ||||||||||||||||||
|
Depreciation and amortization |
10.0 | 11.4 | 10.9 | 11.1 | 11.0 | 3.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
69.8 | 80.1 | 79.2 | 76.8 | 91.1 | 28.1 | ||||||||||||||||||
| 2.2(b) Norvial | ||||||||||||||||||||||||
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit |
30.1 | 31.1 | 40.9 | 47.3 | 49.4 | 15.2 | ||||||||||||||||||
|
Financial expense |
13.3 | 9.7 | 4.1 | 4.9 | 3.4 | 1.0 | ||||||||||||||||||
|
Financial income |
(3.8 | ) | (0.4 | ) | (0.4 | ) | (1.6 | ) | (0.9 | ) | (0.3 | ) | ||||||||||||
|
Income tax |
10.2 | 10.9 | 13.6 | 16.3 | 18.7 | 5.8 | ||||||||||||||||||
|
Depreciation and amortization |
9.8 | 11.0 | 10.8 | 10.9 | 10.8 | 3.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
59.6 | 62.3 | 68.9 | 77.7 | 81.4 | 25.1 | ||||||||||||||||||
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2.3 Mass Transit
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit (loss) (5) |
(13.1 | ) | 12.1 | 18.8 | 23.9 | 19.5 | 6.0 | |||||||||||||||||
|
Financial expense |
60.3 | 39.8 | 7.9 | 20.5 | 18.4 | 5.7 | ||||||||||||||||||
|
Financial income |
(34.3 | ) | (35.3 | ) | (4.9 | ) | (25.8 | ) | (14.0 | ) | (4.3 | ) | ||||||||||||
|
Income tax |
(0.5 | ) | 10.8 | 8.1 | 10.9 | 9.5 | 2.9 | |||||||||||||||||
|
Depreciation and amortization |
0.6 | 0.9 | 0.1 | 0.1 | 0.1 | 0.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
13.0 | 28.3 | 30.0 | 29.6 | 33.5 | 10.3 | ||||||||||||||||||
2.4 Energy
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit |
45.0 | 62.7 | 20.2 | 12.0 | 38.1 | 11.7 | ||||||||||||||||||
|
Financial expense |
28.5 | 30.6 | 50.3 | 61.7 | 34.8 | 10.7 | ||||||||||||||||||
|
Financial income |
(14.3 | ) | (19.2 | ) | (30.5 | ) | (52.0 | ) | (23.3 | ) | (7.2 | ) | ||||||||||||
|
Income tax |
20.1 | 29.8 | 7.7 | 5.3 | 13.2 | 4.1 | ||||||||||||||||||
|
Depreciation and amortization |
53.4 | 58.1 | 74.2 | 72.5 | 79.4 | 24.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
132.8 | 162.0 | 121.8 | 99.5 | 142.1 | 43.8 | ||||||||||||||||||
2.5 Concar
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit (loss) |
7.9 | (26.5 | ) | 18.5 | 14.0 | 16.9 | 5.2 | |||||||||||||||||
|
Financial expense |
6.2 | 12.0 | 9.1 | 4.5 | 1.7 | 0.5 | ||||||||||||||||||
|
Financial income |
(6.3 | ) | (7.2 | ) | (5.0 | ) | (4.6 | ) | (2.3 | ) | (0.7 | ) | ||||||||||||
|
Income tax |
4.6 | (0.8 | ) | 11.4 | 6.7 | 11.4 | 3.5 | |||||||||||||||||
|
Depreciation and amortization |
5.6 | 7.1 | 5.3 | 6.4 | 6.4 | 2.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
18.0 | (15.3 | ) | 39.3 | 27.0 | 34.1 | 10.5 | |||||||||||||||||
3. Real Estate
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 (1) | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit |
59.0 | 26.5 | 29.3 | 77.2 | 117.7 | 36.3 | ||||||||||||||||||
|
Financial expense |
27.0 | 30.4 | 47.7 | 65.1 | 36.0 | 11.1 | ||||||||||||||||||
|
Financial income |
(13.2 | ) | (15.6 | ) | (36.8 | ) | (53.5 | ) | (17.7 | ) | (5.5 | ) | ||||||||||||
|
Income tax |
21.4 | 11.5 | 7.6 | 27.1 | 35.9 | 11.1 | ||||||||||||||||||
|
Depreciation and amortization |
3.6 | 3.8 | 4.9 | 5.6 | 5.3 | 1.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
97.9 | 56.5 | 52.8 | 121.4 | 177.3 | 54.6 | ||||||||||||||||||
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4. Technical Services
4.1 Full Segment
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit (loss) |
32.0 | 21.4 | 23.3 | (7.0 | ) | (28.0 | ) | (8.6 | ) | |||||||||||||||
|
Financial expense |
29.0 | 27.9 | 22.8 | 36.8 | 39.4 | 12.1 | ||||||||||||||||||
|
Financial income |
(13.1 | ) | (7.1 | ) | (5.1 | ) | (19.6 | ) | (13.2 | ) | (4.1 | ) | ||||||||||||
|
Income tax |
12.1 | 6.6 | (20.6 | ) | 1.6 | (4.8 | ) | (1.5 | ) | |||||||||||||||
|
Depreciation and amortization |
31.6 | 30.1 | 14.7 | 28.0 | 43.3 | 13.3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
91.6 | 78.9 | 35.1 | 39.8 | 36.7 | 11.3 | ||||||||||||||||||
4.2 CAM
| For the year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (in millions of S/.) |
(in millions of US$) (2) |
|||||||||||||||||||||||
|
Net profit |
23.5 | 15.5 | 23.3 | (3.0 | ) | (28.0 | ) | (8.6 | ) | |||||||||||||||
|
Financial expense |
16.2 | 19.6 | 22.8 | 28.2 | 27.8 | 8.6 | ||||||||||||||||||
|
Financial income |
(5.3 | ) | (3.4 | ) | (5.1 | ) | (16.2 | ) | (12.1 | ) | (3.7 | ) | ||||||||||||
|
Income tax |
6.2 | 1.2 | (20.6 | ) | 3.5 | (4.6 | ) | (1.4 | ) | |||||||||||||||
|
Depreciation and amortization |
16.3 | 11.5 | 14.7 | 19.5 | 23.3 | 7.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
EBITDA |
56.9 | 44.4 | 35.1 | 31.9 | 6.5 | 2.0 | ||||||||||||||||||
| (1) | For the effects on our results of operations for 2016 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and notes 5(e) and 16 to our audited annual consolidated financial statements included in this annual report. |
| (2) | Calculated based on an exchange rate of S/3.245 to US$1.00 as of December 31, 2017. |
| (3) | Includes the results of operations of DSD since August 2013, Morelco since January 2015 and Adexus which began consolidating in August 2016. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Acquisitions.” Additionally includes the results of Stracon, although we sold our interest in Stracon on April 11, 2018. |
| (4) | Our E&C segment EBITDA includes S/.42.0 million, S/.48.2 million, S/.2.2 million, S/.15.8 million and S/.30.6 million in 2013, 2014, 2015, 2016 and 2017, respectively, which represents GyM’s 39.0% equity interest in Viva GyM’s net profit. |
| (5) | In 2013 we generated losses as a result of the limited number of trains we initially operated in the Lima Metro. 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.” |
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Exchange Rates
The Peruvian 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.
The following table sets forth, for the periods indicated, certain information regarding the exchange rates for 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 soles.
| High | Low | Average | Period end | |||||||||||||
|
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 | ||||||||||||
|
2016 |
3.537 | 3.249 | 3.375 | 3.360 | ||||||||||||
|
2017 |
3.392 | 3.231 | 3.261 | 3.241 | ||||||||||||
|
December 2017 |
3.289 | 3.231 | 3.246 | 3.241 | ||||||||||||
|
January 2018 |
3.229 | 3.207 | 3.215 | 3.216 | ||||||||||||
|
February 2018 |
3.269 | 3.212 | 3.248 | 3.260 | ||||||||||||
|
March 2018 |
3.271 | 3.217 | 3.252 | 3.227 | ||||||||||||
|
April 2018 |
3.249 | 3.216 | 3.231 | 3.249 | ||||||||||||
|
May 2018 |
3.291 | 3.259 | 3.274 | 3.273 | ||||||||||||
|
June 2018 (through June 26, 2018) |
3.284 | 3.260 | 3.271 | 3.271 | ||||||||||||
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
Risk Relating to Recent Developments
Our reputation has been adversely affected by our association with Odebrecht’s affiliates in Peru
We have participated in consortia with Odebrecht affiliates in Peru. Our reputation has been adversely affected as a result of the plea agreements and criminal convictions of Odebrecht and certain key persons related to Odebrecht in connection with corruption, money laundering and criminal organization. Peruvian authorities have initiated congressional inquiries and criminal investigations into the dealings of Odebrecht’s affiliates in Peru, the scope of which include certain consortia in which we participated. Moreover, as a result, our company and certain of our former directors and executive officers have been the subject of congressional and criminal investigations related to corruption investigations. These investigations are ongoing.
Our reputation is a key factor in our clients’ evaluation of whether to engage our services, key industry players’ willingness to partner with us, financial institutions’ willingness to provide us credit, and recruiting and retaining talented personnel to our company. The impact on our business reputation related to our association with Odebrecht and the alleged actions of our former board members and executive officers has had, and is likely to continue to have, a material adverse effect on our business, financial condition and results of operation.
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Investigations regarding potential corruption or other illegal acts could have a material adverse effect on our business, financial condition and results of operations
The Lava Jato commission of the Peruvian congress has undertaken congressional inquiries into the company and other construction companies in Peru, which have included certain of the company’s former board members and executive officers.
Peruvian prosecutors have included José Graña Miró Quesada, a shareholder and the former Chairman of the company, in an investigation for the crime of collusion, and Hernando Graña Acuña, a shareholder, a former board member of the company and chairman of our subsidiary GyM, for the crime of money laundering against the Peruvian government, each in connection with the IIRSA South project concession (tranches II and III), in which we participated with Odebrecht. Gonzalo Ferraro Rey, the former Chief Infrastructure Officer of the company, has also been included in an investigation for the crime of money laundering in connection with the same project.
In connection with investigations relating to the IIRSA South project concession (tranches II and III), the Peruvian criminal prosecutor moved to charge the company and our construction subsidiary, GyM, as criminal defendants in connection with the projects. Separately, an Ad Hoc Public Prosecutor appointed by the Peruvian executive branch to investigate matters of corruption (the “Ad Hoc Prosecutor”) moved to directly include the company as a civilly-responsible third party. In response, the Peruvian First National Preparatory Investigation Court ( Primer Juzgado de Investigación Preparatoria Nacional ) notified us of its decision to formally include the company and GyM in its criminal investigation. We appealed the court’s decision and, on June 22, 2018, the First Court of Appeals of the Superior Court of Lima revoked the judicial order No. 05 dated February 28, 2018 that indicted the company and GyM, among other corporate defendants, in the criminal investigation on charges of collusion and other crimes and rejected the petition, without prejudice, made by the prosecutor to incorporate both companies in the aforementioned process. Nevertheless, we cannot assure you that the criminal prosecutor will not appeal this decision, or file a new claim, against the company and GyM, or that our position will ultimately prevail. Furthermore, a decision from the Peruvian judiciary on whether our company will be included in the investigation proceedings as a civilly responsible third party remains pending, and we cannot assure you that our company will not be included or that our position would ultimately prevail.
The Ad Hoc Prosecutor has also moved to directly include GyM as a civilly-responsible third party in the investigation relating to Tranches 1 and 2 of Line 1 of the Lima Metro. A decision from the Peruvian judiciary regarding these matters remains pending, and we cannot assure you that our subsidiary will not be included or that our position would ultimately prevail.
We cannot assure you that other of our former or current board members and executive officers will not be included in the foregoing proceedings as criminal defendants or civilly-responsible third parties as well, or that the company will not be included in other investigations.
A conviction of corruption or settlements with government authorities could lead to criminal and civil fines as well as penalties, sanctions, injunctions against future conduct, profit disgorgement, disqualifications from directly and indirectly engaging in certain types of business, the loss of business licenses or permits or other restrictions. Moreover, our alleged involvement in corruption investigations, and any findings of wrongdoing in such investigations, could further damage our reputation and have a material adverse impact on our ability to compete for business. Such investigations may also adversely affect our ability to pursue strategic projects, and could potentially result in the termination or modification of certain existing contracts or relationships. In addition, such investigations may affect the company’s ability to secure financing in the future. Furthermore, investigations could continue to divert management’s attention and resources from other issues facing our business.
There is substantial uncertainty with regard to the amount, timing and manner in which the payment for the termination of the GSP gas pipeline concession will be paid
There is substantial uncertainty with regards to the payment contemplated under the GSP gas pipeline concession contract as a result of the termination of the gas pipeline concession, including with respect to the amount, timing and manner in which the payment will be made or if it will be made at all.
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Although the concession contract provides that payment must be made within one year of termination, the Peruvian Ministry of Energy and Mines has not made payment or, to our knowledge, initiated the payment process or the auction process for a new concessionaire. As a result, we may be forced to assert our rights against the Peruvian government in judicial or arbitration proceedings, which may place us in an adversarial position with the Peruvian government and/or other GSP shareholders. We cannot assure you that we will pursue any such claims, or that any such claims would ultimately prevail in a timely manner, or at all.
To initiate arbitration against the Peruvian government, we need the approval of all three shareholders of GSP. We have sought such approval on two occasions but have not succeeded. We cannot assure you that we will obtain the consent needed to initiate legal proceedings in the short term.
In 2016, in connection with efforts to restructure or sell Odebrecht’s participation in GSP, due to the corruption scandal surrounding Odebrecht, Odebrecht contractually agreed to subordinate its claims under the concession to other GSP shareholders, Enagás and ourselves. On January 2, 2018, we received a notification that Odebrecht commenced arbitration proceedings against us and Enagás, seeking to invalidate the contractual subordination. While we believe that the subordination arrangement with respect to Odebrecht’s claims in connection with the anticipated payment is enforceable, we cannot assure you that our position will prevail. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
In addition, we have made certain estimates in our consolidated financial statements with respect to the expected payment for the termination of the GSP contract. In particular, after taking into account the S/.593.1 million impairment we recognized to our investment in GSP during 2016, we continue to record S/.218.3 million in connection with our investment in GSP as of December 31, 2017. If our assumptions and estimates are incorrect, our actual results could differ significantly from those reflected in our consolidated financial statements. Failure to receive the expected payment on a timely basis, or at all, would have a material adverse effect on our business, financial condition and results of operations.
We are in default under certain of our debt instruments and may not reach agreement with our creditors to amend or waive the covenants
We are currently in default under certain of our debt instruments and are initiating the process of renegotiating with our creditors under such instruments. See “Item 13. Defaults, Dividend Arrearages and Delinquencies.” Failure to successfully renegotiate new payment terms could force us to precipitate the sale of assets, including on unfavorable terms, to repay these debt instruments. Moreover, if we are not able to renegotiate the terms of these debt instruments or repay them promptly, our ability to obtain financings, including performance guarantees or similar financings required under many of our business contracts, would be impaired, which may have a material adverse effect on our business, financial condition and results of operations.
We may not be able to sell assets on favorable terms or at all
As part of our strategic action plan, our board of directors has approved the sale of certain non-strategic assets, to make payments in respect of debt related to the termination of the GSP gas pipeline concession. We cannot assure you that we will be able to sell assets on favorable terms or at all. If we are not able to sell assets on a timely basis, our ability to address our liquidity needs could be adversely affected and we may breach our payment obligations under our debt related to the termination of the GSP gas pipeline concession.
Conversely, if we sell significant assets, our business and results of operations will be diminished.
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A class action civil lawsuit in the United States may adversely affect our company
A securities class action civil lawsuit has been filed against the company and certain of our former directors and former and current executive officers in the United States. The suit is in early stages, and we cannot assure you that our position will prevail. If our position does not prevail, the case may have substantial adverse effects on our business, financial condition and results of operations.
We may be unable to access credit that we need to operate our business
Due to uncertainty relating to the investigations of our company, our creditors and other banks operating in the Peruvian market have placed restrictions on our ability, and the ability of other construction companies, to acquire future credit lines or other financings. This may affect our ability to obtain financing for new or existing projects on favorable terms or at all, and also may render us unable to compete for or win new projects.
Changes in key personnel could affect our future business
Our success depends significantly on the services of our senior management, board of directors and other key personnel. On February 27, 2017, our former chairman of the board, our former CEO and board member, and our former board member and the former chairman of our subsidiary GyM resigned from their positions at our company. Effective March 2, 2017, we appointed a new CEO, and on March 31, 2017, our shareholders at the annual shareholders’ meeting appointed a new board of directors, replacing all but two of our existing directors. Moreover, other senior managers have recently left the company.
While most of these officers have already been replaced, the replacement of directors and senior management is likely to have an impact on our business and results of operations. Moreover, we cannot assure you that we will be able to continue to attract and retain senior management, qualified engineers and other key personnel.
INDECOPI and Peruvian prosecutors have initiated investigations in response to a news report alleging that certain construction companies in Peru, Brazil and Spain, including our company, colluded to receive public contracts
In July 2017, media reports alleged that certain construction companies in Peru, Brazil and Spain, including our company, colluded as a “construction club” to receive public contracts. As a result of these reports, the Peruvian National Institute for the Defense of Free Competition and the Protection of Intellectual Property (“INDECOPI”) has initiated an investigation regarding the anti-competitive activities of construction companies in Peru, including our company. In July 2017, INDECOPI conducted a search of our facilities related to these allegations. Separately, a former employee of GyM has been included in a criminal investigation for collusion and other alleged crimes. Neither the company nor GyM have been formally included in these criminal investigations
We cannot assure you that the company or any of its current or former directors or senior management will not be included in these investigations in the future, nor can we predict the outcome of any such investigations, the timing thereof or how they may impact our business, financial condition and results of operations.
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. Subsequently, global economic conditions, including slower growth in China, declines in global commodity, in particular oil and gas prices, the
20
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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, generated economic uncertainty which affected private- and public-sector investments. The United Kingdom voted to exit the European Union on June 23, 2016. As of the date hereof, the actions to be taken by the United Kingdom to effectively exit the European Union and the duration of this process are uncertain. The results of the referendum in the United Kingdom have caused, and are expected to continue to cause, volatility in financial markets, which in turn could have substantial adverse effects on our business, financial condition and results of operations. On November 8, 2016, Mr. Donald J. Trump was elected president of the United States. President Trump has implemented greater restrictions on free trade and limitations on immigration. Changes in social, political, regulatory and economic conditions in the United States or in laws and policies governing foreign trade could create uncertainty in the international markets and could have a negative impact on emerging market economies, including the Peruvian economy, which in turn could have a negative impact on our operations. 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 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 when the projects are executed. Furthermore, financial difficulties suffered by our clients, joint operation partners, subcontractors or suppliers due to global economic conditions could result in payment delays or defaults, or increase our costs or adversely impact our project execution. Accordingly, a global economic downturn could have a material adverse effect on our financial performance.
We face significant competition in each of our markets
Each of the markets in which we operate is competitive. We compete on the basis of, among other factors, price, performance, product and service quality, skill and execution capability, client relations, reputation and brand, and health, safety and environmental record. We face significant competition from both local and international players. Some of these competitors may have greater resources than us or specialized expertise in certain sectors. In addition, a portion of our business is derived from open bidding processes which can be highly competitive. Certain of our markets are highly fragmented with a large number of companies competing for market share. Our competitors may be more inclined to take greater or unusual risks or accept terms and conditions in a contract that we might not deem acceptable. Moreover, we cannot assure you that we will not face new competition from industry players entering or expanding their operations in our markets. If we are unable to compete effectively, our ability to continue to grow our business or maintain our market share would be affected. In addition, because one of the factors on which we generally compete is price, increased competition could impact our operating margins. Accordingly, our business and financial performance could be adversely affected by competition in our markets.
A major change in Peruvian government policies could affect our business
Our business is significantly affected by national, regional and municipal government policies and regulations, 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.
Social conflicts may disrupt infrastructure projects
Despite Peru’s ongoing economic growth and stabilization, high levels of poverty and unemployment and social and political tensions continue to be pervasive problems in the country. Peru has, from time to time, experienced social and political turmoil, including riots, nationwide protests, strikes and street demonstrations. In recent years, certain regions experienced strikes and protests related mainly to the environmental impact of mining activities, which resulted in commercial disruptions, 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.
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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 non-binding 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; and therefore, upon completion of this prior consultation procedure, the Peruvian government retains the discretion to approve or reject the applicable legislative or administrative measure. However, we cannot assure you that these consultation procedures will not negatively influence a decision by Peruvian government to grant us a permit, concession or consent and, therefore, adversely affect new projects and concessions. Accordingly, our business and financial performance may be materially and adversely affected.
Our backlog and our ratio of historical backlog to revenues may not be reliable indicators of future revenues or profit
Our backlog amount is subject to revision over time and our ability to realize revenues from our backlog is subject to a number of uncertainties. Cancellations, scope adjustments or deferrals may occur, from time to time, with respect to contracts reflected in our backlog and could reduce the amount of our backlog and the revenue and profits that we actually earn. For example, the termination of the GSP gas pipeline concession on January 24, 2017 reduced our backlog as of December 31, 2016 by US$855 million, 30.2% of our E&C backlog and 21.4% of our total backlog as of that date. Contracts may also remain in our backlog for an extended period of time and poor performance could also impact our profit from the contracts in our backlog. In addition, our backlog is expressed in U.S. dollars based on period-end exchange rates while a significant portion of our contracts are payable in soles or other local currencies. As a result, any depreciation of local currency would diminish the amount of revenues eventually earned relative to backlog. Moreover, as of December 31, 2017, one client, Ecopetrol, concentrated 23.3% of Morelco’s backlog. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.” 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 decline further. We cannot assure you that we will be able to obtain sufficient contracts in the future in number and magnitude to increase our backlog. Additionally, the amount of new contracts that we obtain can fluctuate significantly from period to period due to factors that are beyond our control.
The ratio of our historical backlog to revenues earned in subsequent years is volatile and substantially affected by a number of factors, some of which are outside our control, including levels of contract scope adjustments and our ability to enter into new contracts (which are substantially influenced by general macroeconomic conditions), delays and cancellations, foreign exchange rate movements and our ability to increase the scale of our operations to expand the amount of work we carry out beyond that previously contracted. Accordingly, historical correlations between backlog and revenues may not recur in future periods.
Our success depends on key personnel
Our success depends, to a significant degree, upon the services of our senior management, board of directors and other key personnel. Members of our management team are not subject to 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. In addition, the success of our business depends on our ongoing ability to attract, train and retain qualified engineers and other personnel. In recent years, the availability in Peru of qualified personnel who have the necessary expertise and experience has been lower than demand and, therefore, competition for human resources has become intense. We cannot assure that we will be able to hire and retain the number of qualified personnel required to meet the needs of, or to grow, our business. If we are unable to attract, train and retain the qualified personnel that we require at reasonable cost, our business and financial performance could be adversely affected.
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Our success depends, to a large extent, on our reputation for the quality, reliability, timely delivery and safety of our products and services
We believe our track record and reputation are key factors in our clients’ evaluation of whether to engage our services and purchase our products, encouraging key industry players to partner with us, and recruiting and retaining talented personnel to our company. Our reputation is based, to a large extent, on the quality, reliability, timeliness and safety of our products and services. If our products do not meet expected standards or we fail to meet our deadlines, our relationship with our clients and partners could suffer, the reputation of our company could be adversely affected, we may not be invited to new bidding processes and our ability to capture new business could be severely diminished.
The nature of our business exposes us to potential liability claims and contract disputes
We may be subject to a variety of legal or administrative proceedings, liability claims or contract disputes. The government, clients and other third parties may present claims against us for injury or damage caused, directly or indirectly, by our operations, for example for alleged failures in our engineering and construction, the operation of our infrastructure concessions (such as our toll roads or the Lima Metro), and real estate developments we sell. Although we have a range of insurance coverage policies and have adopted risk management and risk avoidance programs designed to reduce potential liabilities, a catastrophic event resulting from the services we have performed or products we have provided could result in significant professional or product liability, warranty or other claims against us as well as reputational harm, especially if public safety is impacted. We may in the future be named as a defendant in legal proceedings where our clients or third parties may make a claim for damages or other remedies with respect to our projects or other matters. Any liability not covered by our insurance, or in excess of our insurance limits, could result in a significant loss for us, which may affect our financial performance. Moreover, certain of our clients have executed the performance guarantees that we were required to deliver in connection with their project in order to gain leverage, we believe, in the negotiation of contract disputes with us.
We are susceptible to operational risks that could affect our business and financial performance
Our business is subject to numerous industry-specific operational risks, including natural disasters, adverse weather conditions, operator error or other accidents, mechanical and technical failures, explosions and other events and accidents, many of which are beyond our control. Such occurrences could result in injury or loss of life, severe damage to and destruction of property and equipment, business interruption, pollution and other environmental damage, clean-up responsibilities, regulatory requirements, investigations and penalties, potential liability claims and contractual disputes. In addition, such occurrences could materially impact our reputation. Although we maintain comprehensive insurance covering our assets and operations at levels that our management believes to be adequate, our insurance coverage will not be sufficient in all circumstances or to protect against all hazards. The occurrence of such an operational risk could have a material adverse effect on our business and financial performance.
Deterioration in our safety record could adversely affect our business and financial performance
Our ability to retain existing clients and attract new business is dependent on our ability to safely operate our business. Existing and potential clients consider the safety record of their services providers to be of high importance in their decision to award service contracts. Some of our activities, in particular in our E&C segment, 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. Although our track record on safety matters is consistent with industry standards, we cannot assure you that we will not experience accidents in the future, causing our safety record to deteriorate. Accidents may be more likely as we continue to grow, particularly if we are required to hire less experienced employees due to shortages of skilled labor. Moreover, often times we do not perform these activities by ourselves and accidents can happen due to errors committed by partners and subcontractors over whom we have no control. Because many of our clients require us to report our safety metrics to them as part of the bidding process and because a substantial part of our client base is comprised of major companies with high safety standards, a general deterioration in our safety record could have a material adverse impact on our business including our ability to bid for new contracts.
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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 inputs used in our operations are susceptible to significant fluctuations in prices, over which we may have little control. The prices of some of these inputs are affected to a significant extent by the prices of commodities, such as oil and iron. Global oil prices in particular have declined significantly in recent years, although they increased in 2017, and we cannot assure you that oil prices will not continue to 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 a result, if prices increase significantly or if we are required to find alternative suppliers, our costs to procure these inputs may increase significantly. In addition, growing demand for labor, especially when coupled with shortages of qualified employees in the countries where we operate, may result in significant wage inflation. To the extent that we are unable to pass along to our clients increases in the prices of our key inputs or increases in the wages that we must pay, our operating margins could be materially adversely impacted.
We may not be able to 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. Emerging markets 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 pursue 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 following successful arbitration awards, particularly against the government. A failure to promptly recover on these types of claims and change orders could have a material adverse effect on our financial performance.
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If we are unable to enter into consortia or other strategic alliances, our ability to compete for new business may be adversely affected
We may join with other companies to form joint operations or other strategic alliances to compete for a specific concession or contract, including with partners that contribute expertise in a specific field. Because a consortium or alliance can often offer stronger combined qualifications than a company on a stand-alone basis, these arrangements can be important to the success of a particular bid. If we are unable to enter into consortia or other strategic alliances, our ability to compete for new business may be adversely affected.
Our consortia and other strategic alliances may be affected by disputes with, or the unsatisfactory performance by, our partners
Although we have a thorough partner selection process, consortia and other strategic alliances that we enter into as part of our business, including arrangements where operating control may be shared with unaffiliated third parties, may involve risks not otherwise present when we operate independently, including: sharing approval rights over major decisions; responsibility for our partners’ unpaid obligations or liabilities; ensuring ethical and compliance behavior; and inconsistencies in our and our partners’ economic or business interests or goals. Any disputes between us and our partners may result in delays, litigation or operational impasses. We may also incur liabilities as a result of action taken by our partners. In addition, if we participate in consortia or other strategic alliances where we are not the controlling party, we may have limited control over operation decisions and actions and the success of the consortium or other strategic alliance will depend largely on the performance of our partners. These risks could adversely affect our ability to transact the business that is the object of such consortium or other strategic alliance, and could result in the termination of the applicable concession or contract. Under these circumstances, we may be required to make additional investments and provide additional services to ensure adequate performance and delivery. These additional obligations could result in reduced profits or, in some cases, increased liabilities or significant losses for us. In addition, failure by a partner to comply with applicable laws or regulations could negatively impact our business and, in the case of government contracts, could result in fines, suspension or even debarment from participating in bidding processes. As a result, our business and financial performance could be adversely affected by disputes involving our consortia or other strategic alliances. We have recently been involved in ongoing disputes, including arbitration proceedings, with our minority partner in Adexus. These disputes could result in disruptions in Adexus’ operations.
We are dependent upon third parties to complete many of our contractual obligations
We rely on third-party suppliers to provide a significant amount of the materials and equipment used in our businesses. A portion of the work performed under our infrastructure concessions and, to a lesser extent, other contracts is performed by third-party subcontractors. As a result, the timely completion and quality of our projects may depend on factors beyond our control, including the quality and timeliness of the delivery of materials supplied for use in the project and the technical skills of subcontractors hired for the project. If we are unable to find qualified suppliers or hire qualified subcontractors, our ability to meet our contractual obligations could be impaired. In addition, if the amount we are required to pay for supplies, equipment or subcontractors exceeds what we have estimated, we may suffer losses under our contract. If a supplier or a subcontractor fails to provide supplies, equipment or services as required under a negotiated arrangement for any reason, or provides supplies, equipment or services that are not of an acceptable quality, we may be required to source those supplies, equipment or services on a delayed basis or at a higher price than anticipated, which could impact our financial performance. In addition, faulty materials or equipment could result in claims against us for failure to meet contractual specifications, and failure by suppliers or subcontractors to comply with applicable laws and regulations could negatively impact our reputation and our business and, in the case of government contracts, could result in fines, suspension or even debarment from participating in bidding processes. These risks may be intensified during economic downturns if these suppliers or subcontractors experience financial difficulties. As a result, our business and financial performance may be adversely affected by our dependence on third-party providers.
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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 and second instances of the judicial proceeding we had initiated to contest such administrative proceeding. We appealed the adverse judgment and are currently in annulment 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. Subsequently, we canceled the road maintenance services contract because the regional government of Cusco did not pay any valuations (January, February and March of 2014) and did not give us access to the entire stretch of the related road. We have initiated an action against the regional government of Cusco for an amount of S/.97.4 million, and the government has filed a counterclaim for S/.403 million. All these proceedings remain pending as of the date of this annual report, and we cannot assure you that our position will prevail.
During 2016 and 2017, 11% and 4.5%, respectively, of our revenues on a consolidated basis was derived from public sector contracts in Peru (excluding public infrastructure concessions). As of December 31, 2017, 12.2% of our backlog is comprised of contracts with the public sector. 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.
We may not be able to successfully expand outside of Peru
One of our long term strategies has been to continue to expand our operations outside of Peru, particularly in Chile and Colombia, and we expect that our international operations could 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. Moreover, we may not be able to make equity investments when needed by our foreign operations, due to restrictions imposed by Law 30737 in our ability to transfer funds abroad. Section II of Law 30737, promulgated in March 2018, imposes certain restrictions on companies that have been consortium partners of groups that have been, or whose officers or representatives have been, convicted of, or have admitted to, corruption, money-laundering or similar crimes. Among other things, the law requires that these companies suspend money transfers abroad.
Many countries in Latin America have suffered significant economic, political and social crises in the past, and these events may occur again in the future. If we are unable to overcome these challenges, we may not be able to successfully expand internationally.
We may not be able to make successful acquisitions
Part of our long-term strategy has been to evaluate strategic acquisition opportunities to expand our operations and geographic footprint, especially in Chile and Colombia. We may not be able to identify appropriate acquisition opportunities, or, if we do, we may overpay for these acquisitions or may not otherwise be able to negotiate terms and conditions that are acceptable to us. We may also face difficulties obtaining financing to pay for acquisitions. 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
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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.
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 and could impact our financial condition. Moreover, more stringent environmental regulation could increase the costs of projects for our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the demand for our services. Accordingly, new environmental regulation could have a material adverse effect on our business and financial performance.
We may not be able to effectively protect ourselves against financial market risks
Our operations are exposed to financial market risks, such as risks related to exchange rates, commodity prices and, 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
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us from the adverse effects of financial market risks. While hedging transactions are intended to reduce market risks, such transactions may expose us to other risks, such as counterparty risk. We may not be able to adequately protect ourselves against financial market risks and may not ultimately achieve an economic benefit from our hedging strategy.
The loss of a key client in some of our lines of business may affect our business and financial performance
In some of our lines of business, such as our Infrastructure 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. 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 is currently positive, we cannot assure you that we will not experience work slowdowns, work stoppages, strikes or other labor disputes in the future, which could result in the interruption or delay of our operations. Such interruptions or delays could have an adverse impact on our business, including on the cost of our projects and our ability to make timely delivery. Moreover, our operations may also be affected by labor unrest in our clients’ or our partners’ workforce.
The proceeds from our insurance policies may not be sufficient and we may not be insured against all risks
We maintain insurance coverage both as a corporate risk management strategy and in order to satisfy the requirements under certain regulations and contracts. We cannot assure you that proceeds from our insurance policies, however, will be sufficient to cover the damages resulting from any event covered by such policies. Certain risks are not covered under the terms of our insurance policies, such as interruption of operations. In such event, we may incur significant expenses to rebuild our facilities, repair or replace our equipment, or cover other damages. In addition, if any of our third-party insurers fail, abruptly cancel our coverage or otherwise cannot satisfy their insurance requirements to us, then our overall risk exposure and operational expenses could be increased. Moreover, we may not be able to renew our insurance policies on favorable terms, or at all. Although in the past we have been generally able to cover our insurance needs, we cannot assure you that we will be able to secure all necessary insurance in the future.
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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 high quality mechanical instruments and equipment at attractive prices. While we have historically been able to do so, such instruments and equipment may become subject to higher import taxes than currently apply. We cannot assure you that there will not be further increases in import taxes, changes in laws related to imports or the imposition of quotas by countries from which we import mechanical instruments and equipment, 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 bidding for a project or concession, the government may subsequently declare the process void for political, budgetary or other reasons and may cancel or terminate the project or concession awarded to us. For example, in June 2014, we were determined the winner of a public bidding for a concession to operate the fare collection system of Lima’s integrated transportation system for a period of 16 years. However, in January 2015, the Municipality of Lima notified us that the board of directors of the Instituto Metropolitano Protransporte de Lima – Protransporte had declared the nullity of the public bidding process, based on a report issued by the Peruvian Ministry of Economy and Finance, which concluded that the Ministry should have pronounced itself with respect to the concession prior to the bidding process instead of afterwards. We initiated a judicial proceeding in July 2015 to challenge such declaration of nullity, which proceedings remain ongoing. If upheld by the courts, the declaration of nullity of projects or concessions awarded to us could affect our future results of operations. Moreover, the uncertainty that results from these type of decisions may adversely impact investor confidence in Peru and our business.
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. A decline in prices for minerals, oil and gas has had in the past, and could have in the future, a significant impact on our clients’ exploration and production activities and, as a result, on their demand for our engineering and construction services. 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
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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. Public and private investment in Peru, Colombia and Chile slowed significantly during 2016 and 2017 as a result of market conditions and, in the case of Peru, as a result of corruption investigations and political uncertainty.
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 other third parties; changes in laws and regulations or difficulties in obtaining permits or other approvals; unanticipated technical problems; unforeseen increases in the cost of inputs, components, equipment, labor, or the inability to obtain these on a timely basis; delays caused by weather conditions; incorrect assumptions related to productivity or scheduling estimates; and project modifications that create unanticipated costs or delays. These risks tend to be exacerbated for longer term contracts since there is increased risk that the circumstances under which we based our original bid could change. In many of our contracts, we may not be able to obtain compensation for additional work performed or expenses incurred. Our failure to estimate accurately the resources and time required to complete a project could adversely affect our profitability. Even under our cost-plus contracts, our inability to complete projects within the estimated budget could affect our relationship with our clients and negatively impact awards of future contracts. As a result, if we incorrectly estimate the costs of our projects, our business and financial performance could be adversely affected.
We may be unable to deliver our services in a timely manner
The success of our engineering and construction business depends on our ability to meet the standards and schedules required by our clients. Significant delays that prevent us from providing our services on agreed time frames could adversely affect our client relations and reputation. Delays may occur for a number of reasons, including: our inability to adequately foresee the needs of our clients; delays caused by our joint operation partners, subcontractors or suppliers; insufficient production capacity; equipment failure; shortage of qualified workers; changes to customs regulations; and natural disasters. Failure to finish construction by the contractual completion date set forth in the contract could result in costs that reduce our projected profit margins, including a requirement to pay daily penalties and damages. If we are unable to meet deadlines, either due to internal problems or as a result of events over which we have no control, we may lose the trust of our clients and, therefore, experience a decrease in the demand for our services. In such event, our business and financial performance could be adversely affected.
We may not be able to obtain compensation for additional work or expenses incurred as a result of client-requested change orders
Clients often determine, after commencement of the project, to change various elements of the project. Some of our contracts may also require that clients provide us with design or engineering information or with equipment or materials to be used on the project, and, in some cases, the client may provide us with deficient design or engineering information or equipment or materials or may provide the information or equipment or materials to us later than required by the project schedule. Our project contracts generally require the client to compensate us for
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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.
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 years, with the average Brent crude prices declining from US$108.64 in 2013, US$99.02 in 2014 and US$52.46 per barrel in 2015 to US$43.55 per barrel in 2016 and US$54.20 per barrel in 2017. During the first quarter of 2018, the average Brent crude price was US$66.82 per barrel. Oil is a commodity and its price is subject to wide fluctuations in response to relatively minor changes in supply and demand for oil, market uncertainty, and a variety of additional factors beyond our control. Those factors include, among others: global demand and supply; political developments in producing regions; weather conditions; governmental regulations; international conflicts and acts of terrorism; the price and availability of alternative sources of energy; and overall local and global economic conditions. Moreover, lower oil prices may not only decrease our revenues on a per unit basis, but may also reduce the amount of oil we can produce economically, if any, and, as such, may have a negative impact on the reserves of the fields in which we operate. As result, our financial performance could be materially and adversely affected by declines in oil prices.
Our reserves estimates depend on many assumptions that may turn out to be inaccurate and are not subject to review by independent reserve auditors
The process of estimating oil and gas reserves is complex, although the fields where we produce oil and gas are mature (Block I has been in production for over 100 years, Block III for approximately 100 years, Block IV for approximately 95 years and Block V for over 50 years). In order to prepare our reserves estimates presented in this annual report, we must project production rates and timing of development expenditures as well as analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil prices, drilling and operating expenses, capital expenditures, taxes, and availability of funds. Therefore, estimates of reserves are inherently imprecise. Moreover, our reserve estimates included in this annual report have been prepared internally by our team of engineers, and have not been audited or reviewed by independent engineers. Future real production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable reserves will most likely vary from the estimates presented in this annual report, and those variances may be material. Any significant variance could materially affect the estimated reserves of the fields in which we operate.
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Our 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 terminate the concession or contract pursuant to the provisions set forth therein or in accordance with applicable legislation, including the failure to comply with any contractual terms (including the concessionaire’s default on debt) or applicable law. Moreover, the relevant governmental authority may terminate and/or repossess a concession at any time, if, in accordance with applicable law, the governmental authority determines that it is in the public interest to do so. The relevant governmental authority may also assume the operation of a concession in certain emergency situations, such as war, public disturbance or threat to national security. In addition, in the case of force majeure , the relevant governmental authority may require us to implement certain changes to our operations. If the government terminates any of our concessions, under Peruvian law, it is generally required to compensate us for the amount of our unrecovered investment, unless the concession is revoked pursuant to applicable law or the terms of the concession which would imply a serious breach of the concession’s terms by us. Such compensation process is likely to be time consuming and the amount paid to us may not fully compensate us. We cannot assure you that we would receive such compensation on a timely basis or in an amount equivalent to the value of our investment in a concession plus lost profits.
We are exposed to risks related to the operation and maintenance of our concessions and similar contracts
The operation and maintenance requirements under our concessions could encounter delays or cause us to exceed our budgeted costs for such projects, which could limit our ability to realize the expected return on these projects, increase our operating or capital expenses and adversely affect our business and financial performance. In addition, our operations may be adversely affected by interruptions or failures in the technology and infrastructure systems that we use to support our operations, including toll road collection and traffic measurement systems. The Lima Metro in particular may be susceptible to outages due to power loss, telecommunications failures and similar events. The failure of any of our technology systems may cause disruptions in our operations, adversely affecting our profitability. While we have business continuity plans in place to reduce the adverse impact of information technology system failures on our operations, we cannot assure you that these plans will be effective. Furthermore, accidents and natural disasters may also disrupt the construction, operation or maintenance of our projects and concessions, which could adversely affect our business and financial performance.
We may not be successful in obtaining new concessions
The market for infrastructure concessions in Peru is competitive. We compete with Peruvian and foreign companies for infrastructure concessions in Peru, some of whom may have greater financial and other resources or particular expertise pertinent to a specific concession. Additionally, our public-sector clients may face budget deficits that may prohibit the development of infrastructure concessions, which could affect our business. We may also not be able to obtain additional concessions if the government decides not to award new concessions, due to budget constraints or policy changes or because alternative financing mechanisms are used. Recently, the awarding of concessions and the use of public-private associations in Peru have stalled, due in part to concerns related to the corruption scandal surrounding Odebrecht and its potential effect on government officials in the country. Our inability to bid for or obtain new concessions may adversely affect our business and financial performance.
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Our contract with Petroperú S.A. (“Petroperú”) for fuel storage at the South terminal is currently scheduled to expire in August 2018. However, on June 6, 2018, the concessionaire, Consorcio Terminales, received a letter from Petroperú to initiate negotiations to extend the contract up to one more year. Moreover, we cannot assure you whether or when we will undertake any of the projects that have been awarded to us but for which contract negotiations are ongoing or stalled, in particular the concessions for Via Expresa Sur and Via Expresa Javier Prado.
Additional Risks Related to our Real Estate Business
We are exposed to risks associated with the development of real estate
Our real estate business is subject to the risks that generally affect the real estate industry, such as availability and prices of suitable land, environmental and zoning regulations, interruptions in supply and volatility of the prices of construction materials and equipment, and changes in the demand for real estate. Our real estate business is specifically affected by the following risks: macroeconomic conditions in Peru that may impact the growth of the real estate sector as a whole, particularly in the residential market, including an increase in unemployment or a decrease in wage levels; an increase in prevailing interest rates or lack of available credit; changes in government subsidies for affordable housing; unfavorable real estate market conditions, such as an oversupply of residential units or scarcity of suitable land in particular areas; the level of customer interest in our new projects or the sales price per unit necessary to sell the unit may be lower than expected; customer perception of the security, convenience and attractiveness of our projects and the areas in which they are located; cost overruns, many of which may be beyond our control, that exceed our estimates and affect our profit margins, including the price of labor, land, insurance, taxes and public charges; the construction and sale of units may not be completed on schedule; bankruptcy or significant financial difficulties of large industry players, which cause a loss of confidence in the industry; limitations when contracting with government entities; and restrictions on real estate development imposed by local, regional and national authorities which often render restrictive or higher bureaucratic laws and regulations. Recently, real estate sales have slowed due to modifications by the government to a program ( Bono de Buen Pagador ) that encourages social interest housing sales as well as access to credit. The occurrence or continuation of any of the above events may have a material adverse effect on our business and financial performance.
Real estate prices may not continue to rise and may decline
Real estate prices in Peru have risen significantly over the last decade. We cannot assure you that this increase in real estate prices does not represent a bubble. Real estate prices in Peru may not continue to rise or may decline significantly, particularly if financing costs rise or consumer confidence in the real estate market erodes. 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, municipal authorities are responsible for issuing most of the licenses that are required during the development stage, including zoning, demolition, construction and conformity ( conformidad de obra ) licenses, among others. Currently, we have approximately 22 real estate projects in various stages of development. For some of these projects, we have not yet initiated administrative proceedings with the appropriate authorities, or such proceedings are pending approval. A denial or an extended delay in issuing licenses, authorizations or registrations, or an extended delay by municipal authorities in approving licensing procedures, may render land unsuitable for development, delay the completion of planned projects, increase our costs or otherwise negatively impact the pricing of projects and adversely affect our business and financial performance.
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The scarcity of financing, an increase in interest rates or an increase in the security required by financial institutions as collateral may adversely affect the ability or willingness of prospective buyers to purchase our real estate properties. In most cases, the purchasers of our residential or commercial properties finance at least part of the purchase price with mortgage loans. In 2016 and 2017, approximately 95% and 88%, respectively, of our residential units were sold to purchasers who received government subsidies to finance the purchase of homes. An increase in interest rates, whether as a result of market conditions or government action or otherwise, may cause a decrease in the demand for our residential and commercial properties and for land development. An increase in interest rates could also increase our own financing costs, which may, in turn, increase the sale price of our projects and adversely affect our business and financial performance.
We may experience difficulties in finding desirable land and increases in the price of land may increase our cost of sales and decrease our earnings
The continued growth of our real estate business depends in large part on our ability to continue to acquire land at a reasonable cost. As more developers enter or expand their operations in the Peruvian real estate sector, land prices could rise significantly and suitable land could become scarce or overpriced due to increased demand or decreased supply. A resulting rise in land prices may increase our cost of sales and decrease our earnings. We may not be able to acquire suitable land at reasonable prices in the future, which may have a negative impact on our financial performance.
Changing market conditions may adversely affect our ability to sell home inventories in our land and at expected prices
There is a lag between the time we acquire land and the time that we can bring the developed properties to market. Lag time varies by sector and on a project-by-project basis. As a result, we face the risk that demand for real estate may decline or that other developments may occur during this period that affect market conditions, and that we will not be able to dispose of developed properties or undeveloped land at expected prices or profit margins or within anticipated time frames or at all. Significant expenditures associated with investments in real estate, such as maintenance costs, architectural fees in high-end projects, construction costs and debt payments, cannot generally be reduced if changes in market conditions cause a decrease in expected revenues from our properties. Moreover, the market value of home inventories and undeveloped land can fluctuate significantly because of changing market conditions. As a result of these and other factors beyond our control, we may be forced to sell properties or land at a loss or for prices that generate lower profit margins than we anticipate.
Determinations by INDECOPI may adversely affect our ability to enforce binding contracts
In resolving consumer protection complaints in the real estate and insurance sectors, INDECOPI has made determinations against real estate developers resulting in the modification of contractual provisions applicable to purchasers. Some purchasers of real estate properties have taken advantage of these INDECOPI determinations and filed complaints against developers before INDECOPI and/or made public claims through the media seeking to obtain compensation for alleged deficiencies in housing construction as well as the modification of the terms of their contracts, which may have a negative impact on our real estate business. Although we have a small number of such complaints in INDECOPI, an increase in consumer complaints and consumer protective measures, particularly those resulting in the modification of contractual terms, may affect our ability to enforce our contracts under their original terms if we are not able to counter such claims, which in turn may have a negative impact on our real estate business.
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
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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, Enel, which acquired 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.
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 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.
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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 open-market policies that stimulate economic growth and social stability.
Moreover, investigations against former or current government officials relating to bribery payments made by Odebrecht have, and may continue to, result in political uncertainty in Peru. On March 22, 2018, President Pedro Pablo Kuczynski presented his resignation, due to allegations of corruption for vote-buying in connection with the impeachment proceeding against him. On March 23, 2018, the Congress accepted his resignation and his first vice president, Martín Vizcarra, was sworn in as acting president. We cannot assure you whether President Vizcarra will remain in office for the remainder of the presidential term, which ends in July 2021. If President Vizcarra and the current second vice president both resign, the president of the Congress would become acting president and the Congress would call for new elections.
A separate criminal investigation and extradition order has been initiated against former President Alejandro Toledo. Investigations have also been initiated against former Presidents Ollanta Humala, Alan García and Pedro Pablo Kuczynski.
Several corruption scandals regarding authorities at municipal, regional and national ministry-levels are also ongoing, and former and current government officials have been detained. These corruption investigations have resulted in lower investments in large projects.
The political instability caused by these events could affect macroeconomic conditions in the country, including currency volatility, as well as have a negative effect on our business.
Fluctuations in the value of the sol could adversely affect financial performance
Fluctuations in the value of the sol relative to the U.S. dollar could adversely affect Peru’s economy. In addition, fluctuations in the value of the sol to the U.S. dollar can materially adversely affect our results of operations. In 2017, 39.3% and 43.8% of our revenues were denominated in soles and U.S. dollars, respectively, whereas 63.9% and 18.3% of our costs of sales were denominated in soles and U.S. dollars, respectively. In the past the exchange rate between the sol and the U.S. dollar has fluctuated significantly. We cannot assure you that the value of sol against other currencies will not fluctuate significantly in the future, which could adversely affect the Peruvian economy and our business, financial condition and results of operations.
In addition, although Peruvian law currently imposes no restrictions on the ability to convert 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.
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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 2.9% in 2013, 3.2% in 2014, 4.4% in 2015, 3.2% in 2016 and 1.4% in 2017, as measured by the Peruvian Consumer Price Index ( Índice de Precios al Consumidor del Perú ).
If Peru experiences substantial inflation in the future, our costs of sales and administrative expenses could increase which could affect our operating margins. Inflationary pressures may lead to governmental intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Peruvian economy. For example, in response to increased inflation, the Peruvian Central Bank, which sets the Peruvian basic interest rate, may increase or decrease the basic interest rate in an attempt to control inflation or foster economic growth.
Changes in tax laws may increase our tax burden and, as a result, negatively affect our financial performance
The Peruvian congress and government regularly implement changes to tax laws that may increase our tax burden. These changes may include modifications in our tax rates and, on occasions, the enactment of temporary taxes that in some cases have become permanent taxes. Tax reforms related to the Peruvian income tax, value added tax and tax code have recently been approved, but we are unable to estimate the impacts that these reforms may have on 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 if there is such a resurgence, it will not disrupt the economy of Peru and our business.
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The Peruvian economy could be affected by adverse economic developments in regional or global markets
Financial and securities markets in Peru are influenced, to varying degrees, by economic and market conditions in regional or global markets. Although economic conditions vary from country to country, investors’ perceptions of events occurring in one country may adversely affect cash flows and securities from issuers in other countries, including Peru. 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, low global commodity prices, in particular oil and gas prices, and the appreciation of the U.S. dollar against foreign currencies 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 United Kingdom voted to exit the European Union on June 23, 2016. As of the date hereof, the actions to be taken by the United Kingdom to effectively exit the European Union and the duration of this process are uncertain. The results of the referendum in the United Kingdom have caused, and are expected to continue to cause, volatility in financial markets, which in turn could have substantial adverse effects on our business, financial condition and results of operations. On November 8, 2016, Mr. Donald J. Trump was elected president of the United States. President Trump has implemented restrictions on free trade and limitations on immigration. Changes in social, political, regulatory and economic conditions in the United States or in laws and policies governing foreign trade could create uncertainty in the international markets and could have a negative impact on emerging market economies, including the Peruvian economy, which in turn could have a negative impact on our operations. The worsening of current global conditions or a new economic or financial crisis could affect Peru’s economy, and, consequently, materially adversely affect our business and financial performance.
Risks 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. During 2016 and 2017, approximately 26.5% and 28.0%, respectively, of our revenues on a consolidated basis derived from operations outside of Peru.
These countries have suffered significant economic, political and social crises in the past, and these events may occur again in the future. We cannot predict whether changes in current administrations will result in changes in governmental policy and whether such changes will affect our business. Instability in the region has been caused by many different factors, including: significant governmental influence over local economies; substantial fluctuations in economic growth; high levels of inflation; changes in currency values; exchange controls or restrictions on expatriation of earnings; high domestic interest rates; wage and price controls; changes in governmental economic or tax policies, including retroactive changes; imposition of trade barriers, including import duties on information technology equipment; electricity rationing; liquidity of domestic capital and lending markets; unexpected changes in regulation; expropriations; and high levels of organized crime, terrorism and social conflicts, as well as overall political, social and economic instability. Moreover, macroeconomic conditions in these countries are highly influenced by global commodity prices, including the price of copper for Chile and the price of oil and gas for Colombia.
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Risks Relating to our ADSs
We have identified material weaknesses in our internal control over financial reporting, and if we cannot maintain effective internal controls or provide reliable financial and other information in the future, investors may lose confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our ADSs
Based on the assessment of our internal control over financial reporting as of December 31, 2017, management has concluded that, as of such date, our internal control over financial reporting was not effective at the reasonable assurance level due to control deficiencies that constituted material weaknesses. These material weaknesses consisted of:
| • | Control Environment . The control environment was not always sufficient to ensure adequate monitoring mechanisms were in place to secure that internal controls over financial reporting operated effectively. Personnel also lacked sufficient knowledge, experience and training in these areas. Management found deficiencies in the implementation of our internal control system of financial reporting in accordance with the Sarbanes-Oxley Act throughout all subsidiaries. |
| • | Risk Assessment . We identified deficiencies in the controls to address the risks of material misstatements, which contributed to deficiencies in controls with respect to: (i) the review, approval and documentation related to journal entries; (ii) the segregation of duties; (iii) timely accounting for signed contracts to prevent or detect material inaccuracies; (iv) accounting for revenue; and (vi) inventory. |
| • | Information and Communication . We identified deficiencies in the controls over information and communication. |
| • | Monitoring and Evidential Matter . We identified deficiencies in the monitoring controls related to the design and operational effectiveness of our internal controls. |
These material weaknesses resulted in adjustments to the accounting for revenue and accounts receivable and a number of adjustments and reclassifications in other accounts. Additionally, these material weaknesses could result in other misstatements in our financial results and disclosures, which could result in a material misstatement to our annual or interim consolidated financial statements not being prevented or detected. Because of these material weaknesses, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2017, based on criteria in Internal Control-Integrated Framework (2013) issued by the COSO.
For more information, see “Item 15. Controls and Procedures.” A “material weakness” is a deficiency, or combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement in financial statements will not be prevented or detected in a timely basis.
We are in the process of implementing measures to address these material weaknesses. We may not be able to remediate these identified material weaknesses. Moreover, we may in the future discover other areas of our internal controls that have material weaknesses or that need improvement, particularly with respect to businesses that we acquire.
Any failure to maintain an effective internal control over financial reporting, or implement required new or improved controls, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, or if our independent registered public accounting firm is unable to provide us with an unqualified opinion regarding the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our consolidated financial statements, which could result in a decrease in the value of our ADSs.
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The New York Stock Exchange has commenced delisting procedures with respect to our ADSs
On May 17, 2018, the New York Stock Exchange suspended trading of our ADSs on the exchange and commenced proceedings to delist the company due to our delay in filing this annual report. The company has appealed the decision. As a result, our ADSs have traded on the over-the-counter (OTC) market in the United States since May 21, 2018, which is a significantly less liquid market than the New York Stock Exchange.
If our appeal is unsuccessful and the New York Stock Exchange does not resume trading of our ADSs on the exchange and halt the delisting process, our ADSs may not trade on the New York Stock Exchange in the future. In addition, although the company may continue to be subject to reporting and corporate governance requirements applicable under U.S. securities laws and regulations, we would not be subject to the listing requirements under the New York Stock Exchange. If we are not able to resume the trading of our ADSs on the New York Stock Exchange, this could materially impact the market price of our ADSs.
The market price of our ADSs may fluctuate significantly, and you could lose all or part of your investment
Volatility in the market price of our ADSs may prevent you from being able to sell your ADSs at or above the price you paid for them. The market price and liquidity of the market for our ADSs may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, among others: actual or anticipated changes in our results of operations, quarterly fluctuations, or failure to meet expectations of financial market analysts and investors; 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 former chairman beneficially owns 17.81% of our outstanding share capital. No shareholder or group of shareholders currently owns a majority of our common shares. In addition, there is no shareholders’ agreement among any of our significant shareholders. Accordingly, no shareholder or group of shareholders may on its own determine the outcome of substantially all matters submitted for a vote to our shareholders. In addition, a new investor or group of investors may in the future seek to acquire a significant stake in, or control of, our company, subject to compliance with Peruvian tender offer requirements which require that a tender offer be made to all shareholders upon, among other matters, acquisition of 25%, 50% and 60% of our voting rights. If a new investor or group of investors acquires a significant stake in, or control of, our company, we cannot assure you that such investor or group of investors will not seek to change how our business is managed.
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Holders of ADSs may be unable to exercise voting rights with respect to our common shares underlying the ADSs at our shareholders’ meetings
As a holder of ADSs representing common shares being held by the depositary in your name, you may exercise voting rights with respect to the common shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. Holders of our common shares will receive notice of shareholders’ meetings through publication of a notice 25 days in advance, in accordance with Peruvian law, in the official gazette in Peru, a Peruvian newspaper of general circulation and the website of the Peruvian Securities Commission, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders will not receive notice directly from us. Instead, pursuant to the deposit agreement, we will notify the depositary, who will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given. To exercise their voting rights, ADS holders must instruct the depositary how to exercise the voting rights for the common shares which underlie their ADSs. Due to these additional procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of our common shares.
Holders of ADSs also may not receive voting materials in time to instruct the depositary to vote the common shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADS or for the manner of carrying out such instructions, unless such failure can be attributed to gross negligence, bad faith or willful misconduct on the part of the depositary or its agents. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the underlying common shares are not voted as requested.
Our shareholders’ ability to receive cash dividends may be limited
Our shareholders’ ability to receive cash dividends may be limited by the ability of the depositary to convert cash dividends paid in soles into U.S. dollars. Under the terms of our deposit agreement with the depositary for the ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the common shares underlying the ADSs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If this conversion is not possible or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADR holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the dividend distribution.
Holders of ADSs may be unable to exercise preemptive or accretion rights with respect to the common shares underlying their ADSs
Under Peruvian corporate law, if we issue new common shares as part of a capital increase, unless otherwise agreed to by holders of 40% of our subscribed voting common shares and, provided that such capital increase does not favor, directly or indirectly, certain shareholders to the detriment of others, our shareholders will generally have the right to subscribe to a proportional number of common shares of the class held by them to maintain their existing ownership percentage, which is known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed common shares at the end of a preemptive rights offering, on a pro rata basis, which is known as accretion rights. You may not be able to exercise the preemptive or accretion rights relating to common shares underlying your ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the common shares relating to these preemptive and accretion rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, you may receive only the net proceeds from the sale of your preemptive and accretion rights by the depositary or, if the preemptive and accretion rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of our ADSs may suffer dilution of their interest in our company upon future capital increases.
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We are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement without the prior consent of the ADS holders
We are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement without the prior consent of the ADS holders. Any change related to an increase in deposits or charges for book-entry securities services or any modification that might hinder the rights of the ADS holders will be effective within 30 days after the ADS holders have received notice of such change or modification and such holders will have no right to any compensation whatsoever.
Peru has different corporate disclosure and accounting standards than those you may be familiar with in the United States
Financial reporting and securities disclosure requirements in Peru differ in certain significant respects from those required in the United States. There are also material differences among IFRS, Peruvian GAAP and U.S. GAAP. Accordingly, the information about us available to you will not be the same as the information available to holders of 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 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.
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Minority shareholders in Peru are not afforded equivalent protections as minority shareholders in other jurisdictions and investors may face difficulties in commencing judicial and arbitration proceedings against our company or the controlling shareholder
Our company is organized and existing under the laws of Peru. Accordingly, investors may face difficulties in serving process on our company, officers and directors or significant shareholders in the United States of certain other jurisdictions, and in enforcing decisions granted by courts located in other jurisdictions against our company, our officers and directors or significant shareholders that are based on securities laws of jurisdictions other than Peru.
In Peru, there are no proceedings to file class action suits or shareholder derivative actions with respect to issues arising between minority shareholders and an issuer, its controlling shareholders or directors and officers. Furthermore, the procedural requirements to file actions by shareholders differ from those of other jurisdictions, such as in the United States. As a result, it may be more difficult for our minority shareholders to enforce their rights against us, our directors, officers or significant shareholders as compared to the shareholders of a U.S. company. The deposit agreement provides that the depositary has no obligation to commence or become involved in any judicial proceedings and any other legal actions relating to the ADSs or the deposit agreement, either on behalf of the ADS holders or on behalf of any other person.
Judgments of Peruvian courts with respect to our common shares will be payable only in soles
If proceedings are brought in the courts of Peru seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other than soles. Under Peruvian exchange control limitations, an obligation in Peru to pay amounts denominated in a currency other than soles may be satisfied in Peruvian currency only at the exchange rate, as determined by the Peruvian Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Peruvian investors with full compensation for any claim arising out of or related to our obligations under the ADSs.
If securities or industry analysts publish unfavorable research about our business or if they cease to follow our business, the price and trading volume of the ADSs could decline
The trading market for the ADSs will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades the ADSs or publishes unfavorable research about our business, the price of the ADSs would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for the ADSs could decrease, which could cause the price and trading volume of the ADSs to decline.
| ITEM 4. | INFORMATION ON THE COMPANY |
A. History and Development of the Company
Graña y Montero has been operating in Peru since 1933 and it is listed on the Lima Stock Exchange since 1997. Set forth below are key highlights in our company’s history:
| • | Graña y Montero traces its origins to its predecessor company GRAMONVEL, founded 84 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. |
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| • | In 1949, GRAMONVEL merged with Morris y Montero to form Graña y Montero Contratistas Generales S.A. (now GyM S.A., our construction subsidiary), expanding its service offerings and increasing its capacity to undertake large-scale infrastructure projects. |
| • | In 1983, we began a diversification strategy by developing complementary lines of business. In 1984, we founded GMP, our oil and gas subsidiary. In 1985, we partnered with Sonda S.A. (a Chilean IT services company) to form GMD, our IT services subsidiary. Beginning in 1987, we founded our real estate development business, 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. |
| • | 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”), through our subsidiary GyM Chile SpA, we hold an 86.2% interest in Vial y Vives-DSD. As of the date of this annual report, we hold a 94.5% interest in Vial y Vives-DSD. |
| • | In March 2014, we acquired control of Coasin Instalaciones Ltda. (“Coasin”) for an amount of US$2.1 million (S/.7.1 million). |
| • | In September 2014, our subsidiary Norvial established its first bond program for a maximum amount of S/.380 million or its equivalent in U.S. 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 December 2014, our subsidiary GyM S.A. acquired 70% of the share capital of Morelco S.A.S. (“Morelco”), a Colombian engineering and construction company specialized in the oil and gas and other energy sectors. |
| • | In April 2015, GMP started operations of its hydrocarbon extraction services in Blocks III and IV for Perupetro, in the provinces of Talara and Paita in northern Peru. |
| • | 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 US$2.5 million (S/.8.4 million) and, in August 2016, we increased our interest to 91%. In June 2018, we increased our stake to 100%. |
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| • | In July 2016, our subsidiary GyM Ferrovías S.A., subscribed the Addendum N° 4 to the Line one concession contract of the Basic Metro Network of Lima-Mass Electrical Transport System for Lima and Callao, in order to purchase a total of 20 trains and 39 railcars. The total amount of the investment is approximately US$505 million (S/.1,696.8 million). |
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 Prospects— Liquidity and Capital Resources—Capital Expenditures.”
Overview
We are the largest engineering and construction company in Peru as measured by revenues during 2017, and one of the largest publicly-traded engineering and construction company in Latin America as measured by market capitalization as of December 31, 2017, with strong complementary businesses in infrastructure and real estate.
With 85 years of operations, we have a long track record of successfully completing the engineering and construction of many of Peru’s landmark private- and public-sector infrastructure projects, such as the Lima International Airport and the Peru LNG gas liquefaction plant, and we believe we have a track record of operational excellence in our markets. We have developed a highly-experienced management team, a talented pool of more than 2,996 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 and Colombia. In October 2012, we acquired a controlling interest in Vial y Vives, an engineering and construction company specializing in the Chilean mining sector, and in August 2013, we acquired a controlling interest in DSD Construcciones y Montajes, a Chilean engineering and construction company specialized in providing services to the energy, oil and gas, cellulose and mining sectors in Chile and Latin America. In December 2014, we acquired a controlling interest in Morelco, an engineering and construction company specialized in the Colombian oil and gas and other energy sectors.
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The tables below show our backlog, revenues and EBITDA from 2013 to 2017.
| BACKLOG (1) | REVENUES (1) | EBITDA (1) | ||
|
|
||||
| (1) | On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well. |
During 2017, we generated revenues of S/.6,080.1 million (US$1,873.7 million), EBITDA of S/.788.7 million (US$243.1 million), and net profit of S/.209.2 million (US$64.5 million) including net profit attributable to controlling interest of S/.148.7 million (US$45.8 million).
Our Strengths
We believe our company’s strengths provide us with significant competitive advantages. Our principal strengths include the following:
Leader in growing markets
We are the largest engineering and construction company in Peru as measured by revenues during 2017, and one of the largest publicly-traded engineering and construction company in Latin America as measured by market capitalization as of December 31, 2017. Peru is undergoing a period of development, with over 4.4% average annual real GDP growth between 2009 and 2017 and significant private and public investments in the mining, power, oil and gas, transportation, real estate and other infrastructure sectors. We have completed some of the most complex and large-scale infrastructure projects in the country, and we believe we are an integral part of Peru’s ongoing transformation with projects that contribute to the overall economic development of the country. We believe our expertise, track record, scale and operational capabilities in Peru position us to take advantage of the country’s favorable economic conditions and growth opportunities. We believe we are also a significant infrastructure concessionaire in Peru and a large apartment building developer in Peru.
Long-standing track record for operational excellence
During our 85-year history, we have focused on the successful and on-time execution of complex projects, through our “deliver before deadline” and “lean construction” initiatives. Our extensive experience has allowed us to gain deep market knowledge and expertise, which help us better serve our clients and manage risks in our contractual arrangements. We believe we have a track record of operational excellence. We believe that our track record of operational excellence are key factors in winning new and repeat business, as well as in partnering with strategic industry players and attracting top talent to our company.
Complementary lines of business which generate more stable cash flows and create additional business opportunities across our segments
We have expanded our company by developing complementary lines of business, many of which have become leaders in their respective markets. These lines of business create significant business opportunities across our segments, enabling us to capture a greater share of infrastructure spending, and also generate cost synergies. One
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example is Norvial, a toll-road concession operated within our Infrastructure segment. In addition to managing the concession, we used our E&C segment to design and construct the expansion of the highway and, once constructed, we are now using our Infrastructure segment to operate and maintain the highway. In addition to increasing our levels of consolidated activity, many of these lines of business enable us to achieve more stable cash flows through medium and long-term client service contracts and concessions, which counter in part the cyclicality of the engineering and construction business.
Significant backlog
Our backlog amounted to US$2,388.4 million as of December 31, 2017. We believe that our backlog, which as of December 31, 2017 represented approximately 1.42x of our related 2017 revenues, provides visibility as to our potential for growth in the coming years, although backlog may not always be an accurate indicator of future revenues. See “Item 3.D. Key Information—Risk Factors—Risks Related to our Company—Our backlog and our ratio of historical backlog to revenues may not be reliable indicators of future revenues or profit.” Moreover, we believe our backlog is strategically targeted to our key end-markets such as mining, infrastructure, power, energy and real estate. Approximately 72.7% of our backlog as of December 31, 2017 is comprised of contracts with the private sector. Furthermore, we continuously evaluate bidding on contracts arising from the significant ongoing private and public investments in Latin America.
Proven ability to create and grow businesses organically and through acquisitions
We have proven our ability to extend our engineering and construction capabilities into complementary lines of business in a diverse range of industries, some of which began as innovative start-ups in response to client needs. For example, in 1984, we created a new IT business division, which grew and evolved through the years to become the second largest IT company in Peru (we sold this business in June 2017). 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 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. We believe that our proven ability to create new businesses, develop businesses organically and acquire and successfully integrate new businesses into our platform is a key competitive advantage to expand our operations in Latin America.
Highly experienced management, talented engineers and skilled workforce, with shared core corporate values
Our senior management team has an average tenure within our company of approximately 20 years. 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 2,996 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 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 2017, we had an accident incidence rate of 0.46, calculated over 200,000 hours worked.
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Our Strategies
In response to the impact of our association with Odebrecht in certain projects in Peru and the termination of the GSP pipeline concession, we are implementing a strategic action plan, as described in “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
Our vision is to be “the most reliable engineering services company in Latin America.” Our key long-term 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.
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. With the renegotiation and eventual repayment of debt related to GSP, we intend to regain our financially disciplined approach by significantly limiting our debt incurrence to identified projects with repayment sources.
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. 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 an 85-year track record and is the largest player in Peru as measured by revenues during 2017, according to our estimates based on Peru: The Top 10,000 Companies 2017 undertaking a 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 2017 revenues by end-market.
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2017 E&C Revenues by End-Market
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 2017, approximately US$256.4 million (S/.832.1 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$18.7 billion between 2017 and 2021 and Chile as projected investment flows of approximately 64.9 billion between 2017 and 2026, according to the Peruvian Ministry of Economy and Finance, respectively—we have significant expertise with respect to specialized engineering and construction services for the mining sector. As a result, we believe we are one of the leading mining construction companies in Latin America and we leverage this expertise both within our principal markets as well as to selectively undertake complex projects across the region.
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The table below sets forth selected financial information for our E&C business segment.
| As of and for the year ended December 31, | ||||||||||||||||
| 2015 | 2016 (1) | 2017 | 2017 | |||||||||||||
| (in millions of S/., except as indicated) |
(in millions of
US$) (2) |
|||||||||||||||
|
Revenues |
5,829.4 | 4,159.5 | 3,353.2 | 1,033.3 | ||||||||||||
|
Net profit |
(121.8 | ) | (93.4 | ) | 12.4 | 3.8 | ||||||||||
|
Net profit (loss) attributable to controlling |
(131.2 | ) | (87.7 | ) | 12.1 | 3.7 | ||||||||||
|
EBITDA |
220.1 | 106.1 | 194.3 | 59.9 | ||||||||||||
|
EBITDA margin |
3.8 | % | 2.6 | % | 5.8 | % | 5.8 | % | ||||||||
|
Backlog (in millions of US$) (3)(4) |
3,129.4 | 1,977.9 | 1,456.7 | 1,456.7 | ||||||||||||
|
Backlog/revenues ratio (3)(4) |
1.8x | 1.6x | 1.4x | 1.4x | ||||||||||||
| (1) | For the effects on our results of operations and backlog for 2016 resulting from the termination of the GSP gas pipeline concession, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and notes 5(e), 5(f) and 16 to our audited annual financial statements included in this annual report. |
| (2) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (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. |
| (4) | In the third quarter of 2015 we added US$1,067 million in backlog from our participation in the engineering procurement and construction contract for the southern gas pipeline project of GSP. When the GSP gas pipeline concession was terminated on January 24, 2017, our E&C backlog as of December 31, 2016 decreased by US$855 million, representing 30.2% of our E&C backlog. |
Principal Engineering and Construction Activities
The following chart sets forth our 2017 revenues by E&C activity.
2017 E&C Revenues by Activities
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.
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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.
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 Marriott Hotel in Lima; |
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| • | 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; |
| • | in 2005, the Cerro Verde mine concentrator plant for Phelps Dodge; in 2008, the Cerro Corona concentrator plant for GoldFields; |
| • | in 2008, the Parque Agustino real estate development project, the first major affordable housing project in Peru, which consists of 3,400 units; |
| • | in 2009, the Westin Lima Hotel, one of the tallest buildings in Peru; |
| • | 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, the Pueblo Viejo Mine concentrator plant for Barrick Gold Corp. in the Dominican Republic; |
| • | in 2011, the first stretch of Line One of the Lima Metro for the Peruvian Ministry of Transport and Communications; |
| • | in 2012, for project manager Bechtel, the Antapaccay copper concentrator developed by Xstrata Copper, the world’s fourth largest copper producer; |
| • | in 2013, expansion of the plant for Cementos Lima, the largest cement producer in Peru; |
| • | in 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; |
| • | in 2014, construction of the Nueva Fuerabamba city, an integral real estate development project for the population surrounding the Las Bambas mining project; |
| • | in 2014, construction of a concentrator plant for the Toromocho copper mine, developed by Chinalco Mining; |
| • | in 2014, construction of a primary crusher for Mina Caserones, developed by Minera Lumina Copiapo, which is expected to have a daily production capacity of 144,230 tonnes; |
| • | in 2015, construction of a copper concentrator plant for the Las Bambas mining project, managed by Bechtel and developed by Xstrata Copper; |
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| • | in 2015, expansion of the process plant for the Cerro Verde mine, one of the biggest concentrator plants in Latin America; |
| • | in 2015, engineering, procurement and construction of Guyana Goldfields’ Aurora gold project in Guyana, with the scope of works including a 1.75 Mt/a processing plant, power station and integration management; and |
| • | in 2015, design, engineering, procurement and construction of a new stock pile and 10,000 conveyor belts for the Escondida Mine, managed by Bechtel; |
| • | in 2016, engineering, procurement and construction of the 510 MW Cerro del Águila S.A. hydroelectric plant for IC Power, which is expected to represent approximately 10% of Peru’s installed generation capacity; |
| • | in 2016, engineering, procurement and construction of La Chira, a waste water treatment plant for the city of Lima for which we also have the concession through a joint operation with Acciona Agua; |
| • | in 2016, engineering, procurement and construction of a concentrator plant for the La Inmaculada silver and gold project, developed by Hochschild Mining. This project is expected to have a daily processing capacity of 3,500 tonnes; |
| • | in 2016, construction of an Open Plaza shopping center in the city of Huancayo, province of Junin; |
| • | in 2016, construction of civil works and electromechanical assembly of the combined cycle power plant in the Kelar combined cycle thermoelectric plant located in Mejillones, Antofagasta Region, Chile; |
| • | in 2017, prefabrication of certain products for the modernization of the Talara refinery in Peru; |
| • | in 2017, electromechanical assembly of certain infrastructure in connection with the Cuajone mine improvement project in Peru; |
| • | in 2017, various urban and industrial projects in the Lurin district of Lima, Peru, including moving earth for a road platform, a secondary network for potable waters and sewage, and electrical distribution networks; |
| • | in 2017, construction of a 20-story residential building on the Pezet Avenue of Lima; |
| • | in 2017, construction of a pavillion at the Universidad del Pacifico, Peru; and |
| • | in 2017, construction of a multi-use hall at the Universidad ESAN in Peru. |
We currently have a diversified portfolio of ongoing projects, on our own or through majority or minority interests in joint operations, in a wide range of sectors in Peru and the other countries where we operate, including the following:
| • | construction and design of a luxury business complex consisting of offices and a hotel in Lima, with state-of-the-art technology which will make it a smart building. This project named Talbot is scheduled to be completed in July 2018; |
| • | execution of civil and electromechanical works in the interconnections area and off-sites of Talara’s refinery modernization project, which are scheduled to be completed in November 2018; and |
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| • | execution of civil works and assembly of structures for the wet area of Toquepala, which were completed in May of 2018, and assembly of equipment and installation of pipelines, electricity and instrumentation of the wet area of Toquepala’s unit expansion, which is scheduled to be completed in September 2018. |
Clients
We believe that we have developed long-term relationships with many clients as a result of our performance over the years and are focused on the successful and on-time execution of complex projects, through our “deliver before deadline” and “lean construction” initiatives. Our extensive experience of operational excellence has allowed us to gain deep market knowledge and expertise, which help us better serve our clients. The principal clients of our E&C segment include renowned domestic and multinational mining, power, oil and gas, transportation and infrastructure development companies, such as Glencore, Sociedad Minera Cerro Verde, Guyana Goldfields, Luz Del Sur, Kallpa Generación, Samsung Engineering, Rio Alto, Chinalco Mining, Hudbay Minerals and Red Eagle Mining Corporation, among others. We have a well-diversified client base, as none of our engineering and construction clients accounted for 7% or more of our consolidated revenues in 2017.
Project Selection and Bidding
We win new engineering and construction contracts through private and public bidding processes or direct negotiation, from a variety of sources, including potential client requests, proposals from existing or former clients, opportunities sought by our commercial team and from requests by the Peruvian government. Approximately 98.3% of our 2017 revenues came from private-sector contracts. The Peruvian government and its agencies typically award construction contracts through a public bidding process conducted in accordance with the Peruvian State Contracting Law ( Ley de Contrataciones del Estado ). In the private sector, in addition to obtaining new projects, another important source of revenue involves increases in the scope of work to be performed in connection with already existing projects. These arrangements are typically negotiated directly with the client, often during the course of the work we are already performing for that client.
We have a designated team that oversees the management of project proposals and a commercial team that reviews and evaluates potential projects in order to estimate costs. In considering whether to bid for a potential project, we principally consider the following factors: competition and the probability of being awarded the project; project size; the client; our experience undertaking similar projects; and the availability of resources, including human resources. As part of the project selection process, our commercial team performs a detailed cost analysis utilizing sophisticated software we developed to assist in determining whether the project is viable and cost-effective. If we choose to pursue a project, a budget leader is assigned to prepare the offer that is eventually presented to our potential client.
Despite the budgeting risks generally associated with engineering and construction contracts, our management believes that our experience generally allows us to estimate our project costs accurately. Our project management teams also periodically review project budgets for inconsistencies between budgeted and actual costs in order to recover for cost variations through contract renegotiation. Budgeting risks are also mitigated through advance payments. Considering that we receive advance payments for most of our E&C contracts, our E&C projects typically do not require significant working capital investment. Our E&C segment secures financing primarily to purchase machinery and equipment for our construction and contract mining services.
We are required, in the majority of our construction contracts, to provide a performance bond to guarantee project performance and completion, which remain in effect for the contract’s duration. We are also required to provide performance bonds to secure any advance payments provided to us by our clients. These bonds are periodically reduced during the project’s execution in accordance with project advancement. After the expiration of the contract term, we are typically required to provide an additional performance bond that remains valid for one year.
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Contracts
We principally enter into four types of engineering and construction contracts:
| • | Cost-plus fee contracts . The contract price is based upon actual costs incurred for time and materials plus a fee, which may be a percentage of the costs incurred or a pre-determined fee. Sometimes, cost-plus fee contracts include a target price, and a contractual arrangement that determines our responsibility in the event the total cost of the project exceeds the target price or the benefit we receive if the total contract price results in cost savings. Cost-plus fee contracts tend to involve the least budgeting risk for us. |
| • | Unit price contracts . The contract price is based upon a price per unit (i.e., variable quantities of work priced at defined unit rates). Each line item of the project budget, such as cubic meter of earth excavated or cubic meter of concrete poured, has a defined price, but the quantities of the units may vary. Our bid price reflects our estimate of the costs that we expect to incur for each work unit. These contracts typically include an “escalation” clause which is essentially an adjustment mechanism to account for Peruvian inflation. |
| • | Lump-sum contracts . The contract price is fixed. Our bid is meant to cover all costs and include a profit. The principal risk in these types of contracts are errors in calculating our costs, including those of raw materials; miscalculation of the number of units or workers needed to complete the project; unanticipated technical complexities; or other unexpected events or circumstances that may increase our costs. |
| • | Engineering, procurement and construction (EPC) contracts . EPC contracts, known as “single source” or “turn-key” contracts, are also lump-sum contracts. Pursuant to EPC contracts, we provide a broad range of basic and detailed engineering services, including preparation of the technical project specifications, detailed drawings and construction specifications; technical studies; and identification of lists of materials and equipment necessary for the project. These contracts, which we utilize predominantly for our mining contracts, require a high-level of expertise and generally involve the most budgetary risks for us. |
For further information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations.”
Raw Materials
The principal inputs we use in our E&C segment are, among others, fuel, cement and steel. These and the other products we require in our E&C segment may be subject to the availability of raw materials, such as oil and iron, and commodity pricing fluctuations, which we monitor on a regular basis. We typically aim to enter into master supply agreements for a period of six months to one year. Although we obtain the majority of our inputs needs in Peru, we believe we have access to numerous global supply sources. The availability of these inputs, however, may vary significantly from year to year due to various factors including client demand, producer capacity, market conditions, transport costs and specific material shortages, and we may incur additional costs in obtaining them.
We purchase and lease the equipment we require for our E&C segment business from several local and international suppliers, currently with no significant concentration with any particular suppliers. While we do not have difficulty obtaining the equipment we need, we may face difficulties finding skilled personnel who are able to operate certain equipment and machinery.
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Competition
We generally compete with some of the largest contractors in Peru and the other countries where we operate. Because the E&C sector is highly competitive, the markets served by our business generally require substantial resources and highly-skilled and experienced technical personnel. The principal competitors of our E&C segment include local companies such as Besalco Cosapi S.A., San Martín Contratistas Generales, ICCGSA, JJC Contratistas Generales S.A., and international companies such as Techint S.A.C., SSK Montajes e Instalaciones S.A.C., Skanska del Perú S.A., Mota-Engil Peru S.A., Salfacorp S.A., OHL, Acciona, Astaldi, Grupo FCC, Ismocol, Termotecnica, Masa, Thiess, Redpath, among others. For certain projects, due to the size of the project, expertise required and other factors, we may choose to partner with our competitors, including the aforementioned companies.
Competition for our E&C segment is driven by performance, skill and project execution capabilities for completing complex projects in a safe, timely and cost-efficient manner, as well as price.
Infrastructure
We are an important toll road concessionaire in Peru, operating three toll roads. Moreover, we are the concessionaire for the Lima Metro, the largest mass-transit rail system in Peru, and a waste water treatment plant. Additionally, we operate ten multiple fuel storage facilities, four producing oil fields under long-term government contracts and we own a gas processing plant. Also, we provide services to maintain and operate different infrastructure projects.
The table below sets forth selected financial information for our Infrastructure business segment.
| As of and for the year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 | 2017 | |||||||||||||
|
(in millions of S/., except as
indicated) |
(in millions of
US$) (2) |
|||||||||||||||
|
Revenues |
1,353.1 | 1,174.8 | 1,447.9 | 446.2 | ||||||||||||
|
Net profit |
112.4 | 98.3 | 129.3 | 39.9 | ||||||||||||
|
Net profit attributable to controlling |
93.0 | 74.4 | 103.8 | 32.0 | ||||||||||||
|
EBITDA |
272.2 | 237.8 | 300.9 | 92.7 | ||||||||||||
|
EBITDA margin |
20.1 | % | 20.2 | % | 20.8 | % | 20.8 | % | ||||||||
|
Backlog (in millions of US$) (3) |
385.2 | 519.0 | 544.8 | 544.8 | ||||||||||||
|
Backlog/revenues ratio (3) |
1.0 | x | 1.5 | x | 1.2 | x | 1.2 | x | ||||||||
| (1) | Two of our four oilfields started operations in April 2015. |
| (2) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (3) | For more information on our backlog, see “—Backlog.” Does not include our Norvial toll road concession, our Energy line of business and our jointly controlled COGA venture (which we sold on April 24, 2017). Backlog is calculated as of the last day of the applicable year. Revenues are calculated for such year and converted into U.S. dollars based on the exchange rate published by the SBS on December 31 of the corresponding year. Includes revenues only for businesses included in backlog. |
Our strategy is to pursue concessions with the potential to generate business opportunities across our organization. Once we obtain a concession, our goal is to be involved virtually in all aspects of project execution through the participation of our different business segments, from the design and construction to the operation and maintenance of the infrastructure asset.
Through our Infrastructure segment we participate in a number of joint operations with the objective of bidding for government concessions or other long-term contracts. When bidding, we occasionally look for partners to reduce our risks and achieve the level of expertise needed to meet the demands of each particular project.
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The following table shows selected information about our current concessions and long-term contracts as of December 31, 2017.
|
Project |
Year
Granted |
Initiated
Operations |
Expiration |
Characteristics |
% Owned
by Us |
Status | ||||||||||||||||
|
Toll Roads: |
||||||||||||||||||||||
|
Norvial |
2003 | 2003 | 2028 | 183 km | 67.0 | % | Operating | |||||||||||||||
|
Survial |
2007 | 2008 | 2032 | 750 km | 99.9 | % | Operating | |||||||||||||||
|
Canchaque |
2006 | 2010 | 2025 | 78 km | 99.9 | % | Operating | |||||||||||||||
|
Mass Transit: |
||||||||||||||||||||||
|
Lima Metro |
2011 | 2012 | 2041 | 33.1 km | 75.0 | % | Operating | |||||||||||||||
|
Water Treatment: |
||||||||||||||||||||||
|
La Chira |
2010 |
|
June
2016 |
|
2037 | Avg. treatment capacity of 6.3 m3/sec (expected) | 50.0 | % | Operating | |||||||||||||
|
Energy: |
||||||||||||||||||||||
|
Oil Production (1) Block I |
1995 | 1995 | 2021 | Avg. daily production of 1,307 bbl (2016) | 100.0 | % | Operating | |||||||||||||||
|
Block V |
1993 | 1993 | 2023 | Avg. daily production of 728 bbl (2016) | 100.0 | % | Operating | |||||||||||||||
|
Block III |
2015 | 2015 | 2045 | Avg. daily production of 950 bbl (2016) | 100.0 | % | Operating | |||||||||||||||
|
Block IV |
2015 | 2015 | 2045 | Avg. daily production of 638 bbl (2016) | 100.0 | % | Operating | |||||||||||||||
|
Gas Processing (2) |
2006 | 2006 | N/A | Avg. daily processing capacity of 44 MMcf (2016) | 100.0 | % | Operating | |||||||||||||||
|
North and Central Fuel Terminals |
2014 | 2014 | 2034 | Aggregate storage capacity of 2.2 MMbbl | 50.0 | % | Operating | |||||||||||||||
|
South Fuel Terminals |
1997 | 1998 |
|
August
2018 |
|
Aggregate storage capacity of 1.4 MMbbl | 50.0 | % | Operating | |||||||||||||
| (1) | Percentages owned in Energy reflect GMP’s ownership. We own 95% of GMP. |
| (2) | We own a gas processing plant and have a long-term delivery and gas processing contract with Enel Generación Piura S.A. |
Additionally, the Chavimochic concession was awarded in 2013 for the design, construction, operation and maintenance of major hydraulic works in northern Peru. Affiliates of Odebrecht own 73.5% of the Chavimochic consortium, with the remaining 26.5% stake held by us. The second phase of the hydraulic works project has not begun as a result of the government’s failure to deliver the required lands for the project. Chavimochic has requested the termination of the concession in light of the government’s breach, and the parties are currently in discussions with the government, including for a potential sale of the project.
On November 11, 2013, we entered into a memorandum of understanding with Canada Pension Plan Investment Board (“CPPIB”), to create an alliance regarding a partnership to invest in infrastructure projects in Latin America, mainly Peru, Chile and Colombia. This alliance is non-exclusive and investments will be determined on a case-by-case basis. In December 2014, we undertook our first large investment with CPPIB, by formalizing an agreement with Enagás (as defined below) and CPPIB whereby we acquired 51% of Tecgas and owner of 100% of the shares of COGA, the current operator of TGP while Enagás acquired 30% and CPPIB maintained 19% of the participation. COGA is dedicated to the management, operation, maintenance, and integrity management of transport and distribution hydrocarbon pipelines and installations as well as industrial plants and ancillary installations. COGA operates and maintains more than 1,430km of pipelines, one compression plant with 72,000 horse power and four pump stations with 19,200 horse power each. COGA operates two pipelines: one which is 730 km and transports natural gas (GN) with a 1,275 MM cubic feet per day capacity; and the other one which is 530 km and transports natural gas liquids (NGL) with a 130,000 barrels per day capacity. Both pipelines run from Cusco to Ayacucho and Huancavelica, with the GN pipeline extending to Lurin and the NGL pipeline continuing to the Pisco fractionation plant. As this is a joint operation, we do not include the results of our COGA venture in our consolidated results under our Infrastructure segment. On April 24, 2017, we sold our interest in COGA.
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On September 29, 2015, we entered into a memorandum of understanding with Odebrecht Latinvest to participate with a 20% stake in the shareholder equity of Concesionaria Gasoducto Sur Peruano S.A., for an amount of US$215 million (S/.722.4 million). On November 2, 2015, we acquired this 20% stake in GSP through a capital increase. The other shareholders are Odebrecht Latinvest with a 55% stake and Enagás with a 25% stake. Concesionaria Gasoducto Sur Peruano S.A. was responsible for the design, financing, construction and operation of the southern gas pipeline, a project which would bring natural gas to the southern region of Peru, particularly to the provinces of Cuzco, Arequipa, Puno and Moquegua. The GSP gas pipeline concession was terminated by the Peruvian Ministry of Energy and Mines on January 24, 2017. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results.
Principal Infrastructure Lines of Business
Toll Roads
Peru’s economic development is underpinned by a strong government commitment to infrastructure investment, with a particular focus on improving the country’s road system through the award of new concessions to the private sector. We believe this commitment offers significant opportunities to our Infrastructure segment.
Our Infrastructure segment currently has three toll road concessions through our subsidiaries Norvial, Survial and Canchaque. All three toll roads are currently in operation and we have the authorizations, permits and licenses necessary to fulfill our obligations under each concession, including releases of rights of way. All of our toll road concessions have utilized the construction services of our E&C segment and the roads are currently operated and maintained by our subsidiary Concar. The table below sets forth selected financial information relating to our toll roads.
| For the year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 | 2017 | |||||||||||||
| (in millions of S/.) |
(in millions of
US$) (1) |
|||||||||||||||
|
Revenues |
394.5 | 264.4 | 263.8 | 81.3 | ||||||||||||
|
EBITDA |
79.2 | 76.8 | 91.1 | 28.1 | ||||||||||||
|
EBITDA margin |
20.1 | % | 29.0 | % | 34.5 | % | 34.5 | % | ||||||||
| (1) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
The charts below set forth the breakdown of our revenues and EBITDA from our toll road concessions for 2017.
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Norvial
Under our Norvial concession, we operate and maintain part of the only major highway that connects Lima to the northwest of Peru. This 183-km road, known as Red Vial 5, runs from the cities of Ancón to Pativilca and has three toll stations. The concession was awarded to Norvial in 2003 for a 25-year term. We own 67% of Norvial; and our partner in this concession is JJC Contratistas Generales. The following map shows the location of the Red Vial 5 road in Peru.
Norvial’s revenue derives from the collection of tolls. For the Norvial toll road, the toll rate is set out in the Norvial concession agreement and adjusted in accordance with a contractual formula that takes into account the sol/U.S. dollar exchange rate and Peruvian and U.S. inflation. We are required to transfer 5.5% of our monthly toll revenue to the Peruvian Ministry of Transport and Communications and pay a 1% regulatory fee to the Peruvian Supervisory Agency for Investment in Public Transportation Infrastructure.
Our obligations under the concession include expanding the already existing road by, among other things, adding two additional lanes. The first stage of construction was completed in 2008, and the second stage commenced in the second quarter of 2014 and is expected to be completed by March 2019. We estimate that our capital investment for the second stage will be approximately US$95 million (S/.319.2 million).
Unlike other toll roads in Peru, Norvial charges toll fees in both directions. Our road is highly transited both by heavy vehicles, primarily for the purpose of transporting goods, and also by passenger vehicles, which typically use the road to access tourist destinations. The following table sets forth average daily traffic volume and average toll fees charged for vehicle equivalents in respect to the Norvial toll road concession for 2015, 2016 and 2017.
| For the year ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
|
Average daily traffic by vehicle equivalents (1) |
21.965 | 24.140 | 24.965 | |||||||||
|
Average toll fee charged for vehicle equivalents (in S/.) |
13.83 | 14.3 | 14.76 | |||||||||
| (1) | Each automobile is counted as one equivalent vehicle and commercial vehicles (such as trucks or buses) represent the number of equivalent vehicles equal to the ratio between the toll rate applicable to commercial vehicles and that which is applicable to one automobile. |
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The table below sets forth selected financial information relating to Norvial.
| For the year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 | 2017 | |||||||||||||
| (in millions of S/.) |
(in millions of
US$) (1) |
|||||||||||||||
|
Revenues |
246.2 | 216.3 | 149.5 | 46.1 | ||||||||||||
|
Net profit |
40.9 | 47.3 | 49.4 | 15.2 | ||||||||||||
|
EBITDA |
68.9 | 77.7 | 81.4 | 25.1 | ||||||||||||
|
EBITDA margin |
28.0 | % | 35.9 | % | 54.5 | % | 54.5 | % | ||||||||
| (1) | Calculated based on an exchange rate of S/./.3.245 to US$1.00 as of December 31, 2017. |
Survial
Under our Survial concession, we operate and maintain a 750 km road from the San Juan de Marcona port to Urcos, Peru, which is connected to an interoceanic road that runs up to the Peruvian-Brazilian border. The road has five toll stations and three weigh stations. The concession was awarded to Survial in 2007 for a 25-year term. We own 99.9% of Survial. The following map shows the location of the road in Peru.
Our obligations under the concession include the construction of the road, which was completed in 2010.
Our revenue from this concession consists of an annual fee paid to Survial by the Peruvian Ministry of Transport and Communications in consideration for the operation and maintenance of the road, which fee can vary depending on the amount of maintenance required due to road damages. In 2015, 2016 and 2017 the fee amounted to US$33.9 million (S/.115.7 million), US$8.1 million (S/.27.2 million) and US$28.4 million (S/.92.2 million), respectively. Our revenue in this concession does not depend on traffic volume.
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Canchaque
Under our Canchaque concession, we operate and maintain a 78 km road from the towns of Buenos Aires to Canchaque, in Peru. The road has one toll station. The concession was awarded to Canchaque in 2006 for a 15- year term. We own 99.9% of Canchaque. Our obligations under the concession include the construction of the road, which was completed in 2009. Our revenue from this concession consists of an annual fee paid by the Peruvian Ministry of Transport and Communications in consideration for the operation and maintenance of the road, which fee can vary depending on the amount of road maintenance required due to road wear and tear. In 2015, 2016 and 2017, the fee amounted to US$1.3 million (S/.4.4 million), US$1.2 million (S/.4.0 million) and US$2.6 million (S/.8.5 million), respectively. Our revenue in this concession does not depend on traffic volume.
Additional Toll Road Projects
We continuously evaluate infrastructure projects and strategically present public-private partnership proposals and participate in bidding processes for road concessions. In 2012 we were awarded, and in 2013 we signed the contract for, a 40-year concession for a 4.6 km extension of Vía Expresa Sur, one of the main roads in Lima, which crosses the city from north to south. The road will connect downtown Lima to Panamericana Sur, a highway that runs from Ecuador to Chile. Our estimate of the total investment under the concession, as submitted in our bid, is approximately US$200 million (S/.672 million). Such investment will be made during the construction phase, which was originally to be completed in 2018. Our revenue will derive from the collection of a toll fee upon completion of the construction. The concession is expected to generate a minimum annual revenue of US$18 million (S/.60.5 million) during the first two years of the concession term, US$19.6 million (S/.65.9 million) for the third year. If in a particular year, our annual revenue is lower than the minimum guaranteed, we expect the government to compensate us for the difference, up to an amount not to exceed US$10 million (S/.33.6 million). The beginning of the construction phase is subject to expropriation by the government of the land necessary for the construction of the road. Moreover, in June of 2017, we signed Initial and Additional Acts of Suspension of the Concession with the municipality of Lima to freeze the responsibilities of the government, on the one hand, and the concessionaire, on the other hand, with respect to the concession for a period of 12 months. The concessionaire continues to act as custodian of certain assets of which it had taken possession and continues to maintain certain performance guaranties in connection with the concession. Also, the government and the concessionaire continue to meet and coordinate aspects of the project, with the goal of resuming operations. We cannot assure you that this concession contract will be resumed.
A joint operation in which we have a 50% interest has been awarded, and is in the process of negotiating the terms for, a 37-year concession for Via Expresa Javier Prado, a 20 km toll road that crosses Lima from east to west, traversing through eight districts. According to estimates from the Municipality of Lima, the total investment in the concession is expected to amount to approximately US$700 million (S/.2,352 million). Such investment will be made during the construction phase which is expected to take between five to seven years. Our revenue will derive from the collection of a toll fee upon completion of the construction. This concession was awarded to the joint operation at the end of the 1990s and negotiations were discontinued but were resumed in 2012. A project contract 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 prior to approving the project. Subsequently, on July 26, 2017, the municipality of Lima signed an agreement that annulled the granting of the concession. The company has initiated legal action in Peru against such decision, and the municipality of Lima responded, but a decision remains pending. A preliminary injunction is pending that would prevent the municipality of Lima from granting the concession to another party. We cannot assure you that our position in these proceedings will prevail, nor can we assure you if or when the concession contracts will be agreed or whether the contractual terms will be favorable to us.
These projects are not included in our backlog. See “Item 3.D. Key Information—Risk Factors—Risks Related to our Infrastructure Business.”
Mass Transit
In 2011, we were awarded a 30-year concession for the operation of Line One of the Lima Metro, Peru’s only urban railway system. The concession was awarded to our subsidiary GyM Ferrovías, in which we hold a 75% ownership interest, with the other 25% being held by Ferrovías S.A.C. Our obligations under the contract include: (i) the operation and maintenance of the five trains provided by the government; (ii) the acquisition of 19 new trains on
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behalf of the Peruvian government, which will be the legal owner of such trains; (iii) the operation and maintenance of the 19 new trains (24 trains in the aggregate); and (iv) the design and construction of the railway maintenance and repair yard, which was built by our E&C segment. We currently have all 24 trains (including two backup trains) in operation. The construction of the second stretch of Line One was completed in July 2014, and started operations on July 25, 2014.
We entered into the fourth addendum to the Lima Metro concession contract on July 11, 2016, in order to expand the transportation capacity of Line One. In accordance with the fourth addendum, the expansion project involves: (i) the purchase of 20 new trains with five-car from Alstom; (ii) the purchase of 39 new cars from Alstom, to be coupled with the 19 existing Alstom trains and the 20 new Alstom trains, resulting in a consolidated fleet of 39 Alstom trains with a six-car configuration; and (iii) the expansion and improvement of the existing infrastructure, including revamping and improvement of five stations, improvements in the electrical systems, a new access route to the maintenance workshop and new switches on the main track. The construction of the expansion of the infrastructure will be carried out by our E&C segment and it is scheduled to be completed by the end of 2018 with the additional trains and rail cars to be delivered by the end of 2019.
As compensation for the investments of the expansion project, we are entitled to receive from the Ministry of Transportation and Communication, an advance payment of 30% of each investment component as well as the balance of 70% of each investment component compensated through an annual payment for complementary investments ( pago annual por inversiones complementarias ), which represents the unconditional and irrevocable right to receive a series of 56 quarterly payments from the Ministry of Transportation and Communication. In 2016 we received the advance payment of the trains and cars, and in the third quarter of 2017 we have received the advance payment corresponding to the infrastructure expansion.
The construction of the first and second stretches of Line One was carried out by our E&C segment. The operation and maintenance of the trains is carried out by our subsidiary Concar. The map below shows the route of Line One.
As of December 31, 2017, GyM Ferrovías had spent a total of S/.8.0 million (US$2.4 million) in capital expenditures in connection with the Lima Metro.
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Our revenue from this concession consists of a quarterly fee that we receive from the Ministry of Transport and Communications based on the kilometers travelled per train and adjusted for inflation, with the fee per kilometer, the number of trains required to be in operation and the number of kilometers that we are required to travel established by the terms of the concession. Our revenues do not depend on passenger traffic volume.
As of May 31, 2018, we operated 34 trains (including three backup trains), which we expect to enable us to travel 3,476,154.48 kilometers per year. The average frequency of the trains is 4 to 8.5 minutes and the fee per kilometer traveled is, for our original 24 trains, S/.81.43, and for our 10 newer trains, S/.53.19.
Pursuant to the concession, we must comply with certain requirements in the operation of the trains. According to the concession, at least 95% of our trains must be running and available for use and not less than 85% of our trains that are available for use must arrive to destination on scheduled time. The table below shows our monthly average results during 2017.
Water Treatment
In 2010, we were awarded a 25-year concession for the construction, operation and maintenance of La Chira waste water treatment plant in the south of Lima. The project is aimed at addressing Lima’s environmental problems caused by sewage discharged directly into the sea. We hold a 50% share in this concession and our partner Acciona Agua holds the remaining 50%. The plant began operations in June 2016.
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La Chira’s total investment in the concession was S/.250 million (US$74.4 million). Once the project is completed, La Chira will be entitled to collect (i) an annual payment for the investment made in the construction of the project for an amount of S/.24.2 million (approximately US$7.1 million), and (ii) and annual payment for the operation and maintenance of the project for an amount of S/.6.8 million. These fees will be paid by Sedapal S.A., the public utility company responsible for the supervision of the water service in Lima, for a period of 25 years. We funded our construction costs related to La Chira through the sale of government certificates to financial institutions, and, as a result, will not receive future cash flows from item (i). See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting Our Results of Operations—Infrastructure.” A joint operation in which our E&C segment participates is undertaking the construction of the waste water treatment plant.
Energy
We currently operate three energy businesses within our Infrastructure segment: Exploration and Production; Natural Gas; and Transport and Distribution. We operate and extract oil from four onshore fields (Block I, Block III, Block IV and Block V) located in the provinces of Talara and Paita in northern Peru. We have two long-term hydrocarbon extraction service contracts with Perupetro, the Peruvian entity responsible for the administration and supervision of all exploration and production contracts in Peru, under which we operate two oil producing fields, Blocks I and V. In addition, we have two long-term license contracts with Perupetro for two other blocks, Block III and IV, which started operations in April 2015. During 2017, the oil production of our four blocks was approximately 3,140 bbl per day. We also own and operate a natural gas processing plant located in northern Peru, which processes and fractions natural gas liquids and delivers dry gas to a gas-fired power generation company under a long-term processing and fractionation agreement. In addition, we are a 50% partner in two consortiums named Consorcio Terminales (CT) and Terminales del Peru (IP) both of which have contract with Petroperú, a state owned oil and gas company, to operate and maintain ten fuel storage terminals.
In addition, we are a 50% partner in Oil Tanking Andina Services S.A.C. (“OTAS”). This subsidiary operates a fuel terminal named Terminal Marino Pisco Camisea under a contract subscribed with Pluspetrol to operate an export terminal for gasoline, diesel, propane and butane. Additionally, through OTAS, we are also a 25% partner in Logística Químicos del Sur S.A. (“LQS”), which operates the Terminal de Químicos de Matarani and which in 2017 dispatched 54,878 tonnes of sodium hydrosulfide for international mining companies.
The table below sets forth selected financial information relating to our Energy line of business.
| For the year ended December 31, | ||||||||||||||||
| 2015 (1) | 2016 | 2017 | 2017 | |||||||||||||
| (in millions of S/.) |
(in millions of
US$) (2) |
|||||||||||||||
|
Revenues |
389.4 | 382.2 | 436.9 | 130.0 | ||||||||||||
|
Net Profit |
20.2 | 12.0 | 38.1 | 11.3 | ||||||||||||
|
EBITDA |
121.8 | 99.5 | 142.1 | 42.3 | ||||||||||||
|
EBITDA margin |
31.3 | % | 26.0 | % | 32.5 | % | 32.5 | % | ||||||||
| (1) | Includes production from the start of operations of Blocks III and IV in April 2015. |
| (2) | Calculated based on an exchange rate of S/3.245 to US$1.00 as of December 31, 2017. |
The pie charts below set forth the breakdown of our revenues and EBITDA from our Energy line of business for 2017.
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| Revenues | EBITDA | |
|
||
Oil and Gas Production
We operate and extract oil from four mature fields (Block I, Block III, Block IV and Block V) located in the provinces of Talara and Paita in northern Peru. Two of these fields, Blocks I and V, are operated under long-term service contracts under which we provide hydrocarbon extraction services to Perupetro. Hydrocarbons extracted from these two blocks belong to Perupetro, which in turn pays us, once a month, a variable fee per barrel of lifted hydrocarbons. This extraction fee is based on a basket of international crude prices and the level of production. The other two fields, Blocks III and IV, are operated under long-term license contracts with Perupetro. The hydrocarbons extracted are owned by our subsidiary GMP, which in turn pays royalties, on a fortnightly basis, to Perupetro, based on the average prices of three international crude oil prices: Fortis, Suez Blend and Oman Blend crudes. Our activities are focused on proved reserves development and production and are conducted in mature oil fields, which have been producing oil for over 100 years in the case of Block I, approximately 96 years in the case of Block III, approximately 95 years in the case of Block IV, and over 50 years in the case of Block V. We believe our activities in these fields bear limited exploration risk.
The following table shows selected information about our fields.
|
Property |
Basin |
GMP’s
Ownership |
Expiration |
Developed
Acres |
Undeveloped
Acres |
|||||||||||||||
|
Block I |
Talara | 100 | % | 2021 | 25,154 | 4,110 | ||||||||||||||
|
Block III |
Talara | 100 | % | 2045 | 7,475 | 80,986 | ||||||||||||||
|
Block IV |
Talara | 100 | % | 2045 | 8,400 | 64,550 | ||||||||||||||
|
Block V |
Talara | 100 | % | 2023 | 6,320 | 2,220 | ||||||||||||||
Block I:
We operate and extract oil and natural gas from Block I under a 20-year hydrocarbon extraction service contract with Perupetro, which was extended for an additional 10-year term and expires in December 2021. Average daily production during 2017 was 852 barrels of crude oil. We operate 204 wells using various oil extraction systems and operate a network of production batteries and pipelines to collect, measure and deliver oil in fiscalization point close to the Talara refinery. The field is located in the province of Talara, department of Piura, in northern Peru, approximately five miles from the Talara refinery, the second largest refinery in the country. Block I is the oldest oil producing field in Peru and has been producing oil since around 1890.
Block III:
We operate and extract oil and natural gas from Block III under a 30-year license agreement with Perupetro, which expires in April 2045. Average daily production during 2017 was 734 barrels of crude oil. We operate 167 wells using various oil extraction systems and operate a network of production batteries and pipelines to collect, measure and deliver oil in a fiscalization point close to the Talara refinery, which purchases the oil according to a contract based on an average price of three international crude oil prices: Fortis Blend, Suez Blend and Oman crudes, as adjusted by certain factors. The field is located between the provinces of Talara and Paita, department of Piura, in northern Peru, approximately 21 miles from the Talara refinery.
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Block IV:
We operate and extract oil and natural gas from Block IV under a 30-year license agreement with Perupetro, which expires in April 2045. Average daily production during 2017 was 1,454 barrels of crude oil. We operate 251 wells using various oil extraction systems and operate a network of production batteries and pipelines to collect, measure and deliver oil in a fiscalization point close to the Talara refinery, which purchases the oil according to a contract based on an average price of three international crude oil prices: Fortis Blend, Suez Blend and Oman crudes, adjusted for costs related to hydrocarbon transportation. The field is located in the province of Talara, department of Piura, in northern Peru, approximately 21 miles from the Talara refinery.
Block V:
We operate and extract oil and natural gas from Block V under a 20-year hydrocarbon extraction service contract with Perupetro, which was extended for an additional 10-year term and expires in October 2023. Average daily production during 2017 in this field was 99 barrels of crude oil. We operate 32 wells in this field using various oil extraction systems. The Block V field is located in the province of Los Órganos, department of Piura, Peru, close to the border with Ecuador. Block V has been producing oil since the 1950s.
The map below shows the geographic location of our oil producing blocks in northern Peru.
For Block I and Block V, we are entitled to a variable fee paid by Perupetro, which is based on the level of production of each field and a price formula that is based on an average price of three international crude oil prices: Fortis blend, Suez blend and Oman crudes, and a discount over this price of approximately of 72% per barrel. For Block III and Block IV, we pay royalties to Perupetro based on an average price of three international crude oil prices: Fortis blend, Suez blend and Oman crudes. The royalties paid to Perupetro were US$12.76 per barrel during 2016 and US$18.79 per barrel during 2017.
During 2015, 2016 and 2017, we received an average revenue (for all blocks) of US$45.59, US$38.55 and US$49.19, respectively, per barrel of extracted oil, which was equivalent to approximately 84.26 %, 88.52% and 91.84%, respectively, of average Brent crude oil prices in the same years. We are not committed to provide a fixed volume of oil or natural gas under our four contracts.
We produce natural gas as a byproduct of the production of crude oil (an average of 7,291 MMcf per day during 2017). In Block I, we provide natural gas to ENEL under a “take or pay” contract (an average of 5,619 MMcf
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per day during 2017), and we pay to Perupetro a fee which varies depending on market conditions. The additional volume of natural gas extracted is sent to our Pariñas plant to be processed and commercialized as liquid natural gas. In Block V, we reinject the natural gas produced back into the wells. In Block III, we use part of the produced gas as fuel to operate wells equipment (pumping units) and we are looking for a market to sell the excess. In Block IV, we also use a volume of gas as fuel and the residual volume is burnt. Our revenues for the sale of natural gas are not material relative to our oil production revenues.
Estimated Proved Reserves:
The following table sets forth estimated proved crude oil and natural gas reserves in Blocks I, III, IV and V as of December 31, 2017. We have only included estimates of proved and have not included any estimates of probable and possible reserves.
|
Crude Oil
(Mbbl) |
Natural Gas
(MMcf) |
Crude Oil
Equivalents (MBoe) |
||||||||||
|
Block I: |
||||||||||||
|
Proved developed producing |
1,4076 | 9,354 | 2,709 | |||||||||
|
Proved developed non—producing |
— | — | — | |||||||||
|
Proved undeveloped |
— | — | — | |||||||||
|
Total proved reserves |
1,406 | 9,354 | 2,709 | |||||||||
|
Block III: |
||||||||||||
|
Proved developed producing |
2,635 | — | 2,635 | |||||||||
|
Proved developed non—producing |
22 | — | 22 | |||||||||
|
Proved undeveloped |
11,989 | — | 11,989 | |||||||||
|
Total proved reserves |
14,647 | — | 14,647 | |||||||||
|
Block IV: |
||||||||||||
|
Proved developed producing |
4,475 | — | 4,475 | |||||||||
|
Proved developed non—producing |
228 | — | 228 | |||||||||
|
Proved undeveloped |
5,844 | — | 5,844 | |||||||||
|
Total proved reserves |
10,547 | — | 10,547 | |||||||||
|
Block V: |
— | |||||||||||
|
Proved developed producing |
256 | — | 256 | |||||||||
|
Proved developed non—producing |
— | — | — | |||||||||
|
Proved undeveloped |
— | — | — | |||||||||
|
Total proved reserves |
256 | — | 256 | |||||||||
|
Total: |
||||||||||||
|
Proved developed producing |
8,412 | 9,354 | 10,075 | |||||||||
|
Proved developed non—producing |
251 | — | 251 | |||||||||
|
Proved undeveloped |
17,833 | — | 17,833 | |||||||||
|
Total proved reserves |
26,496 | 9,354 | 28,159 | |||||||||
Proved reserves are those quantities of oil and natural gas which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. To achieve reasonable certainty, we employed methodologies that have been demonstrated to yield results with consistency and repeatability. The methodologies and economic data used in the estimation of the proved reserves in the fields include, but are not limited to, well logs, geologic maps and available down hole and production data, seismic data, and well test data.
Reserve amounts were based on the 12-month unweighted arithmetic average of the first-day-of-the-month Brent crude price for each month in the period January through December 2017, which, pursuant to our contractual agreements, resulted in average oil and gas prices of US$53.02 per barrel and US$3.36 per million British Thermal Units, respectively, that for the purpose of reserve amount estimation were assumed to remain constant.
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Proved undeveloped reserves in the fields as of December 31, 2017 were 17,833 MBbbl consisting of 17,833 Mbbl of crude oil (0 MMcf of proved undeveloped reserves of natural gas). We estimate that during 2017, proved undeveloped reserves increased by 2,905 Mboe of crude oil and approximately 1,776 Mboe of crude oil of proved undeveloped reserves were converted into proved developed reserves. Capital expenditures, for both drilling activities and workovers, made during 2017 to convert undeveloped reserves to prove developed reserves amounted to approximately US$17.04 million (S/.55.3 million).
The principal changes in proved undeveloped reserves during 2017 were:
| • | Crude oil reserves: in 2017, due to drilling in Block IV and to an increase in the price of oil, 2.570 MMbbl were re-categorized from “resources” to “reserves.” In addition, 1,408 MMbbl were recategorized from “undeveloped” to “developed” reserves). As a result, proved, undeveloped crude oil reserves increased 1,162 MMbbl during 2017; |
| • | Associated natural gas reserves increased 1,742 Mboe (9,802 MMcf) during 2017 due to development of a project to transport gas of the Block IV to our gas processing plant, which remains in progress. |
For changes in proved developed and undeveloped reserves from December 31, 2015 to December 31, 2017, see supplementary data (unaudited) annexed to our audited annual consolidated financial statements included in this annual report.
Qualifications of Technical Persons and Internal Controls Over Reserves Estimation Process:
The reserves estimates shown in this annual report have been prepared internally by our engineers in accordance with the definitions and guidelines of the SEC. Our reserves are estimated at the property level and compiled by our engineering staff. Our engineering staff interacts with our internal staff of operations engineers and geoscience professionals and with accounting employees to obtain the necessary data for the reserves estimation process. Our reservoir engineers and geoscience professionals have worked to ensure the integrity, accuracy and timeliness of the data, methods and assumptions used in the preparation of the reserves estimates. Mr. Luis Huaranga and Javier Portuguez are our Reservoir Engineers. The reserves estimate report was submitted to our Committee of Reserves, which is formed by Mr. Anthony Alfaro (Exploration and Production Manager), Mr. Iván Miranda (Exploration and Production Technical Manager), Mr. Jose Pisconte Lomas (Chief of Geology), and Mr. Manuel Gomez (Chief of Reservoir Engineering). Mr. Huaranga holds a Petroleum Engineering degree from Universidad Nacional de Ingeniería in Lima, Peru and has 20 years of experience, developed as a reservoir engineer at Pluspetrol, Petrobras, and Repsol. He has been working for GMP since September 2016. Mr. Portuguez holds a Petroleum Engineering degree from Universidad Nacional de Ingeniería in Lima, Peru and has 23 years of experience, developed as a production and reservoir engineer at Mercantile and Interoil Peru. Mr. Gomez holds a Petroleum Engineering degree from Universidad Nacional de Ingeniería in Lima, Peru and has 10 years of experience, most of it as drilling, completion, stimulation, and reservoir engineer. Mr. Pisconte Lomas, holds a Geologist Engineering degree and a Regional Geology Master’s degree from Universidad Nacional Mayor de San Marcos and has 25 years of experience in the oil industry. Mr. Miranda holds a degree in Petroleum Engineering from Universidad Nacional de Ingeniería in Lima and a Petroleum Engineering Master’s degree from Texas A&M University of Texas—USA, and has 33 years of experience in the oil industry developed at Petroperu, Unipetro ABC, and GMP. Mr. Alfaro holds a Petroleum Engineering degree from Universidad Nacional de Ingeniería in Lima, Peru, Master´s degree in Business Administration from Universidad Rafael Belloso Chacin in Maracaibo, Venezuela, a Master´s degree in Projects Management an Administration from Universidad de Ciencias Aplicadas in Lima, Peru and has 28 years of experience developed at Petroperu, Perez Companc Peru and Argentina, Petrobras Venezuela and Peru, Grupo Synergy E&P Ecuador, and GMP.
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Production, Revenues, Prices and Costs:
The following table sets forth information regarding our production, revenues, prices and production costs for 2015, 2016 and 2017.
| For the year ended December 31, | ||||||||||||
| 2015 (1) | 2016 | 2017 | ||||||||||
|
Production volumes (2) : |
||||||||||||
|
Crude oil (Mbbl) |
||||||||||||
|
Block I |
507.9 | 381.3 | 310.9 | |||||||||
|
Block III |
319.7 | 347.7 | 267.8 | |||||||||
|
Block IV |
174.7 | 232.7 | 530.9 | |||||||||
|
Block V |
59.0 | 46.9 | 3.2 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total (crude oil Mbbl) |
1,061.40 | 1,008.60 | 1,145.8 | |||||||||
|
Natural gas (MMcf) |
||||||||||||
|
Block I |
3,729.9 | 2,025.8 | 2,979.0 | |||||||||
|
Block III |
1,075.7 | — | ||||||||||
|
Block IV |
156.7 | — | ||||||||||
|
Block V |
175.7 | — | ||||||||||
|
|
|
|
|
|
|
|||||||
|
Total (natural gas MMcf) |
5,138.0 | 2,025.8 | 2,979.0 | |||||||||
|
Crude oil equivalents (Mboe) |
913.4 | 360.1 | 529.5 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total Company |
1,974.8 | 1,368.7 | 1,675.3 | |||||||||
|
Average sales prices (3) : |
||||||||||||
|
Crude oil (US$/bbl) |
45.59 | 38.48 | 49.81 | |||||||||
|
Natural Gas (US$/Mcf) |
2.15 | 1.53 | 4.07 | |||||||||
|
Crude oil equivalents (US$/boe) |
37.56 | 30.62 | 41.95 | |||||||||
|
Costs and expenses (3) : |
||||||||||||
|
Production expenses (US$/boe) |
10.07 | 10.08 | 17.35 | |||||||||
|
Royalties (US$/boe) |
4.0 | 5.4 | 9.27 | |||||||||
|
General and administrative expenses (US$/boe) |
2.42 | 2.09 | 2.02 | |||||||||
|
Depreciation, depletion, amortization and accretion expenses (US$/boe) |
8.57 | 12.58 | 8.99 | |||||||||
| (1) | Includes operations of Blocks III and IV starting in April 2015. |
| (2) | Hydrocarbons extracted from Blocks I and V belong to Perupetro, which in turns pays us a per barrel fee for lifted hydrocarbons. Hydrocarbons extracted from Blocks III and IV belong to GMP, which in turn pays Perupetro a royalty as per the extracted hydrocarbons. |
| (3) | Crude oil sales volume differs from total production volume due to operational circumstances such as the inventory of product stored in our field batteries at the end of each monthly measurement. “Average sales prices” refers to the fees received in consideration for our extraction services, which do not equal the sales prices of crude oil. Average sales prices have been calculated using a basket price formula according to the service and license contracts of each block. Such formulation is at a discount to global oil prices for Blocks I and V, and for Blocks III and IV we pay royalties on the oil extracted. Per unit costs have been calculated using sales volumes. |
Acreage, Productive and Development Wells, Drilling:
The following table sets forth certain information regarding the total developed and undeveloped acreage as of December 31, 2017.
|
Formation |
Developed Acreage | Undeveloped Acreage | ||||||
|
Block I |
||||||||
|
Pariñas |
2,271 | 70 | ||||||
|
Mogollón |
2,583 | 320 | ||||||
|
Basal Salina |
1,850 | 100 | ||||||
|
Mesa |
1,485 | 1,650 | ||||||
|
|
|
|
|
|||||
|
Total Block I |
8,189 | 2,140 | ||||||
|
Block III |
||||||||
|
Salina Mogollón |
7,475 | 3,983 | ||||||
|
Amotape |
1,750 | 2,370 | ||||||
|
|
|
|
|
|||||
|
Total Block III |
9,225 | 6,353 | ||||||
|
Block IV |
||||||||
|
Pariñas |
4,155 | 3,402 | ||||||
|
Palegreda |
5,292 | 3,951 | ||||||
|
Mogollón |
1,470 | 2,606 | ||||||
|
|
|
|
|
|||||
|
Total Block IV |
10,917 | 9,959 | ||||||
|
Block V |
||||||||
|
Verdún |
530 | 650 | ||||||
|
Ostrea |
175 | 115 | ||||||
|
Mogollón |
1,350 | 120 | ||||||
|
|
|
|
|
|||||
|
Total Block V |
2,055 | 885 | ||||||
|
|
|
|
|
|||||
|
Total |
30,386 | 19,337 | ||||||
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As of December 31, 2017, we had a total of 654 producing wells. Our wells are oil wells, many of which also produce natural gas. We do not have interests in wells that only produce natural gas.
The following table shows the number of development and exploratory wells drilled during 2015, 2016 and 2017 in Blocks I, III, IV and V.
| For the year ended December 31, | ||||||||||||
| 2015 (1) | 2016 | 2017 | ||||||||||
|
Development Wells |
||||||||||||
|
Productive |
4 | 11 | 22 | |||||||||
|
Dry |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
4 | 11 | 22 | |||||||||
|
Exploratory Wells |
||||||||||||
|
Productive |
— | — | 1 | |||||||||
|
Dry |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
— | — | 1 | |||||||||
| (1) | Includes operations of Blocks III and IV, starting in April 2015. |
During 2015, 2016 and 2017 we invested US$3.8 million (S/13.0 million), US$5.4 million (S/18.1 million) and US$16.5 million (S/53.6 million), respectively, in drilling activities. We drilled a total of 23 wells during 2017 in Block IV. All of them are productive wells.
During 2014, 2015 and 2016 we invested US$25.6 million (S/.76.5 million), US$3.8 million (S/.13.0 million) and US$5.4 million (S/.18.1 million), respectively, in drilling activities. We drilled a total of eleven wells during 2016 in Block IV. All of them are productive wells.
Under the terms of our agreements with Perupetro, at the time the contract terminates, we are required to close non-producing wells that we have drilled. As of December 31, 2017, we estimated that we will be required to close 48 wells in Block I in December 2021 and 6 wells in Block V in October 2023, 40 wells in Block III and 50 wells in Block IV in December 2045. We have created a provision in our financial statements for the costs relating to those well closings. See notes 5.1(d) and 18(d) to our audited annual consolidated financial statements included in this annual report.
Gas Processing Plant
We own a gas processing plant located 7 km north of the city of Talara in Piura, Peru. We currently have under a long-term delivery and gas processing and fractioning contract with Enel Generación Piura (formerly known as EEPSA), according to which Enel Generación Piura delivers wet natural gas that it purchases from onshore and offshore gas operators in the area. We then process and fraction the gas into two products: (i) dry natural gas, which can be used as fuel in Enel Generación Piura’s gas-fired turbine; and (ii) natural gas liquids, which are sold in the Peruvian market. Under the terms of the agreement, we are responsible for all operating costs of the gas processing plant but are also entitled to keep revenues from the sale of the natural gas liquids to third parties after payment of a variable royalty, based on the volume of gas processed, to Enel Generación Piura. Our current gas processing and fractionation contract with Enel Generación Piura expires in 2023.
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Our gas processing plant has the capacity to process up to 44 MMcf per day. We processed 31.7 MMcf per day during 2015, 33.19 MMcf per day during 2016 and 30.57 MMcf per day during 2017. Approximately 70% of the volume processed by our gas processing plant depends on the gas volumes provided by Enel Generación Piura for processing and use on its gas-fired turbines. These volumes vary per month and depend upon the power dispatch curve of Enel Generación Piura among Peruvian power generation plants. In rainy months (December to April) where hydroelectric power generation in Peru is typically higher, gas volumes demanded by Enel Generación Piura are lower than in dryer months (May to November) in which activity of thermal generators tends to be higher. The remaining approximately 13% of the volume processed by our gas processing plant depends on the volumes of gas extracted by GMP in Block I, which we process and commercialize as liquid natural gas.
Fuel Storage Terminals
We are a 50% partner in Consorcio Terminales with a Peruvian affiliate of Oiltanking GmbH, one of the world’s largest operators of independent terminals for bulk liquid storage. Consorcio Terminales had a contract with Petroperú to operate the North and South Fuel Terminals in Peru, which expired in August 2014. In May 2014, there was a public bidding for the operation of the North, Center and South Terminals. In June 2014, Terminales del Perú, a new consortium also integrated by our subsidiary GMP S.A. and Oiltanking Peru was awarded a concession for the operation of the North and Central Fuel Terminals for Petroperú. The contracts have a 20-year term and consist of the operation of four terminals in the north and one terminal in the center of the country, providing storage and dispatching bulk liquid fuel. The total amount of the committed investment for both projects is approximately US$37.2 million (S/.125 million), while the total amount of the additional investment, which will be reimbursed, is approximately US$186 million (S/.625 million). There was no winner in the public bidding for the operation of the South Fuel Terminals, and the contract of Consorcio Terminales was extended through contract amendments: first, for an additional year until August 2015; subsequently, for two more years until August 2017; and most recently, in July 2017 for an additional year until August 2018. The total amount of the additional investment required during this two year period, which will be reimbursed, is approximately US$10 million (S/.84 million). On June 6, 2018, the concessionaire, Consorcio Terminales, received a letter from Petroperú to initiate negotiations to extend the contract up to one more year.
Our open-access terminals offer our customers dependable and critical handling and storage services for refined petroleum liquid products, maintaining high quality, safety and environmental standards. We provide storage, handling and loading and uploading services for a broad range of refined petroleum liquid products, including gasoline, aircraft fuel, diesel and heavy fuel oil. We deliver the liquids into two types of transportation systems, railroad cars and cistern trucks. Because of the strategic location of our assets, our deep-water access, inland terminals and our aggregate storage capacity of 2.2 MMbbl in the North and Central Terminals and of 1.4 MMbbl in the South Terminals, we believe that we are well-positioned to cover the needs of our clients, the two principal refineries in Peru. The map below shows the location of each of our fuel storage terminals in Peru.
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Under the current contracts, Consorcio Terminales and Terminales del Perú receive revenues paid in connection with monthly reserved volume in tanks for refined crude products (storage fee) and for volumes loaded and delivered into railroad cars or cistern trucks to each terminal (throughput fee). The storage fee per barrel, is based upon reserved volumes whether they are received or not. The throughput fee is paid based on effective barrels delivered per month. During 2015, 2016 and 2017, Consorcio Terminales and Terminales del Perú generated revenues of US$66.8 million (S/.228.0 million), US$74.1 million (S/.249.0 million) and US$39.42 million (S/.127.9 million) (we are entitled to 50% of the joint operation revenues), respectively. Under the contracts, Consorcio Terminales and Terminales del Perú are responsible for paying the fuel terminals operating and maintenance costs and also paying a royalty fee to Petroperú based on effective barrels delivered each month.
At the current stage of the contracts, any capital expenditure we invest in the fuel storage terminals can be recouped from any present and future royalties we owe to Petroperú.
Other Terminal Operations
We are a 50% partner in Oiltanking Andina Services S.A.C. (“OTAS”). This subsidiary operates a fuel terminal named “Terminal Marino Pisco Camisea” under a contract subscribed with Pluspetrol to operate an export terminal for gasoline, diesel, propane and butane. In 2016, this terminal dispatched 30.0 million barrels of natural gas liquids. Additionally, through OTAS, we are also a 25% partner in LQS, which operates the “Terminal de Químicos de Matarani,” which in 2017 dispatched 54,878 tonnes of sodium hydrosulfide for international mining companies. During 2015, 2016 and 2017 these activities generated revenues in the aggregate of approximately US$4.6 million (S/.15.7 million), US$6.3 million (S/.21.2 million) and US$6.6 million (S/.21.4 million), respectively.
Operation and Maintenance of Infrastructure Assets
We began providing our operation and maintenance of infrastructure assets services in 1994 when we were awarded the concession for the Arequipa Matarani highway in southern Peru. With this experience, in 2003, we began providing operation and maintenance services to Norvial. In 2007, the Peruvian government initiated Proyecto Peru, a program aimed at maintaining roads not under concession to ensure their longevity. Proyecto Peru allowed us to develop new business opportunities providing maintenance services to more than 4,000 km of public roads in Peru. We believe the experience we have gained operating highway and transportation concessions positioned the company to capitalize on the Peruvian government’s initiatives to increase infrastructure development.
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Our revenue in the operation and maintenance of infrastructure assets is generated either from fees we charge to Norvial, Survial, Canchaque, Pasco, Chinchaypujio, Chuquibambilla, Cora Cora and the Lima Metro to operate and maintain our concessions or from government payments through maintenance service contracts we have been awarded. As depicted in the chart below, we operate and maintain more than 2,579.3 km of Peruvian roads and highways, including our own highway concessions, in addition to the Lima Metro.
Operation and Maintenance of Infrastructure Assets
Total 2,579.3 KM
The table below sets forth selected financial information for our operation and maintenance of infrastructure assets activities.
| For the year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 (1) | 2017 | |||||||||||||
| (in millions of S/.) |
(in millions of
US$) (1) |
|||||||||||||||
|
Revenues |
334.8 | 262.7 | 378.3 | 112.6 | ||||||||||||
|
Net profit (loss) |
18.5 | 14.0 | 16.9 | 5.0 | ||||||||||||
|
EBITDA |
39.3 | 27.0 | 34.1 | 10.1 | ||||||||||||
|
EBITDA margin |
11.7 | % | 10.3 | % | 9.0 | % | 9.0 | % | ||||||||
| (1) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
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The below map illustrates the roads in Peru for which we currently provide operation and maintenance services.
We provide the following road operation and maintenance services:
| • | Routine Maintenance. These services aim to preserve roads through ongoing maintenance, including: road demarcation; cleaning; drainage; road fissure treatment, which seals cracks in roads to prevent water infiltration; slurry sealing; and micro-paving, which seals asphalt to prevent aging and improve resistance to water and surface wear. |
| • | Periodic Maintenance. These services entail activities that are performed periodically, intended to prevent the occurrence or exacerbation of defects, conserve the structural integrity of roads and correct major defects. |
| • | Emergency maintenance. This maintenance work is performed whenever the need arises, such as when natural disasters damage road surfaces. |
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We also administer toll stations and weighing stations; offer road patrolling services; operate assistance call centers; and provide emergency medical services.
The operation and maintenance services we provide to the Lima Metro aim to preserve the mass transit system through ongoing maintenance, including cleaning of the trains and stations and providing train operators, among other services.
With respect to operation and maintenance contracts with the Peruvian government, we obtain new contracts through public bidding. With respect to contracts with our Infrastructure segment, we participate in direct negotiation. Contract length typically ranges from three to five years.
Competition
Our ability to grow through successful bids for new infrastructure concessions or other long-term contracts could be affected as a result of competition. We view our competition as including both Peruvian and international infrastructure concession operators including joint operations with partners with specialized expertise in the relevant sector. Competition varies on a case-by-case basis, depending on the main purpose of the concession.
Real Estate
Our Real Estate segment is one of the largest apartment building developers in Peru, in terms of number of units sold and value of sales in 2017, and is focused on the development and sale of affordable housing and housing as well as other real estate projects. Since commencing our operations in 1987, we have developed approximately 850,135 m2 of affordable housing (approximately 13,338 units); approximately 363,392 m2 of housing (approximately 1,743 units); approximately 170,075 m2 of office space (approximately 902 offices); and approximately 43,000 m2 of shopping centers (three shopping centers). Moreover, we are currently building approximately 130,458 m2 of affordable housing (approximately 2,028 units); approximately 23,829 m2 of housing (approximately 148 units). Our Real Estate segment also owns significant land parcels in Lima, comprising of approximately 786 hectares as of December 31, 2017, and we have sold undeveloped land in the past and intend to continue such sales in the future.
The table below sets forth selected financial information for our Real Estate business segment.
| For the year ended December 31, | ||||||||||||||||
| 2015 | 2016 (1) | 2017 (1) | 2017 (1) | |||||||||||||
| (in millions of S/., except as indicated) |
(in millions of
US$) (2) |
|||||||||||||||
|
Revenues |
215.8 | 411.5 | 647.5 | 199.5 | ||||||||||||
|
Net profit |
29.3 | 77.2 | 117.7 | 36.3 | ||||||||||||
|
Net profit attributable to controlling |
12.4 | 22.1 | 48.6 | 15.0 | ||||||||||||
|
EBITDA |
52.8 | 121.4 | 177.3 | 54.6 | ||||||||||||
|
EBITDA margin |
24.5 | % | 29.5 | % | 27.4 | % | 27.4 | % | ||||||||
|
Backlog (in millions of US$) (3) |
111.0 | 95.9 | 25.9 | 25.9 | ||||||||||||
|
Backlog/revenues ratio (3) |
1.8 | x | 0.8 | x | 0.1 | x | 0.1 | x | ||||||||
| (1) | In 2016 we recognized S/.97 million (US$28.9 million) in revenues from land sales. In 2017 we recognized S/.163.1 million (US$50.3 million) in revenues from land sales. |
| (2) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (3) | For more information on our backlog, see “—Backlog.” Backlog is calculated as of the last day of the applicable period. Revenues are calculated for such period and converted into U.S. dollars based on the exchange rate published by the SBS at such period. |
We undertake a significant amount of the activities in our Real Estate segment with partners through financing and commercial arrangements we use to purchase land and to develop real estate projects. See “—Financing.” As a result, a significant amount of our net profit in the Real Estate segment is attributable to the non-controlling interest of our partners. See also “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—General—Real Estate.”
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Principal Real Estate Activities
Our real estate developments include the following products:
| • | affordable housing; |
| • | housing; and |
| • | commercial real estate. |
We began developing affordable housing projects in 2001, following the Peruvian government’s efforts to address the country’s housing deficit, particularly for low-income families. We launched the first major affordable housing project in Peru in 2007, Parque Agustino in Lima’s El Agustino neighborhood. Since 2001, we have completed 16 affordable housing projects. As of December 31, 2017, we are developing six affordable housing projects, which are in various stages of development, including three which are in the construction phase but also are still in the process of obtaining the required approvals and permits. Three of our ongoing affordable housing projects consist of expansions of projects previously completed by us. Affordable housing consists of apartments, usually ranging between 50 and 72 m2, that are purchased through government subsidies. The Peruvian government has adopted the Nuevo Crédito Mi Vivienda and Techo Propio programs, among others, which promote access to affordable housing in Peru by providing government subsidies to individuals for the purchase of homes. In order for a unit to qualify for the Nuevo Crédito MiVivienda program, its selling price must range between S/.57,500 and S/.304,100. In order for a unit to qualify for the Techo Propio program, its selling price must range between S/ .81,000 and S/ .104, 000.
In order to be eligible for an affordable housing subsidy under the Nuevo Crédito MiVivienda program, a purchaser must not own any other home or have benefitted from a housing subsidy program in the past, among other requirements. A purchaser must also provide a down payment between 10% and 30% of the total purchase amount. Housing subsidies under this program fluctuate between S/ .6, 500 and S/ .17, 500 which incentivize purchasers with reduced monthly rates so long as they pay their mortgage loan payments on a timely basis. In order to be eligible for an affordable housing subsidy under the Techo Propio program, a purchaser must have a monthly income that does not exceed approximately S/.2,617 and must not have received any other government-sponsored housing benefit in the past, among other requirements. A Techo Propio purchaser must also show proven savings equal to at least 10% of the total purchase amount. Housing subsidies under this program is S/ .32,400. Purchasers of subsidized housing under both programs are also not required to pay a value-added tax normally applicable to residential purchases.
We develop substantially all of our affordable housing projects on land purchased from the private sector. To the extent these projects meet the requirements of a particular government subsidy program, purchasers can purchase units with government subsidies. Some of our affordable housing projects, however, such as Parque Agustino, are developed through government bidding processes. Government subsidy programs like Nuevo Crédito MiVivienda and Techo Propio have driven the demand for affordable housing in Peru, which has in turn increased our sales of affordable housing units.
Our housing developments consist of residential buildings comprised of apartments with a mid- to high-price range that do not qualify for government subsidies. Since 1987, we have developed 38 housing developments. As of December 31, 2017, we are developing four housing projects, which are in the construction stage. Our housing units typically range between 130 and 400 m2 in size.
Substantially all of our affordable housing and housing development projects are located in Lima. We have also purchased land to develop four affordable housing projects in Piura, Chimbote and Huancayo, two cities north of Lima and one in the center of the country. We intend to develop affordable housing projects in other cities outside of Lima.
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The table below sets forth number of units sold and not yet delivered and number of units delivered, as well as the value of units sold and our sales revenue for the periods indicated.
| For the year ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
|
Number of Units Delivered (1) : |
||||||||||||
|
Affordable Housing |
792 | 855 | 1,353 | |||||||||
|
Housing |
41 | 79 | 65 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
833 | 934 | 1,418 | |||||||||
|
Number of Units Sold and Not Yet Delivered (1) : |
||||||||||||
|
Affordable Housing |
1,316 | 1,620 | 1,152 | |||||||||
|
Housing |
96 | 97 | 43 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
1,412 | 1,717 | 1,195 | |||||||||
|
Total m2 Delivered: |
||||||||||||
|
Affordable Housing |
46,894 | 48,460 | 78,004 | |||||||||
|
Housing |
12,962 | 19,398 | 20,978 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
59,885 | 67,858 | 98,982 | |||||||||
|
Total m2 Sold and Not Yet Delivered: |
||||||||||||
|
Affordable Housing |
74,911 | 55,404 | 66,878 | |||||||||
|
Housing |
29,939 | 21,825 | 12,538 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
104,849 | 77,229 | 79,416 | |||||||||
|
Value of Units Delivered (in millions of S/.): |
||||||||||||
|
Affordable Housing |
99.0 | 138.0 | 170 | |||||||||
|
Housing |
92.0 | 163.0 | 221 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
191.0 | 301.0 | 391 | |||||||||
| (1) | We typically pre-sell our affordable housing and housing units before construction begins and continue to sell during construction, although we recognize revenues at the time of delivery of units. |
We develop and sell office and commercial buildings, such as shopping centers. On certain occasions, we have operated our commercial real estate and later sold it, such as Larcomar, a landmark shopping center which we built in 1998 and sold in 2010. We have also developed commercial real estate buildings in connection with our affordable housing and housing projects, such as the Parque Agustino shopping center. Since 1987, we have developed 14 office buildings, three shopping centers and one medical center. We are currently looking for a plot of land in order to develop a new office building.
Land Bank
We typically purchase land to develop real estate projects with the intention to begin construction within a 12- to 18-month period after the purchase of the land. We may also, from time to time, purchase land for subsequent resale. As of December 31, 2017, we owned approximately 786 hectares, of which 86% is located in Lima and 14% outside of Lima. We continually evaluate opportunities to purchase new land for our real estate development projects.
On February 24, 2017, we sold our interest in Project Espacio (formerly known as Cuartel San Martín) to Urbi Propiedades S.A., our partner in the project, for US$50 million (S/.168 million). On April 28, 2017, we also sold our interest (approximately 20.8%) in Promoción Inmobiliaria del Sur S.A. (“PRINSUR”) of Inversiones Centenario, which owns approximately 937.7 hectares of undeveloped land also located in Lurin, to its partner Inversiones Centenario S.A.A. for US$25 million (S/.84 million). For more information, see “Item 5.A. Operating and Financial Review and Prospect— Operating Results—Recent Developments.”
We have a 50.4% interest in Almonte, which owns approximately 738 hectares of undeveloped land in Lurin, located 30 km south of Lima. We previously sold 27 hectares of the land for industrial use. On May 31, 2018, Almonte signed a contract of sale with PRINSUR for 420.9 hectares of land for an amount of US$92.6 million.
Financing
We generally fund land purchases for our housing and commercial real estate projects through cash from our operations. For our affordable housing projects, we generally partner with real estate investment funds and insurance companies that provide between 60% and 70% of the total capital required to purchase the land and cover
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certain pre-construction costs in exchange for equity in the project. Once we acquire land for a particular real estate development project, we obtain working capital through a credit line from a financial institution, which we utilize to finance additional project needs as they arise. We also obtain financing through pre-construction sales for our affordable housing and housing projects and, to a lesser extent, our commercial real estate projects. Our affordable housing and housing projects generally require less outside financing because they are generally financed with pre-construction sales.
Sales and Marketing
We typically pre-sell our affordable housing and housing units prior to and during construction, and use the related proceeds we receive to finance the construction of the units. Our commercial and sales processes differ depending on the type of development and market segment of the development. We primarily sell our real estate development projects through an internal sales force that is assigned to particular projects and, to a lesser extent, external brokers on a non-exclusive, commission-fee basis. Our marketing efforts primarily consist of newspaper advertisements, radio and television commercials, billboards and promotional offers for referrals. We also advertise our real estate projects on our website.
We believe our brand is associated with product quality, professional operations and reliable post-sale customer service. We provide customer service call centers through which residents can report complaints or defects. Engineers respond with site visits, and repairs are made as long as the property continues to be covered by the applicable warranty or guarantee.
For our affordable housing projects, we provide post-sale customer service through our Ayni program, which aims to preserve the long-term value of our affordable housing developments by promoting a cooperative community life. Through this program, we distribute manuals that teach best practices for living in communities, offer leadership workshops, budget workshops, promote small business development, facilitate conflict resolution and provide other services. These services are provided for a six- to eight-month period following project delivery. In 2012, we initiated the Ayni contest for residents of our affordable housing projects with the aim of stimulating the sustainability of their community. Participants present an enhancement project for their community, such as a recreation center, and a jury selects the best project, which we fund and construct.
Competition
The Peruvian real estate development industry is highly competitive. The market is fragmented and no single company has a significant share of the national market. The principal competitors for our Real Estate segment are Paz Centenario Global S.A., Paz Centenario Inmobiliaria, Corporación Líder Perú S.A., Urbana Perú, Los Portales, Imagina Grupo Inmobiliario, ENACORP, Besco S.A. and Gerpal. In the coming years, we expect more competition from domestic and foreign real estate development companies who recognize the growth potential in the Peruvian residential market. The main factors that drive competition are product design and amenities, price, location and post-sale service offerings.
Technical Services
Our Technical Services segment undertakes a broad range of activities, including (i) information technology (IT) services for private clients and the government; and (ii) electricity networks services. Characterized by mid-to long-term contracts, our Technical Services segment further adds a more stable cash flow stream to our consolidated activities.
On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well.
On June 6, 2017, we sold our 89.19% interest in our former subsidiary GMD to Advent International for US$84.7 million (S/.276.9 million). Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results. We believe that this strategic decision will strengthen and boost the operating capacity of our Infrastructure segment by incorporating the experience and knowledge of our Concar team members for concession management.
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The table below sets forth selected financial information for our Technical Services business segment. (1)
| As and for the year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 | 2017 | |||||||||||||
| (in millions of S/., except as indicated) |
(in millions of
US$) (2) |
|||||||||||||||
|
Revenues |
563.9 | 841.1 | 1,061.0 | 327.0 | ||||||||||||
|
Net profit (loss) |
23.3 | (7.0 | ) | (25.7 | ) | (7.9 | ) | |||||||||
|
Net profit (loss) attributable to controlling interest |
20.0 | 1.5 | (18.1 | ) | (5.6 | ) | ||||||||||
|
EBITDA |
35.1 | 65.5 | 49.0 | 15.1 | ||||||||||||
|
EBITDA margin |
6.2 | % | 7.8 | % | 4.6 | % | 4.6 | % | ||||||||
|
Backlog (in millions of US$) (3) |
364.9 | 513.8 | 460.1 | 460.1 | ||||||||||||
|
Backlog/revenues ratio (3) |
2.2x | 2.1x | 1.4 | 1.4 | ||||||||||||
| (1) | On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well. |
| (2) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
| (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. |
The pie charts below set forth the breakdown of our revenues and EBITDA from our Technical Services for 2017.
| Revenues |
|
IT Services
We began our IT services business in 1984 providing computer equipment to companies and evolved into a technology solutions provider in 2000. In the early 1980s, Sonda, one of the main IT services providers in Latin America, was looking for a partner to represent Digital Equipment Corp. (currently, Hewlett Packard Enterprise) for the sale of hardware in Peru. Sonda’s need coincided with our diversification strategy and, therefore, we decided to jointly constitute GMD. In 1994, we bought out Sonda. Our main focus was the provision of business process and IT outsourcing services, and providing the necessary corresponding equipment, to well-known large companies and public institutions in Peru. On June 6, 2017, we sold our interest in GMD.
The infrastructure through which we operate our business includes the largest software factory in the country, two world class data centers, one of which is Tier III certified and two call centers with high availability for help desk services. In addition, we have successfully entered into strategic partnerships with key international IT vendors such as Cisco Systems, Microsoft, Hewlett-Packard, Oracle, SAP, IBM, Citrix, VMware, CA Technologies and Louis Berger Group.
On January 4, 2016, we completed the acquisition of a 52% stake in Adexus. Adexus is a leading Chilean company in the development and implementation of solutions for information technology, with the ability to integrate technological systems of high added value and over 25 years of experience in the market. It has a significant regional presence distributed between Chile, Peru and Ecuador. The remainder of Adexus is owned by Sistemas y Redes Ltda. with a 47.5% stake and Asesorías e Inversiones Busso with the remaining 0.5%.
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The table below sets forth selected financial information relating to our IT services. (1)
| For the year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 | 2017 | |||||||||||||
| (in millions of S/.) |
(in millions of
US$) (2) |
|||||||||||||||
|
Revenues |
— | 113.2 | 284.2 | 84.6 | ||||||||||||
|
Net profit |
— | (4.0 | ) | 2.3 | 0.7 | |||||||||||
|
EBITDA |
— | 33.5 | 42.4 | 12.6 | ||||||||||||
|
EBITDA margin |
|
—
|
|
29.6 | % | 14.9 | % | 14.9 | % | |||||||
| (1) | On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well. |
| (2) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
Competition
The IT services industry is highly competitive. The market includes both international companies and local or regional companies. Our main competitors, which are sometimes also our partners, include companies such as IBM, Telefónica, Indra, Tata Consultancy Services and Cosapi Data, among others.
Electricity Networks Services
We offer field and specialized services consisting of installation and routine operation and maintenance of electricity infrastructure, primarily for power utility companies in Chile and, to a lesser extent, Colombia, and Peru. Field services include day-to-day services and troubleshooting required to maintain the electric grid. Specialized services require more sophisticated and more tailored technology and expertise. With over 20 years operating experience developing, installing, operating and maintaining metering systems, we have also developed a broad range of specialized solutions to reduce electricity theft, one of the main concerns for power utility companies in Latin America.
The table below sets forth selected financial information for our Electricity Networks Services.
| For the year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 | 2017 | |||||||||||||
| (in millions of S/.) |
(in millions of
US$) (1) |
|||||||||||||||
|
Revenues |
563.9 | 727.9 | 776.8 | 231.2 | ||||||||||||
|
Net profit |
23.3 | (3.0 | ) | (28.0 | ) | (8.3 | ) | |||||||||
|
EBITDA |
35.1 | 31.9 | 6.5 | 1.9 | ||||||||||||
|
EBITDA margin |
6.2 | % | 4.4 | % | 0.8 | % | 0.8 | % | ||||||||
| (1) | Calculated based on an exchange rate of S/.3.245 to US$1.00 as of December 31, 2017. |
The field services we provide include, among others, installing and maintaining medium- and high-voltage electricity networks and public lighting networks; connecting new residential, commercial and industrial customers to the electrical grid; disconnecting and reconnecting the power supply of our clients’ customers; meter reading; verification of electricity theft; and the installation of meters and antitheft solutions. We also provide services that include changing and repairing damaged electrical equipment and maintaining, transferring and expanding the electrical grid. We have developed a sophisticated management system to monitor the efficiency of the field services we provide and increase the daily productivity of our field crews.
We also provide specialized services, which involve more technical expertise and specialized equipment, including the monitoring of electrical consumption for approximately 420,000 industrial, commercial and residential customers. We have developed specialized metering systems and anti-theft solutions for the Latin American markets. We believe we are one of two companies with a relevant market penetration of these antitheft solutions for power utility companies in our markets. We also operate laboratories that offer an array of services in response to local regulation requirements, such as meter certification, equipment testing and theft reports.
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In Brazil and Chile, we also operate the warehouse facilities of local power utility companies, which store and distribute the necessary equipment for operations, such as cables, insulators and meters. In addition, in Chile, we lease residential electricity meters to a power utility company, for which we also provide maintenance services. We have formed strategic alliances with equipment manufacturers in order to develop and commercialize specialized metering systems and anti-theft solutions.
The chart below sets forth the percentage of our 2017 revenues in each of the countries where we operate.
Revenue by Country
Contracts and Clients
We typically provide our services pursuant to long-term contracts ranging between three and five years. Most of our contracts are awarded through a non-public bidding process, although some contracts are negotiated directly with the client.
Our principal clients are power utility companies and, to a lesser extent, industrial clients, predominantly in the private sector. In Peru, we also provide services to the telecommunications industry. Our principal clients are the distribution companies of Enel, which acquired Enersis. Over the years, we have worked with the principal power utility companies in the region, including Chilectra, Saesa, Chilquinta, AES, E-CL, Endesa Chile, Ampla, Coelce, Cemig, Coelba, Elektro, Light, Codensa, Emgesa, EEC, Enertolima, Emcalo, Edelnor, Electrocentro, Enosa, and the telecommunication companies VTR, Entel, Claro and Telefonica.
Competition
The market for electricity networks services is highly fragmented and no single company has a significant share of the national market in the countries where we operate. We primarily compete with small, local privately-held service companies. We expect competition to increase in the coming years as electricity consumption grows in response to the economic growth, and relatively low per capita consumption, in the countries where we operate. The main factors that drive competition are safety; product and service quality; reliability; price; and ability to respond to increased industry regulations.
Backlog
We define our backlog as the U.S. dollar equivalent value of revenue we expect to realize in the future as a result of performing work under multi-period contracts that we have entered into. 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. For contracts denominated in soles or other local currencies, amounts have been converted into U.S. dollars based on the exchange rate published by the SBS, in the case of Peru, or other relevant authority, in the case of other jurisdictions, on December 31 of the corresponding year.
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We do not include backlog in this annual report in our Infrastructure segment for: (i) our Norvial toll road concession because its revenues from the concession are derived from toll fees charged to vehicles using the highway, and, as a result, such revenues are dependent on vehicular traffic levels; and (ii) our Energy line of business because: (a) 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) our COGA venture, which is not consolidated because it is jointly controlled (which we sold on April 24, 2017).
When we present backlog on a segment basis, we do not include eliminations that are included in our consolidated backlog. For a description of how we calculate our backlog, see our segment backlog presented below.
Our consolidated backlog as of December 31, 2017 was US$2,388.4 million. We expect to recognize as revenues 46% of our backlog by December 31, 2018, 27.9% by December 31, 2019 and 26.1% thereafter. The following table sets forth our consolidated backlog from December 31, 2013 to December 31, 2017.
Backlog (in US$ million)
Our backlog declined in 2017 and may decline further in the future, including due to the sale of assets. We cannot assure you that we will be able to continue obtaining sufficient contracts in the future in number and magnitude to grow our backlog. Additionally, the number and amounts of new contracts signed can fluctuate significantly from period to period. For example, the third quarter of 2015, we acquired a 29% participation in the construction consortium of the GSP gas pipeline project, and, as a result, we incorporated US$1.0 billion in backlog. Due to the termination of the GSP gas pipeline concession on January 24, 2017, we have removed US$855 million from the backlog, representing 30.2% of our E&C backlog and 21.4% of our total backlog as of December 31, 2016. During 2017 we also removed US$87.5 million from the backlog related to the Chavimochic project. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
The table below sets forth our ending backlog for 2015, 2016 and 2017 accounting for opening backlog for each year, annual contract bookings and adjustments, cancellations during the year and annual revenues recognized.
| 2015 | 2016 | 2017 | ||||||||||
| (in millions of US$) (1) | ||||||||||||
|
Opening backlog (end of prior year) |
3,815.3 | 3,918.4 | 3,011.6 | |||||||||
|
Contract bookings and adjustments during the year |
2,187.4 | (2) | 1,660.6 | 1,172.1 | ||||||||
|
Cancellations during the year |
— | (855 | ) (2) | — | ||||||||
|
Revenues recognized during the year |
(2,084.3 | ) | (1,712.3 | ) | (1,795.3 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Ending backlog (end of current year) |
3,918.4 | 3,011.6 | 2388.4 | |||||||||
| (1) | On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well. |
| (2) | In the third quarter of 2015, we acquired a 29% participation in the construction consortium of the GSP gas pipeline project, and, as a result, we incorporated US$1.0 billion in backlog. Due to the termination of the GSP gas pipeline concession on January 24, 2017, we have removed US$855 million from the backlog, representing 21.4% of our total backlog. |
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The chart below sets forth our consolidated backlog breakdown by end-market, geography and client sector as of December 31, 2017.
|
Backlog by End-Market
|
Backlog by Geography
|
Backlog by Client Type
The chart below shows the effects on our backlog of our participation in the GSP pipeline concession and the subsequent termination of the concession.
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E & C Backlog
To include an engineering and construction contract in our backlog, we assume that each party will satisfy all of its respective obligations under the contract. We also make assumptions, in agreement with the client, regarding the total expected contract price in the case of unit price and cost-plus fee contracts and the amount of the contract that will be completed in each year. We adjust our backlog periodically to account for developments related to each project. For projects related to joint operations or equity investments, we only include our percentage ownership of the joint operation’s or equity investment’s backlog. Our E&C segment backlog does not include intersegment eliminations.
Our E&C backlog as of December 31, 2017 was US$1,456.7 million. We expect to recognize as revenues 47.8% of such backlog by December 31, 2018 and 52.2% of such backlog thereafter. The following table sets forth of our E&C backlog from December 31, 2013 to December 31, 2017.
E&C Backlog (in US$ million)
The following pie charts set forth our E&C backlog breakdown by end-market, geography, client sector and contract type as of December 31, 2017.
| Backlog by End-Market | Backlog by Geography |
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| Backlog by Client Type | Backlog by Client Contract |
The table below sets forth our ending E&C backlog for 2015, 2016 and 2017 accounting for opening backlog for each year, annual contract bookings and adjustments, cancellations during the year and annual revenues recognized.
| 2015 | 2016 | 2017 | ||||||||||
| (in millions of US$) | ||||||||||||
|
Opening backlog (end of prior year) |
2,885.1 | (1) | 3,129.4 | 1,977.9 | ||||||||
|
Contract bookings and adjustments during the year |
1,954.6 | 926.2 | 415.0 | |||||||||
|
Cancellations during the year |
— | (855.0 | ) (1) | |||||||||
|
Revenues recognized during the year |
(1,710.3 | ) | (1,222.8 | ) | (936.2 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Ending backlog (end of current year) |
3,129.4 | 1,977.9 | 1,456.7 | |||||||||
| (1) | In the third quarter of 2015, we acquired a 29% participation in the construction consortium of the GSP gas pipeline project, and, as a result, we incorporated US$1.0 billion in backlog. Due to the termination of the GSP gas pipeline concession on January 24, 2017, we have removed US$855 million from the backlog, representing 30.2% of our E&C backlog. |
Infrastructure Backlog
In reflecting an Infrastructure contract in our backlog, we assume that each party will satisfy all of its respective obligations under the contract. For our Infrastructure backlog, we only include contracted revenues expected to be paid during the next three years following the backlog calculation date. Infrastructure backlog in this annual report does not include our Norvial toll road concession or our Energy line of business. Beginning on April 1, 2017, we have transferred backlog relating to Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results.
Our Infrastructure segment backlog does not include intersegment eliminations. We calculate our Infrastructure backlog as follows:
| • | for the Lima Metro, our Infrastructure backlog assumes that for 2018, 20 new trains will incrementally begin to operate, and that at the end of the year we will operate our 44 trains, which in the aggregate will travel 3,724,052 kilometers for that year. Our backlog also assumes that for 2019 and 2020, we will operate 44 trains at full operation, which in the aggregate will travel 4,811,780 kilometers per year; |
| • | for our Survial and Canchaque concessions, we assume our contractually agreed upon annual fee, adjusted for inflation. For our 2017 and 2018 backlog, we utilize the same adjustment amount that was utilized for our 2016 fee, which has already been negotiated; and |
| • | for La Chira, for 2017 and 2018, backlog is calculated to include the fees we will receive under the concession for our operation and maintenance, adjusted for inflation. |
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Our Infrastructure backlog as of December 31, 2017 was US$544.8 million. We expect to recognize as revenues 37.8% of our backlog by December 31, 2018 and 62.2% of our backlog thereafter. The following chart sets forth the growth of our Infrastructure backlog from December 31, 2013 to December 31, 2017.
Infrastructure Backlog (in US$ million)
The following pie chart sets forth our Infrastructure backlog breakdown by line of business as of December 31, 2017.
Backlog by Line of Business
The table below sets forth our ending Infrastructure backlog for 2015, 2016 and 2017, accounting for opening backlog for each year, annual contract bookings, cancellations during the year and adjustments and annual revenues recognized.
| 2015 | 2016 | 2017 | ||||||||||
| (in millions of US$) | ||||||||||||
|
Opening backlog (end of prior year) |
465.4 | 385.2 | 519.0 | |||||||||
|
Contract bookings and adjustments during the year |
127.8 | 302.4 | 288.6 | |||||||||
|
Cancellations during the year |
||||||||||||
|
Revenues recognized during the year |
(208.0 | ) | (168.7 | ) | (262.8 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Ending backlog (end of current year) |
385.2 | 519.0 | 544.8 | |||||||||
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Real Estate Backlog
Our Real Estate segment backlog reflects sales contracts with buyers for units that have not yet been delivered and will be recognized as revenues once they are delivered.
Our Real Estate segment backlog as of December 31, 2017 was US$25.9 million. We expect to recognize as revenues 72.9% of our backlog by December 31, 2018, and 27.1% thereafter.
The following pie chart sets forth our Real Estate backlog breakdown by type of real estate activities as of December 31, 2017.
The table below sets forth our ending Real Estate backlog for 2015, 2016 and 2017, accounting for opening backlog for each year, annual contract bookings and adjustments, cancellations during the year and annual revenues recognized.
| 2015 | 2016 | 2017 | ||||||||||
| (in millions of US$) | ||||||||||||
|
Opening backlog (end of prior year) |
81.3 | 111.0 | 95.9 | |||||||||
|
Contract bookings and adjustments during the year |
92.9 | 107.3 | 129.6 | |||||||||
|
Revenues recognized during the year |
(63.2 | ) | (122.5 | ) | (199.5 | ) | ||||||
|
Cancellations during the year |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Ending backlog (end of current year) |
111.0 | 95.9 | 25.9 | |||||||||
|
|
|
|
|
|
|
|||||||
Technical Services Backlog
In reflecting a Technical Services contract in our backlog, we assume that each party will satisfy all of its respective obligations under the contract and that work under the contract will be completed on a straight-line basis. Our Technical Services segment backlog does not include intersegment eliminations. The following information on our backlog for technical services does not include our backlog from GMD, which we sold on June 6, 2017. Begining on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment backlog information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated backlog.
Our Technical Services backlog as of December 31, 2017 was US$460 million. We expect to recognize 46% of our backlog by December 31, 2018 and 54% of our backlog thereafter. The following chart sets forth the growth of our Technical Services backlog from December 31, 2013 to December 31, 2017.
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Technical Services Backlog (in US$ million)
The table below sets forth our ending Technical Services backlog for 2015, 2016 and 2017, accounting for opening backlog for each year, annual contract bookings and adjustments, cancellations during the year and annual revenues recognized.
| 2015 | 2016 | 2017 | ||||||||||
| (in millions of US$) (1) | ||||||||||||
|
Opening backlog (end of prior year) |
492.5 | 364.9 | 513.8 | |||||||||
|
Contract bookings and adjustments during the year |
37.3 | 399.3 | 273.3 | |||||||||
|
Cancellations during the year |
— | — | — | |||||||||
|
Revenues recognized during the year |
(164.9 | ) | (250.3 | ) | (327.0 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Ending backlog (end of current year) |
364.9 | 513.8 | 460.1 | |||||||||
| (1) | On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well. |
The following pie charts set forth our Technical Services backlog breakdown by geography, end-market and client sector as of December 31, 2017.
| Backlog by End-Market | Backlog by Geography | Backlog by Client Type |
Warranties
For certain of our contracts, we are required to provide performance bonds to ensure compliance with contractual obligations such as construction works, operation and maintenance of infrastructure assets, among others. The amount of the performance bond varies on a case-by-case basis, depending on the value of the project.
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Performance bonds are usually renewed annually until the contractual obligation which they intend to guarantee is fully satisfied.
As part of our real estate sales contracts, we provide a six-months warranty for latent defects, which covers hidden flaws not discoverable through inspection. The warranty extends to a five-year term if the defects are caused by: (i) the use of materials below the requisite quality standards; (ii) poor execution; or (iii) faulty land. We also provide a five-year warranty for structural defects, and assume the terms and conditions of our finishes suppliers’ warranties.
We provide warranties in connection with our IT services. All government contracts include a latent defects clause, in accordance with Article 51 of the Procurement Act which establishes a minimum warranty of one year, although, for some contracts, we provide warranties for two or three years. For contracts involving the sale of equipment or licensing, we provide the manufacturer’s warranty and, if a claim arises, we transfer the claim to the manufacturer unless we provided an extended warranty. For software development contracts, we provide a one to three years good performance warranty.
We have had no material disbursement or expenditure related to our warranties in the recent past, other than a disbursement in 2015 of US$17 million in respect of a performance bond in connection with the El Nuble project in Peru.
Quality Assurance
In 2017, our operations were certified according to the following international standards:
|
ISO
9001 |
ISO
14001 |
OHSAS
18001 |
ISO
27001 |
ISO
20000 |
Other
standards |
|||||||||||||||||||||
|
Engineering and Construction |
GMI |
x | x | x | ||||||||||||||||||||||
|
GyM |
x | x | x | |||||||||||||||||||||||
|
MORELCO |
x | x | x | x | ||||||||||||||||||||||
|
Vial y Vives - DSD |
x | x | x | |||||||||||||||||||||||
|
Infrastructure |
GMP |
x | x | x | ||||||||||||||||||||||
|
CONCAR |
x | x | x | |||||||||||||||||||||||
|
GyM Ferrovias |
x | |||||||||||||||||||||||||
|
Technical Services |
CAM Chile |
x | x | x | x | |||||||||||||||||||||
|
CAM Colombia |
x | x | x | x | ||||||||||||||||||||||
|
CAM Perú |
x | x | x | x | ||||||||||||||||||||||
|
ADEXUS |
x | x | x | x | x | x | ||||||||||||||||||||
Engineering and Construction:
| • | GMI: ISO 14001, ISO 9001 and OHSAS 18001; these certifications include ECOTEC, the environmental consulting company of GMI. |
| • | GyM: ISO 9001 for Electromechanical Division and Transport’s Lines of Hydrocarbons; ISO 14001 and OHSAS 18001 for Electromechanical Division. |
| • | Morelco: ISO 14001, ISO 9001 and OHSAS 18001; in addition, ASME ESTAMPES U/S NATIONAL BOARD ESTAMPER. |
| • | Vial y Vives—DSD: ISO 14001, ISO 9001 and OHSAS 18001. |
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Infrastructure:
| • | GMP: ISO 14001, ISO 9001 and OHSAS 18001: certified for oil and gas production processes in lots I and V, gas processing at the Pariñas plant, storage and dispatch of hydrocarbons-derived products in nine terminals (Eten, Salaverry, Chimbote, Supe, Pisco, Ilo, Mollendo, Cusco and Juliaca) and operations carried out at GMP’s Lima headquarters. |
| • | CONCAR: ISO 9001, ISO 14001 and OHSAS 18001 (since Feb 2017). |
| • | CONCAR: ISO 9001, ISO 14001 and OHSAS 18001 (since Feb 2017). |
Technical Services:
| • | CAM Colombia, CAM Chile and CAM Perú have tri-standard. In addition, CAM Chile has NCh ISO 17025 Calibration Laboratory, NCh ISO 17025 Testing Laboratory and NCh ISO 17065 Product Certification Agency. CAM Colombia has ISO/IEC 17020 Certification and ISO/IEC 17025 accreditation. CAM Perú has NTP ISO 17020. |
| • | Adexus: ISO 9001, ISO 14001, OHSAS 18001, ISO/IEC 27001, ISO/IEC 20000-1, SAP Provide of Hosting Partner and SAP in Cloud Provide. |
Corporate Social Responsibility
We are committed to the sustainable development of our operations. We seek to create long-term value and conduct business in a manner that is not only economically viable, but also beneficial to greater society and environmentally responsible.
Our Sustainability Policy was approved by our board of directors on January 28, 2016, and its guidelines allow us to focus on seven managerial priorities linked to our stakeholders: ethical conduct, development of people, operational excellence, health and safety, the environment, communication and dialogue and sharing wellbeing.
The focuses of our social investment projects include education and capacity building to foster job creation and the promotion of responsible citizen behavior, particularly among our users, suppliers and neighboring communities.
The following are key programs we perform for the benefit of society:
| • | Corporate Volunteering: Our corporate volunteering program endeavors to train and promote the community integration of our employees. It brings together enthusiastic employees who want to leave a positive footprint on their environment by volunteering their time and knowledge to improve the community. |
In 2017, volunteers participated in the Project to Expand the National Institute of Neoplastic Illnesses (INEN), in which engineers led playshops for children in a local hospital.
| • | Metro Culture: We conduct workshops that transform trains and train stations into centers of social and cultural education to promote respect and tolerance. In 2017, we carried out 40 workshops. |
| • | Road Safety Education: This program promotes our culture of safety and accident prevention by training communities surrounding roads and highways that we operate or maintain. In 2017, approximately 4,000 road users participated in these workshops. |
| • | Ayni: This social support program aims to improve the quality of life in urban areas by promoting respectful coexistence among new owners of our real estate projects. The initiative trains neighbors on several legal and managerial matters and on conflict management and leadership. In 2017, the program trained 2,400 people. |
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| • | Training: This program trains, during six-month periods, certain stand-out students in Peruvian schools of engineering. Since its creation in 2010, the program has enabled us to recruit 801 junior engineers from Lima and other provinces, lowering the barriers that many young people face to formal employment. In 2017, we recruited 35 outstanding students from Peruvian engineering schools. |
| • | Development of local suppliers: We build the capacities of our local suppliers and help them to develop their businesses by improving the quality of the goods and services they provide and encouraging the adoption of formal and responsible managerial styles. In this way, we make local economies more dynamic. |
| • | Construction Management: In partnership with the Instituto de Educación Superior Tecnológico Público Fe y Alegría (Fe y Alegría Public Higher Technological Institute), we are implementing a technical career titled, “Planning and Control of Construction Projects,” certified by the Peruvian Ministry of Education. The program aims to train young people who cannot afford to increase their employability in construction projects. By 2017, we had 44 graduates, 100% of whom were employed. |
| • | Labor Capabilities: This is a recruitment program where we share construction knowledge and train community members on building techniques, risk prevention and leadership skills. In this way, we increase the employability of members of local communities, generate formal jobs, reduce project risks, develop more efficient recruiting processes, and strengthen the trust with local communities. In 2017, we trained 1,429 participants, 53% of whom joined the Group. |
Regulatory Matters
Set forth below is a description of the regulatory framework applicable to our company. We believe we are in compliance, in all material respects, with applicable laws and regulations in all of our business segments.
Engineering and Construction
Regulatory Framework Applicable to Contracts with the Public Sector
As of the date of this annual report, Peru’s Public Procurement Law, approved by Law No. 30225 ( Ley de Contrataciones del Estado ) and its Regulations, approved by Supreme Decree No. 350-2015-EF, which entered into force on January 9, 2016, governs services and construction agreements entered into with public entities. Article 8 of Supreme Decree No. 350-2015-EF establishes that, at the beginning of the procurement process, the contracting public entity must prepare a technical file describing the characteristics of the services it intends to purchase and the selection process for its counterparts, among other specifications.
The selection processes are established in Article 32 of Supreme Decree No. 350-2015-EF as follows:
| • | public biddings ( licitación pública), applicable to goods and works; |
| • | public tenders ( concurso público ), applicable to services, including consulting services; |
| • | simplified award ( adjudicación simplificada ), applicable for the acquisition of any of the following: to (i) goods, if their value is greater than S/33,200 and less than S/400,000; (ii) services, if their value is greater than S/33,200 and less than S/400,000; and (iii) works, if their value is greater than S/33,200 and less than S/1,800,000; |
| • | electronic reverse auction ( subasta electronica inversa ), applicable to goods and services with a value greater than S/33,200; |
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| • | selection of individual consultants ( selección de consultores individuales ), applicable for the hiring of qualified consultants who do not need teams of personnel or additional professional support; |
| • | price comparison ( comparación de precios ), applicable to goods and services that are easy to obtain in the market and that are not manufactured, produced, supplied or provided under a particular description or set of instructions given by the contracting entity; and |
| • | direct contracting ( contratación directa ), applicable to goods and services, in situations of emergency arising from catastrophic events, involvement of national security, shortages, among other similar reasons. |
As established in Articles 49, 60, 66, 71, 77 and 80 of the Supreme Decree No. 350-2015-EF, the selection processes include the following phases:
| • | in the case of public biddings, public tenders and simplified award: notice; registration of participants; submission and reply of inquiries; submission and reply of comments; preparation of the terms and conditions of the selection process; submission of bids; evaluation and qualification of bids; and award; |
| • | in the case of the selection of individual consultants: notice; registration of participants; submission of bids; evaluation and qualification of bids; and |
| • | in the case of price comparison: notice, submission of bids, and adjudication. |
Article 46 of Peru’s Public Procurement Law establishes that any participants in a public procurement processes must be registered in the Peruvian National Suppliers Registry and must not be barred from contracting with the state. Article 234 of the Supreme Decree No. 350-2015-EF establishes that this registration has an indefinite validity and that all contractors must maintain their information up to date.
Bidders may participate in the selection process as part of a joint operation, in which case all members of the joint operation must be registered in the Peruvian National Registry of Suppliers and will be jointly liable for all consequences arising from the joint operation’s participation in the selection process and the execution of the agreement. Certain exceptions to the abovementioned joint liability for joint operations may apply, in cases where a contractor proves that only one party is liable to be sanctioned due to the nature of the infraction, the joint operation formal undertaking or the joint operation agreement.
GyM and GMI are registered in the Peruvian National Suppliers Registry as a construction and a consulting company, respectively.
Article 14 of the Supreme Decree No. 350-2015-EF establishes the types of contracts that may be entered into by public entities:
| • | lump-sum ( sistema a suma alzada ), applicable when the amounts, scales and quality are determined in the terms and conditions of the selection process. The bidder submits its proposal indicating a fixed amount and a term for the completion of the agreement; |
| • | unit price, rates or percentages ( sistema de precio unitario, tarifas o porcentajes ), applicable when the nature of the service to be provided does not allow an accurate determination of the required quantities; |
| • | lump-sum and unit price, rates or percentages mix ( esquema mixto de suma alzada y precios unitarios ), applicable when accurate determination of the quantities required for some of the components cannot be made; and |
| • | fixed amount plus success fee ( honorario fijo y comisión de éxito ), applicable in contracts for rendering services. The fixed amount and success fee may be estimated on the basis of percentages. |
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Article 15 and the 14 th Complementary Final Disposition of the Supreme Decree No. 350-2015-EF establishes that, in the case of goods and works, the terms and conditions of the selection process must indicate the execution type of the agreement as follows:
| • | “turn-key” ( llave en mano ), when completion is subject to the construction, equipment assembly and, if applicable, the assisted operation of works. In case of goods procurement, the installation and commissioning of such goods are also included; and |
| • | bid contest ( concurso oferta ), when completion is subject to the submission of the technical file and the completion of the works. This completion type is only applicable to lump-sum contracts and public bidding selection process with a referential value exceeding S/10,000,00. |
Peru’s Supervisory Authority on Public Procurement ( Organismo Supervisor de las Contrataciones del Estado , or OSCE, by its Spanish acronym) is a public-sector entity within the Peruvian Ministry of Economy and Finance, that oversees the selection processes carried out by public entities; manages the Peruvian National Registry; imposes penalties to suppliers that violate the provisions set forth in Peru’s Public Procurement Law, its Regulations and other related provisions; and informs the government’s General Comptroller Office ( Contraloría General de la República ) regarding violations to the regulations when damages are caused against the State. As of the date of this annual report we do not believe that Peru’s Public Procurement Law and Supreme Decree No. 350-2015-EF will have a material impact on our business.
Pursuant to recent amendments to the Public Procurement Law, companies sentenced for corruption charges, among other criminal offences, or companies whose representatives have admitted committing corruption acts, will be prohibited from participating in public procurement processes.
Regulatory Framework Applicable to Contracts with the Private Sector
Parties to a private-sector agreement may freely determine the contract type and its contents as long as it complies with certain legal requirements, including the provisions set forth in Article 1353 of the Peruvian Civil Code (which states that all contracts, including innominate contracts, must comply with the rules of Section VIII of the Peruvian Civil Code, absent a statute specific to said contract type that collides with said rules). GyM and GMI participate in private-sector contracts for engineering and constructions.
Construction Activities in Peru
Legal Framework
Peru’s Law for the Promotion of Private Investment in Construction, approved by Legislative Decree No. 727 ( Ley de Promoción de la Inversión Privada en Construcción ), states that construction activities in Peru are in the public interest and a national priority. According to Section F of the Fourth review of the United Nations International Statistical Industrial Classification (ISIC), construction activities typically consist of the construction of dwellings, buildings and stores; and the construction of large scale infrastructure projects such as highways, bridges, tunnels, railways, irrigation systems, sewage systems, industrial facilities, pipelines and electric lines, among others. GyM has developed numerous projects in the construction sector. Currently, the company focuses on buildings (ISIC Division 41), civil works (ISIC Division 42) and specialized activities (ISIC Division 43).
Construction entities must comply with the National Building Regulations, approved by Supreme Decree No. 011-2006-VIVIENDA ( Reglamento Nacional de Edificaciones ), which establishes that urban allotments and buildings must be developed in compliance with the rules governing safety, functionality, accessibility, habitability and environmental impact. According to Technical Regulation No. G.030 of the National Building Regulations, construction companies, such as GyM and GMI, are responsible for (i) executing works in accordance with project specifications and applicable regulations; (ii) possessing sufficient organization and infrastructure to guarantee the feasibility of the project; (iii) appointing the party responsible for the construction to assume its technical representation; (iv) providing the resources and materials to complete the project pursuant to the terms of the agreement and required standards and within the approved budget; (v) executing subcontracts within contractual limitations; and (vi) delivering to the client documented information regarding the executed works.
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Notwithstanding any legal actions that the construction company may take against suppliers, manufacturers or subcontractors, the construction company may be responsible for all the works, including those executed by subcontractors, and for the use of defective materials or supplies.
Penalties for violating the National Building Regulation are determined by the municipal government in the jurisdiction where the project is developed and set forth in its corresponding regulations. In addition, they may also pursue criminal actions or civil claims if applicable.
Safety Regulation in Construction Projects
The Law on Safety and Health at Work (Law No. 29783) is intended to promote workplace accident prevention and applies to all business sectors. The principal safety rules applicable to construction projects include the following:
| • | companies with 20 or more employees must establish a committee for the promotion of workplace safety and health that oversees the implementation of the required internal safety and health regulation policy; |
| • | all projects must have a safety and health plan consisting of all the technical and administrative mechanisms to guarantee the physical integrity and health of workers and third parties during project execution; |
| • | companies shall hire an occupational physician and establish an area of occupational medicine; |
| • | companies shall perform periodic audits to verify whether internal safety and health regulations are in accordance with law; |
| • | occupational diseases and work accidents detected during project execution must be recorded and the competent authority must be notified in accordance with the Regulations of the Law on Safety and Health at Work, approved by Supreme Decree No. 005-2012-TR, and with Occupational Health Manual, approved by Ministerial Resolution No. 510-2005-MINSA; |
| • | companies must provide for medical examinations of its employees prior to, during and at the termination of their employment (subject to certain terms and conditions depending on whether the empoyees were engaged in high-risk activities); |
| • | companies must show a safety and health plan; an index of frequency; and the company’s performance in safety and health in order to be awarded public and private projects; |
| • | use of individual protective equipment, including gloves, safety goggles, boots and helmets, is mandatory when risks to safety and health cannot be prevented by other means; and |
| • | personnel responsible for safety must comply with all requirements in Rule NTP 399.010.1 for fire prevention. |
The Peruvian Ministry of Labor and Employment Promotion, the National Superintendence of Labor Inspection (the “SUNAFIL”) and the Peruvian Ministry of Health are the competent organisms in the safety and health fields, respectively.
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Safety Regulations Applicable to Subsectors
In addition to the Law on Safety and Health at Work applicable to all our business sectors, our Engineering and Construction segment must also comply with the regulations set forth below.
Power and Utilities
GyM and CAM Peru must comply with the Rules of Safety and Health at Work with Electricity, approved by Ministerial Resolution No. 111-2013-MEM-DM, for its activities relating to the construction of hydroelectric plants, transmission lines and substations. OSINERGMIN is the authority responsible for supervising and enforcing compliance of the foregoing rules. The most relevant of the safety rules with which GyM and CAM Peru must comply include: (i) providing employees with necessary information regarding safety measures related to the tasks they perform; (ii) providing employees with adequate safety equipment; and (iii) evaluating and remedying potential sources of danger.
Mining
GyM must comply with the Mining Occupational Health and Safety Regulation, approved by Supreme Decree No. 024-2016-EM, and other related regulations for their mining-related construction activities including the construction of mineral processing plants and other mining-related buildings, among others. In developing mining projects, our subsidiaries’ personnel must follow the safety programs and be familiar with internal rules from their mining sector client. The SUNAFIL and OSINERGMIN are the authorities responsible for supervising and enforcing compliance of the foregoing rules. The most relevant of the safety rules with which GyM must comply include: (i) creating an internal safety and health regulation policy and selecting a manager responsible for its implementation; (ii) monitoring and recording workplace accidents and occupational diseases; (iii) providing information to employees regarding the safety risks related to their work; (iv) providing employees necessary first aid and medical attention in the event of a workplace accident; (v) providing employees the necessary tools, equipment or materials to perform their activities safely; and (vi) evaluating risks in order to establish accident prevention and mitigation plans.
Oil and Gas
GMP must comply with the Hydrocarbons Safety Regulations, as approved by Supreme Decree No. 043-2007-EM, which are enforced by the OSINERGMIN, while performing any hydrocarbon activities. The most relevant safety rules with which GMP must comply include: (i) assuring that senior project managers are responsible for the safety and health of workers; (ii) assigning specialized personnel responsible for safety and health matters; and (iii) monitoring and recording workplace accidents on a monthly basis.
Industrial Construction
GyM must comply with the Industrial Safety Regulation, approved by Supreme Decree No. 42-F ( Reglamento de Seguridad Industrial ), for its activities relating to the construction of industrial plants. The most relevant of the safety rules with which GyM must comply include: (i) overseeing that worksites are constructed, equipped and managed to provide security and protection to employees; (ii) instructing employees about risks to which they are exposed related to their work and adopting necessary measures to avoid accidents and damage to employee health; and (iii) overseeing inspections to verify the proper installation of safety equipment.
Registries and Permits
According to Supreme Decree No. 008-2013-TR, civil contractors must be registered in the National Civil Construction Works Registry and comply with the rules of Ministerial Resolution No. 195-2007-TR which sets out the requirements for registration, including registering through the corresponding local agency and filing an affidavit indicating compliance with the registration requirements before the effective date of registration. GyM is currently registered in the National Civil Construction Contractors and Subcontractor Registry.
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According to Supreme Decree No. 005-2008-EM mining contractors must register with the National Mining Contractors and Specialized Companies Registry. GyM is currently registered. Proper registration requires the filing of a request with the Regional Agency of Energy and Mines with jurisdiction in the area where the mining activities will take place. In addition, within five days upon commencement of construction, GyM must provide in writing its employees with the following information: (i) the company’s legal name; (ii) the scope of the contract; (iii) the place of execution; (iv) the applicable health and safety regulations; (v) the Safe Work Written Procedures (PETS); and, (vi) risk insurance policies.
Labor Law Requirements in Civil Construction
Labor law requirements in civil construction consist of the specific legal framework for civil construction workers and the general legal framework applicable to the administrative personnel in the civil construction sector set forth in the Single Revised Text of the Labor Productivity and Competitiveness Law, approved by Supreme Decree No. 003-97-TR.
Seasonality of services is one of the main features in the specific legal framework due to the temporary nature of construction contracts. Consequently, certain general rules such as the trial period are not applicable to construction workers.
The principal terms and conditions relating to collective bargaining from our civil construction workers have been agreed upon and recorded in the 2017-2018 agreement, dated August 25, 2017, and entered into between the Peruvian Chamber of Construction and the Federation of Civil Construction Workers ( Federación de Trabajadores en Construcción Civil ). By means of the 2017-2018 agreement, the parties have, among other things, agreed on an increase in the daily wage of such employees.
The Supreme Decree No. 009-97-SA, Law No. 26790 and Supreme Decree No. 003-98-SA require construction companies to have complementary high-risk insurance for workers that perform high risk tasks. As of the date of this annual report, GyM has this insurance coverage.
The insurance coverage provides medical care for injured workers to allow them to achieve full recovery. Moreover, it provides pensions to workers or their beneficiaries in case the worker becomes handicapped or dies as a result of a work accident or occupational disease.
Environmental Regulations
Section 24 of the General Environmental Law, approved by Law No. 28611 (the “General Environmental Law”), provides that all human activity likely to cause significant environmental impact is subject of regulation by the National System of Environmental Impact Assessment. The Peruvian Ministry of the Environment, through the Environmental Supervising and Enforcement Agency ( Organismo de Evaluación y Supervisión Ambiental, or “OEFA”) supervises compliance with the law and enforces environmental rules related to mining, oil and gas and electricity.
In addition to being responsible for the impact that its activities, by action or omission, may have on the environment, GyM is also subject to an environmental impact assessment and must obtain an environmental certification necessary to obtain project permits or licenses. GyM must also adopt measures for the management of hazardous materials intrinsic to its activities to mitigate the negative environmental impact its activities may have.
Civil Construction
The Supreme Decree No. 015-2012-VIVIENDA (modified by the Supreme Decree No. 004-2015-VIVIENDA) regulates the environmental aspects of projects related to housing, urbanism, construction and sanitation activities in urban or rural areas. The National Directorate of Housing, Urbanism, Construction and Sanitation supervises the compliance and enforces the applicable rules. Projects are categorized according to their environmental impact during and after their execution and different rules are established for each category including compliance with the following environmental studies prior to starting construction works: (i) projects expected to cause minor environmental impacts require an environmental impact statement; (ii) projects expected to cause moderate environmental impacts require a semi-detailed environmental impact assessment; and (iii) projects expected to cause a major environmental impact require a detailed environmental impact assessment.
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Other Subsectors
Depending on the subsector in which it operates, GyM is required to follow specific environmental provisions issued by the competent authorities. For example, with respect to hydrocarbon activities, the Ministry of Energy and Mines has enacted the Oil and Gas Environmental Regulations, by means of Supreme Decree No. 039-2014-EM.
Tax Legal Regime Applicable to Construction
Section 63 of the Peruvian Income Tax Law, approved by Supreme Decree No. 179-2004-EF, establishes that construction companies engaged in construction contracts for a period longer than one fiscal year can choose to be taxed under any of the following systems:
| • | allocate to each fiscal year the gross income resulting from applying the percentage of gross margin estimated for the work over the amounts collected for the same work; or |
| • | allocate to each fiscal year the gross income calculated by deducting the costs corresponding to the tasks performed during that year from the amount collected or that is expected to be collected corresponding to that work. |
In both situations, a special accounting registry must be kept for each project, which is meant to keep a record of the costs, expenses and income of each project in an account separate from the general analytical accounts ( cuentas analíticas de gestión ).
Until December 31, 2012, construction companies could defer revenues related to each individual project until the total completion of the project, provided the project was completed in three years or less. In such cases, the income was to be recognized in the fiscal year in which the project concluded or was delivered. In case the project was scheduled to conclude in a period exceeding three years, the results would be determined in the third year in accordance with the progress of the works over the three-year period. Beginning in the fourth year, results were determined following the foregoing methods.
Starting on January 1, 2013, in accordance with Legislative Decree No. 1112, which amended the Peruvian Income Tax Law, construction companies that adopted the deferral method are authorized to continue with the use of such method only with respect to income arising from the execution of work contracts initiated prior to January 1, 2013, until their completion, and for execution of work contracts initiated on or after January 1, 2013 the deferral method is no longer accepted.
The Peruvian Income Tax Law also provides that the difference that may result from a comparison between the real gross income and the income assessed pursuant to any of the methods described above shall be allocated to the fiscal year in which the work concluded. Additionally, the company must apply the same system to all its construction contracts and must receive prior authorization from tax authorities to change the applied system.
Prevention of Money Laundering and Financing of Terrorism
Regulations for money laundering and terrorism financing prevention, approved by SBS Resolution No. 789-2018 (which has replaced SBS Resolution No. 486-2008 as of March 15, 2018), require construction and real estate companies to implement a money laundering and terrorism financing prevention system, including, among others, the appointment of a compliance officer, setting up a registry of operations and notifying the Financial Intelligence Unit of the SBS, the entity responsible for supervising and enforcing compliance, of any suspicious activity.
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Infrastructure
Infrastructure and Public Services through Public Private Partnership Contracts
In recent years, the Peruvian state has implemented a new regulatory framework (Single Supreme Decree No. 254-2017-EF, Legislative Decree No. 1224 and its regulations, approved by Supreme Decree No. 410-2015-EF) to set forth the procedures and mechanisms for enhancing private investment for the development of public infrastructure, public services, any ancillary services, applied research projects and/or technological innovation, through Public-Private Partnerships (PPP) and Projects with State Assets.
The main aspects of the new legal framework are the following:
| 1. | The Ministry of Economy and Finance ( Ministerio de Economía y Finanzas ) is the governing authority of the National System for the Promotion of Private Investment (SNPIP), composed by ministries and public agencies of the national government, the Agency for the Promotion of Private Investment— ProInversión , and regional and local governments. |
| 2. | Private investment projects will comprise the following stages: (i) planning and programming, (ii) formulation, (iii) structuring, (iv) transaction, and (v) contract execution. Great emphasis is given to the Evaluation Report ( Informe de Evaluación ), a document determining the economic, financial and legal viability of a potential Public Private Partnership applying, where appropriate, the national public investment system. Investors are entitled to receive from the Peruvian state: (a) in the case of self-financed projects, taxes and tolls to be collected from final consumers; (b) in the case of co-financed projects, subsidies and payments from the public entity awarding the project; and (c) any other financing structure agreed between the parties. |
| 3. | The management of Public Private Partnership contracts by the three levels of government (central, regional and local) is regulated. |
| 4. | For projects in regulated sectors, the monitoring of Public Private Partnership contracts is subject to the provisions of the Law No. 27332, Framework Law on Regulators. According to this law, OSIPTEL, OSITRAN, SUNASS and OSINERGMIN should primarily safeguard the compliance of service levels agreed in Public Private Partnership contracts. For this purpose, Public Private Partnership contracts must establish the necessary arrangements to ensure timely and efficient supervision during the contract execution stage. To this end, public entities are required to ensure timely participation of regulatory agencies in the arbitration, when decisions and matters related to the competence of those bodies are discussed. |
| 5. | Favorable opinions for the Public Private Partnership Agreements from the General Comptroller Office of Peru are required. The General Comptroller will issue a report on any aspects that may jeopardize the financial capacity of the Peruvian state, according to Law No. 27785, Organic Law of the National Control System and the General Comptroller of Peru. |
| 6. | Investors interested in participating as bidders in private investment processes must review the list of restrictions and prohibitions established in the Public Procurement Law. Whether an investor is barred from participating shall be determined through administrative channels, and such restriction will apply to any expected strategic partners as well. Furthermore, it is stated that, the restriction would extend to strategic partners and to companies who have exercised direct control over the investor, as indicated in the regulations approved by the Superintendence of the Stock Market. |
| 7. | The development of projects related to assets owned by the Peruvian state (Legislative Decree No. 674, Law Promoting Private Investment in State Enterprises) can be carried out by private sector initiatives, without committing any public resources or transferring any risks to public entities, unless expressly required by law. |
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Each of our subsidiaries Norvial, Survial, Canchaque and GyM Ferrovías has entered into a concession agreement with ProInversión and the Peruvian Ministry of Transportation and Communications. La Chira has entered into concession agreements with ProInversión and Sedapal S.A. The abovementioned agreements were entered into in accordance with the provisions in force at the time of their execution.
Infrastructure Construction and Safety
Infrastructure concessionaires must assure that the construction companies they hire to construct infrastructure projects comply with the foregoing rules relating to construction projects. In addition, companies engaged in road construction must comply with the guidelines issued by the Road and Railways General Directorate of the Peruvian Ministry of Transportation and Communications and with the National Road Infrastructure Management Regulation regarding road construction, maintenance and safety. These regulations establish procedures for authorizing road construction and approving work contracts, among others.
Environmental Regulations
Peruvian environmental laws and regulations have become increasingly stringent over the last decade. All industries and projects are subject to Peruvian laws and regulations concerning water, air and noise pollution, and the discharge of hazardous substances. The main legislation governing environmental matters is the General Environmental Law; the Law of the National System of the Environmental Impact Evaluation, approved by Law No. 27446 (the “SEIA”); the regulations of the SEIA Law, approved by Supreme Decree No. 019-2009-MINAM; and several environmental regulations that have been issued under the General Environmental Law, SEIA and other laws by the government with the collaboration of the Peruvian Ministry of the Environment.
Since the enactment of the General Environmental Law in October 15, 2005, several technical environmental regulations have been issued and this environmental regulatory framework is generally revised and updated regularly. Some regulations apply generally to Peruvian industries and some technical regulations are issued for specific industries.
The main environmental rules applicable to infrastructure projects include those described above in “—Engineering and Construction—Environmental Regulation.”
Peruvian Hydrocarbon Regulation
Our hydrocarbon operations are subject to governmental regulations as described below.
Exploration and Production
GMP is engaged in two major activities relating to the exploration and production of oil and gas: exploration and production of oil fields; and providing services to the oil industry.
Exploration and Production of Oil Fields
Peru’s hydrocarbon legislation regarding oil and gas exploration and production activities includes, among others, the Hydrocarbon Organic Law and the regulations governing the qualification of petroleum companies; the exploration and production of hydrocarbons; the transportation of hydrocarbons; hydrocarbons pipelines and safety requirements in such activities.
The foregoing regulations define the roles of Peruvian government agencies which regulate the oil and gas industry; provide the framework for the promotion and development of hydrocarbon activities based on the principles of private-sector competition and access to all economic activities; and set the safety and security standards as well as the legal proceedings for carrying out operations.
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The Peruvian Constitution establishes that the government is the sole proprietor of underground hydrocarbons within its national territory. However, the Peruvian government has granted Perupetro, a state-owned company authorized to negotiate and enter into agreements for the exploration and/or production of hydrocarbons, the ownership right over the hydrocarbons extracted which allows Perupetro to enter into such agreements. Furthermore, the Peruvian Ministry of Energy and Mines, the Environmental Evaluation and Supervision Agency (“OEFA”) and OSINERGMIN constitute public entities that play an active role in oil and gas regulation.
The Peruvian Ministry of Energy and Mines is responsible for devising energy and mining policies; supervising activities in the energy and mining sectors; and promoting investments in those sectors. Within the Peruvian Ministry of Energy and Mines, the General Directorate of Hydrocarbons (“DGH”) is responsible for regulating the development of oil and gas fields and the General Directorate of Energy-Related Environmental Affairs (“DGAAE”) is responsible for reviewing and approving regulations related to environmental risks associated with hydrocarbon exploration and production activities.
OEFA is a public entity ascribed to the Peruvian Ministry of the Environment and is responsible for evaluating and ensuring compliance with applicable environmental rules covering hydrocarbon activities, as well as for initiating sanctioning proceedings when a breach of an environmental regulation occurs. OSINERGMIN is a public entity ascribed to the Presidency of the Council of Ministers’ ( Presidencia del Consejo de Ministros ) office and is responsible for ensuring compliance with safety and security standards in the hydrocarbon industry, as well as for sanctioning proceedings. GMP is subject to the supervision, authority and regulations enacted by the foregoing agencies.
Regarding hydrocarbon exploration and production activities, companies are required to enter into either a licensing or a services agreement with Perupetro; other contractual arrangements are permitted with prior approval from the Peruvian Ministry of Energy and Mines. The foregoing agreements are governed by private law and must be approved by the Peruvian Ministry of Energy and Mines and the Peruvian Ministry of Economy and Finance. In licensing agreements, licensees obtain authorizations to explore and produce hydrocarbons in a determined area, are granted ownership over the extracted hydrocarbons and are subject to the payment of royalties. Licensees may trade the hydrocarbons with no limitations on sales prices, except in the event of a national emergency.
Services agreements grant contractors the right to perform hydrocarbon exploration and production activities in a determined area and receive compensation according to the production of hydrocarbons. The contractor is technically and financially responsible for the operations, but Perupetro maintains the ownership over the hydrocarbons extracted. GMP is party to services agreements with respect to Blocks I and V, and to licensing agreements with respect to Blocks III and IV. Each block has an independent contract with Perupetro.
Services and licensing agreements are intended for the development, production and eventually transportation of hydrocarbons, as well as for certain storage activities. Services and licensing agreements commonly include a minimum performance schedule guaranteed by performance bonds and require corporate guarantees to be issued to secure the contractor’s compliance to the provisions established by the parties.
Additionally, a company must be qualified by Perupetro prior to entering into hydrocarbon exploration and production agreements. In order to qualify, a company must meet the standards under the Regulations on the Qualification of Petroleum Companies (approved by means of the Supreme Decree No. 030-2004-EM), requiring companies to demonstrate that they have the technical, legal and financial capacity to comply with all the obligations they will assume under the agreement with Perupetro. Such capacities are measured according to the characteristics of the area to be explored or produced, the expected investment required for the project, and the strict fulfillment of the rules regarding prior consultation (if applicable), citizen participation and environmental issues related to the operation’s performance. Upon a positive evaluation, the company is issued a qualification certificate from Perupetro that allows it to initiate the negotiations of the agreement; notwithstanding the company remains responsible for obtaining all other licenses, permits and approvals required by applicable regulation.
Under the current regulation, 30 years is the maximum term of services and licensing agreements for the production of crude oil. On the other hand, natural gas and condensates-related services or licensing agreements have a maximum term of 40 years. Graña y Montero acts as GMP’s guarantor in all of the Block I, Block III, Block V and Block VI contracts.
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GMP must comply with Supreme Decree No. 043-2007-EM for its activities relating to hydrocarbons in all phases. The OSINERGMIN is the authority responsible for the supervision and enforcement of the foregoing rules.
Services to the Petroleum Industry
Peruvian regulation provides that all companies that enter into a service agreement with any company that holds a licensing or services agreement must be registered as a subcontractor in the Hydrocarbons Public Registry in case they render any of the following services: (i) geological studies, geophysical studies, petroleum engineering related to drilling operations, production and well services; or (ii) construction of oil pipelines, gas pipelines, refineries and their maintenance, and specialized transportation by land, air, sea or river. In order to register a company as a subcontractor in the Hydrocarbons Public Registry, prior authorization from the General Directorate of Hydrocarbons (“DGH”) of the Peruvian Ministry of Energy and Mines is required.
On June 1, 2004, GMP was included as a subcontractor for the petroleum industry in the Hydrocarbons Registry of Lima’s Public Registry of Legal Entities; such registry remains in force as of the date of this annual report.
Environmental Regulations
The Peruvian Ministry of Energy and Mines is responsible for enacting environmental regulation for the oil and gas sector. The Oil and Gas Environmental Protection Regulation, approved by Supreme Decree No. 039-2014-EM, sets out the legal framework and specific rules applicable to the exploration, production, refinement, processing, transportation, commercialization, storage and distribution of hydrocarbons, with the aim of preventing, controlling and remedying the negative environmental impacts arising from the foregoing activities.
The Peruvian Ministry of the Environment establishes general rules applicable to different activities in several sectors, in contrast to the specific rules enacted by the Peruvian Ministry of Energy and Mines regarding the oil and gas sector. Environmental laws and regulations are enforced by the National Environmental Enforcement Agency, OEFA ( Organismo de Evaluación y Fiscalización Ambiental ) which was created in 2008. Sanctions range from warnings and fines to suspensions of activities and mitigation of environmental damages, among others. In this regard, a breach of the obligations contemplated in the Environmental Impact Assessments in the hydrocarbons sector may originate fines up to 30,000 Tax Units (approximately US$39 million or S/124 million) according to the applicable law.
The main environmental rules applicable to GMP’s hydrocarbon projects include:
| • | obtaining an environmental certification and adopting the necessary measures to prevent and/or mitigate environmental impacts resulting from their activities; |
| • | meeting minimum size, environmental and safety requirements applicable to worksites; handling and storing of hydrocarbons pursuant to safety and environmental requirements; establishing programs to monitor environmental issues; and |
| • | providing training on environmental matters related to employee and personnel activities and responsibilities, especially with respect to regulations and procedures established for environmental protection and the environmental and legal consequences of non-compliance. |
Operation of Terminals
In accordance with the Glossary, Acronyms and Abbreviations for the Hydrocarbons Subsector approved by Supreme Decree No. 032-2002-EM, a terminal is a facility that includes storage tanks, submarine lines or docks for receiving or dispatching liquid hydrocarbons and facilities related to activities of storage and reception and/or dispatch of liquid hydrocarbon from/to vessels.
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Consorcio Terminales and Terminales del Perú are two joint operations conducted by GMP and Oiltanking Peru S.A.C. which currently operates ten of Petroperú’s terminals in Peru: (i) the South Terminals of Pisco, Mollendo, Ilo, Juliaca and Cuzco; and (ii) the North Terminals of Eten, Salaverry, Chimbote and Supe; including Callao, respectively. Consorcio Terminales and Terminales del Perú provide hydrocarbons handling and storage services in Peru for gasoline, aviation fuel and diesel, among others.
The operation of both the South and North Terminals was granted through the “South Terminal Operation Agreement” and the “North Terminal Operation Agreement” (the “Operation Agreements”) dated February 2, 1998, by and among Petroperú and Consorcio Terminales. The Operation Agreements resulted from two tenders in accordance with Legislative Decree No. 674, and mandate that Consorcio Terminales, as operator of the terminals, be responsible for the storage, handling, additivation and dispatch of hydrocarbons in such facilities.
The initial term of the Operation Agreements was 15 years; however the parties agreed to extend the duration of the agreement to an additional 18 months ending in August 2014. The purpose of this extension was to undertake the additional investments that were necessary to satisfy the national demand increase and to perform operative and safety-related improvements to the facilities. In July of 2014, the Operation Agreements were extended for an additional four years ending in July of 2018. We expect to extend such agreements, at least for a few months.
In executing its operations, Consorcio Terminales is committed to develop and follow a work program which must include an investment schedule. The work program performed included the installation of fire protection systems and loading systems, among others and was secured by a performance bond.
GMP’s activities as a part of Consorcio Terminales fall under the scope of the Hydrocarbons Storage Safety Regulation, approved by Supreme Decree No. 052-93-EM. Consorcio Terminales is registered in the Hydrocarbon Registry of OSINERGMIN and is authorized to perform transportation activities such as loading and unloading hydrocarbons from vessels on the terminals. This regulation establishes the conditions under which GMP can operate and maintain storage facilities for hydrocarbons. For instance, the regulation specifies the technical requirements for storage systems, which vary depending upon the kinds of hydrocarbons stored. Moreover, pursuant to this regulation, GMP must establish procedures to minimize potential risks that these facilities present for employees, third parties and properties.
Gas Processing Plants
In accordance with the Glossary, Acronyms and Abbreviations for the Hydrocarbons Subsector, approved by Supreme Decree No. 032-2002-EM, a processing plant is a facility where the natural characteristics of hydrocarbons are changed to break them into the different compounds that comprise them, as well as the subsequent transformations to convert the hydrocarbons into fuel of specific qualities and suitable for transportation. This includes the facilities where the impurities, hydrogen sulfide, carbon dioxide, water and hazardous components are removed from natural gas.
Our processing and fractionation activities fall under the scope of regulations governing hydrocarbons refinement and processing including regulations on the design, construction, operation and maintenance of refineries and hydrocarbons processing plants, the oil refining process, the manufacture of natural asphalts, oil and lubricants, basic petrochemical activities and the processing of natural gas and condensates. In order to comply with these regulations, GMP must take cautionary measures in order to protect the safety of its employees and its facilities, protect the environment, preserve energy resources and ensure the quality of the products or services it delivers. For instance, GMP’s plant operations must be authorized by the General Direction of Hydrocarbons and comply with fire safety regulations. In the event of an accident, GMP must notify the Peruvian Ministry of Energy and Mines, the Peruvian Ministry of Labor and the Peruvian Social Security Administration.
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Terms of our Concessions
Our concessions are subject to certain terms and conditions established in each concession agreement. During the term of the concessions, we are responsible for the construction and maintenance of the infrastructure necessary to their operation. The concession agreements establish minimum capital stock requirements for our concessionaire subsidiaries as follows: US$15 million (S/50 million), US$8 million (S/27 million), US$0.8 million (S/2.7 million), S/46 million and S/100 million for Norvial, Survial, Canchaque, La Chira and the Lima Metro, respectively.
The concession agreements establish grounds for termination including mutual agreement of the parties thereto, force majeure and breach of certain contractual obligations. Additionally, in the case of La Chira and the Lima Metro, the agreement can be terminated unilaterally by the grantor, with the payment of compensation. On the expiration date, all of the assets that are essential for the operation of the concession are considered the state’s property and no compensation is paid to the concessionaire.
In the event that changes in legislation or regulations that are exclusively related to the financial conditions of the earnings and/or costs associated with the investment, operation or conservation of the infrastructure, affect the economic terms of the contract by 10% or more, the concession agreements set forth economic terms adjustment mechanisms aimed at restoring the economic and financial equilibrium. See “—Infrastructure—Principal Infrastructure Lines of Business.”
Real Estate
Since 1987, we have been operating in the Peruvian real estate sector. In 2008, we incorporated Viva GyM to concentrate the group’s activities in this sector including promoting and managing real estate projects including affordable housing and housing and commercial real estate projects.
Zoning Regulations
Article 79 of the Municipalities Organic Law (Law No. 27972) establishes that municipal governments are the exclusive authority responsible for approving urban and rural development plans, as well as the zoning of urban areas under their jurisdiction. Peruvian regulation states that urban zoning refers to the division of a municipal jurisdiction in zones for specific usage, such as residential, commercial, industrial or mixed-use.
The main zoning rules applicable to our real estate projects include the following: obtaining a construction license from the corresponding local municipality before commencing construction, reconstruction, conservation or repair of any property.
Environmental Regulations
The Environmental Protection Regulation for real estate, urbanism, construction and regularization related projects, approved by Supreme Decree No. 015-2012-VIVIENDA, sets out to prevent, mitigate, control and remedy negative environmental impacts that may arise from real estate developments. Prior to initiating construction works, companies are required to obtain an environmental authorization from the Housing, Urbanism, Regularization or Construction National Directorate of the Peruvian Ministry of Housing, Construction and Sanitation and to comply with the provisions set forth in the corresponding environmental impact assessment.
The main environmental rules applicable to our real estate projects include the following:
| • | undertaking an environmental impact assessment; and |
| • | requesting the environmental classification of our projects, which depends on the environmental risks associated therewith. |
Licenses
Article 10 of the Single Revised Text of the Urban Habilitation and Buildings Law, approved by Supreme Decree No. 006-2017, establishes the license requirements for urban habilitation and construction, depending on land size, the dimensions of the work to be undertaken and the financial target.
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Upon completion of the real estate development and construction stages, as the case may be, the following requirements must be met:
| • | for urban development, the reception of the works ( recepción de la obra ) must be requested to the corresponding municipal government in compliance with Article 19 of the Single Revised Text of the Urban Habilitation and Buildings Law; and |
| • | for construction, the conformity of the works ( conformidad de obra ) must be requested to the corresponding municipal government in compliance with Article 28 of the Single Revised Text of the Urban Habilitation and Buildings Law, accompanying the request with the construction plans and the construction statement (a description of the technical conditions and characteristics of the work performed). |
Exclusive and Common Property Real Estate Units Regimes
The Law on the Buildings Regularization, on the Factory Declaration Proceeding and on the Exclusive and Common Property Real Estate Units Regime, approved by Law No. 27157, establishes the legal regime applicable to real estate comprised of assets with exclusive and common property, including, among others, (i) apartment buildings; (ii) condominiums; (iii) units under co-ownership; and (iv) commercial spaces, such as galleries and malls. The foregoing construction projects must include internal by-laws prepared or approved by the sponsor or builder, or by the owners with the vote of the majority of participating owners, the content of which is regulated in Article 42 of the aforementioned law. Articles 40 and 41 of the foregoing law itemize the assets and services that qualify as common.
Owners of real estate units have the opportunity to choose between the exclusive and common property regime, and the independent and co-ownership regime. The internal by-laws, the owner’s assembly minutes, all construction plans, architectural division plans, perimetric boundaries and the construction statement must be registered in the Real Estate Registry of the corresponding jurisdiction. Upon completion of the proper registries, units are registered independently from one another.
Fondo Mivivienda
The acquisition of affordable housing units developed by Viva GyM is often financed by Fondo Mivivienda S.A., a publicly owned financial institution established in 1998 by Law No. 26912, with the purpose of (i) promoting and financing the acquisition, bettering and construction of houses, especially those of social interest; (ii) carrying out activities related to the fostering of capital flows to the housing financing market; (iii) participating in the primary and secondary markets of mortgage credits; and (iv) contributing to the development of the capital markets.
Prevention of Money Laundering and Financing of Terrorism
SBS Resolution No. 789-2018 (that has replaced SBS Resolution No. 486-2008 as of March 15, 2018), as amended from time to time, requires construction and real estate companies to implement a money laundering and terrorism financing prevention system, including, among others, appointing a compliance officer, setting a registry of operations and notifying the Financial Intelligence Unit of the SBS, the entity responsible for supervising and enforcing compliance to the resolution referred to herein, of any suspicious activity.
Public- and Private-Sector Contracts
Concar provides services in compliance with Peru’s Public Procurement Law and its Regulations, approved by Supreme Decree No. 350-2015-EF, as amended, when dealing with public counterparties; and with the regulation set forth in the Civil Code when dealing with private counterparties. Such regulations establish the different types of selection processes which companies may undergo when contracting with the state, as well as the rules and conditions applicable to such processes. They also establish general rules applicable to contractual relationships among private parties. See “—Engineering and Construction” for more information on the applicable legal frameworks. Concar is registered with the Peruvian National Registry of Suppliers, required to act as supplier for public entities.
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Technical Services
Intellectual Property
Certain operations of GMI and GMD are protected by Peruvian Copyright Law, approved by Legislative Decree No. 822, specifically the engineering drawings and software registered in the INDECOPI Copyright Registry. However, the company’s business and profitability are not dependent on patents or licenses; industrial, commercial or financial contracts; or new manufacturing processes.
Dimension Testing Services
CAM Peru S.R.L. provides the dimension testing service of electrical meters, for which it must be a registered testing entity as provided by Technical and Commercial Regulations Commission Resolution No. 0065-1999/INDECOPI-CRT. As of the date of this annual report, Cam Peru S.R.L, is registered as an accredited provider of electricity meters dimension-testing services. The pertaining registration can be renewed for consecutive periods, provided that a request is filled 60 days prior to expiration. If Cam Peru S.R.L. does not comply with the rules approved by the INDECOPI, said governmental authority may impose a suspension or revoke the registry.
The following organizational chart sets forth our principal operating subsidiaries within our four business segments
| (1) | In June 2018, Graña y Montero transferred economic rights over 48.8% of the share capital of Norvial S.A. The company continues to possess voting rights over such share capital of Norvial. S.A. |
| (2) | 36.10% of the share capital in Viva GyM is held by our subsidiary GyM. |
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The following charts set forth the principal activities of each of our four business segments:
The following is a brief description of our principal operating subsidiaries:
| • | Engineering and Construction: |
| • | GyM S.A. (“GyM”), incorporated in Peru, is one of the oldest and largest construction companies in Peru. Graña y Montero owns 98.24% of GyM; the remaining 1.76% is held by former and current company executives. |
| • | Vial y Vives—DSD S.A. (“Vial y Vives—DSD”), incorporated in Chile, is an engineering and construction company specialized in the mining sector and in providing services to the energy, oil and gas, and cellulose sector. GyM, through GyM Chile SpA, owns 94.49% of Vial y Vives—DSD; Inversiones VyV S.A., a company controlled by the founders of Ingeniería y Construcción Vial y Vives S.A., (which merged to form Vial y Vives—DSD) owns 1.36%; and the remaining 4.15% is held by third parties. |
| • | GMI S.A. Ingenieros Consultores (“GMI”), incorporated in Peru, is primarily engaged in engineering consultancy for projects in the mining, hydrocarbons, electrical, agricultural, industrial, tourism and transportation sectors. Graña y Montero owns 89.41% of GMI; 5.0% is held by current and former company executives; and the remaining 5.59% is held by third parties. |
| • | Morelco S.A.S. (“Morelco”), incorporated in Colombia, is a recognized specialist in electromechanical assemblies, civil works, and services for the oil and gas and other energy sectors. Our subsidiary GyM S.A. owns 70.0% of Morelco, and the remaining 30% is held by the Serna family in trust. |
| • | Infrastructure: |
| • | Toll Roads: |
| • | Norvial S.A. (“Norvial”), incorporated in Peru, is the concessionaire of the 183 km stretch between Ancón and Pativilca of the Panamerican Highway. Norvial is comprised of common shares (Type A), and non-voting shares (Type B). Graña y Montero owns 52.0% of the common shares of Norvial and JJC Contratistas Generales S.A., a Peruvian construction company, owns the remaining 48.0%. Inversiones en Autopistas S.A. owns 75.1% of the non-voting shares and JJC Contratistas Generals S.A. the remaining 24.9%. |
| • | Survial S.A. (“Survial”), incorporated in Peru, is the concessionaire of the 750 km highway between Marcona and Urcos in Peru. Graña y Montero owns 99.995% of Survial, and the remaining 0.005% is held by Concar S.A. |
| • | Concesión Canchaque S.A.C. (“Canchaque”), incorporated in Peru, is the concessionaire of the 78 km highway between the towns of Buenos Aires and Canchaque in Peru. Graña y Montero owns 99.96% of Canchaque, and the remaining 0.04% is held by Concar S.A. |
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| • | Concar S.A., incorporated in Peru, is engaged in the operation and maintenance of infrastructure assets. Graña y Montero S.A.A. owns 99.9983% of Concar and the remaining 0.0017% is held by GyM S.A. Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. |
| • | Mass Transit: |
| • | GyM Ferrovías S.A. (“GyM Ferrovías”), incorporated in Peru, is the concessionaire of the Lima Metro. Graña y Montero owns 75.0% of GyM Ferrovías; the other 25.0% is held by Ferrovías Participaciones S.A., a railway infrastructure company. |
| • | Water Treatment: |
| • | Concesionaria La Chira S.A. (“La Chira”), incorporated in Peru, is the concessionaire of La Chira waste water treatment plant in southern Lima, Peru. Graña y Montero owns 50.0% of La Chira; the other 50.0% is held by Acciona Agua S.A, an affiliate of a waste water treatment and distribution company. |
| • | Energy: |
| • | GMP S.A. (“GMP”), incorporated in Peru, is engaged in the oil and gas business and provides hydrocarbon extraction services to Perupetro S.A., a Peruvian state oil company; owns a gas processing plant; and, through a joint operation with a Peruvian affiliate of Oiltanking GmbH, operates ten fuel terminals in Peru. Graña y Montero owns 95.0% of GMP; the remaining 5.0% is held by a former company executive. |
| • | Real Estate: |
| • | Viva GyM S.A. (“Viva GyM”), incorporated in Peru, is focused on the development and sale of affordable housing and housing, as well as other real estate projects such as office buildings and shopping centers. Graña y Montero directly owns 63.44% of Viva GyM, with GyM owning an additional 36.10%; and the other 0.46% is owned by a company executive. |
| • | Technical Services: |
| • | CAM Chile S.A. (“CAM”), incorporated in Chile, provides field and specialized electrical services in Chile, Colombia, and Peru. Graña y Montero owns 73.16% of CAM; 24.39% is held by El Condor Combustibles S.A., which is part of a Chilean economic group and the remaining 2.45% is held by Inversiones y Asesoría Samburu Limitada, which belongs to a former executive of the company. |
| • | Adexus S.A. (“Adexus”), incorporated in Chile, provides development and implementation solutions for information technology in Chile, Peru and Ecuador. Graña y Montero owns 100% of Adexus. |
D. Property, Plant and Equipment
Approximately 76.8% of our assets are located in Peru, with the balance located primarily in Chile and Colombia. At December 31, 2017, the book value of all our land (excluding real estate inventories) and buildings, machinery and equipment was US$266.8 million (S/.865.7 million). We currently lease certain machinery and equipment from vendors. The term of our leasing contracts ranges from two to five years, depending on the nature of the equipment. Leased machinery and equipment are capitalized for accounting purposes. Our principal executive offices, which we lease, are located at Av. Paseo de la República 4667, Surquillo, Lima 34, Peru and Av. Petit Thouars 4957, Miraflores, Lima 18, Perú.
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Insurance and Contingency Planning
We have insurance coverage for fire; strike, riot, malicious damage, vandalism and terrorism; loses or damages to construction machinery and equipment; destruction or disappearance of property; civil liability, including physical harm to third parties; professional liability; transportation; vehicle theft, collision, rollover, fire and accidents; and directors and officers liability. Additionally, we carry different policies for specific risks related to our business segments. Our management considers this coverage to be sufficient to cover probable losses and damages, taking into consideration the nature of our activities, the risks involved in our transactions and the advice of our insurance brokers.
We also have contingency plans in place in order to protect our company and the interests of our clients. In the event of an emergency, we have procedures in place designed to minimize any resulting interruption in service to our most critical business processes.
Moreover, in the event of an emergency, we have systems and procedures in place that minimize the impact of unplanned downtime to our IT services’ clients. Our data centers have redundant facility systems and infrastructure to provide continued operation on each of them, complying with international standards such as ISO/IEC 27001 and ISO 9001.
| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion should be read in conjunction with our consolidated financial statements included in this annual report, which have been prepared in accordance with IFRS issued by the IASB. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth under “Part I. Introduction—Forward-Looking Statements” and “Item 3.D. Key Information—Risk Factors.”
Overview
We are the largest engineering and construction company in Peru as measured by revenues during 2017, and one of the largest publicly traded engineering and construction companies in Latin America as measured by market capitalization as of December 31, 2017, 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 the country’s landmark private and public sector infrastructure projects. Beginning in the mid-1980s, we decided to leverage our engineering and construction expertise into complementary lines of business. We have also undertaken the engineering and construction of large and complex projects outside our home market throughout our history. More recently, we decided to expand our activities into other key markets of the Latin American region through the acquisition of businesses with solid positions in those markets.
Recent Developments
Overview
We have participated in six consortia with affiliates of Odebrecht related to the construction and operation of infrastructure projects in Peru during the period from 2005 to 2017. On December 21, 2016, Odebrecht entered into a plea agreement with U.S., Brazilian and other authorities in which they admitted to making illegal bribery payments in connection with projects in various countries, including Peru. These projects include certain consortia in which we participated. As a result of the plea agreement, Peruvian authorities have initiated congressional inquiries and criminal investigations against our company and certain of our former directors and executive officers.
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Additionally, on January 24, 2017, the Peruvian government terminated the gas pipeline concession held by GSP, consortium in which we participated with Odebrecht affiliates, due to failure of GSP to obtain the required project financing by the stipulated deadline. The termination of the GSP gas pipeline concession, despite the government payment contemplated under the concession contract, has had a material impact on our consolidated financial results and backlog.
In response to these events, we have instituted a multi-step strategic action plan. This strategic action plan includes: (i) monitoring the process for government payment resulting from the termination of the GSP gas pipeline concession; (ii) renegotiations with creditors of certain debts that became due upon termination of the GSP gas pipeline concession contract; (iii) board approval of the sale of certain non-strategic assets to repay debt related to GSP; (iv) an internal investigation relating to our participation in consortia with Odebrecht; (v) an assessment to strengthen our anti-corruption compliance program; and (vi) changes to our board of directors and senior management.
See “Item 3.D. Key Information—Risk Factors —Risks Related to Recent Developments.”
Our Association with Odebrecht
We have participated in six construction and operation of infrastructure projects in Peru with affiliates of Odebrecht during the period from 2005 to 2017 (known as: IIRSA South Tranche II; IIRSA South Tranche III; IIRSA North; Electric Train Platform; Gasoducto Sur Peruano; and Chavimochic). Our stakes in these projects ranged from 17% to 33%. During 2017 we only participated in two of these projects (Gasoducto Sur Peruano and Chavimochic), neither of which are currently ongoing. During the period from January 1, 2005 to December 31, 2017 85% of the projects carried out by our company, in terms of consolidated revenues, involved the private sector, while projects with Odebrecht accounted for less than 5% of our consolidated revenues during this period. In its plea agreement, Odebrecht admitted to paying bribes in connection with the IRSA South Tranche II, the IRSA South Tranche III and the Electric Train Platform.
The Chavimochic concession, awarded in 2013 for the design, construction, operation and maintenance of major hydraulic works in northern Peru, is the only project with a contract in effect in which we are currently associated with Odebrecht. Affiliates of Odebrecht own 73.5% of the Chavimochic-related concessionaire company and construction consortium, and we hold the remaining 26.5% stake. As a result of the government’s failure to deliver land required for the project, the project’s first phase, hydraulic works, cannot be concluded, and the project’s second phase cannot begin. Since February 2017, the Chavimochic consortium has requested the termination of the concession in light of the government’s breach, and the parties are currently in discussions, including for a potential sale of the project. As of December 31, 2017, our investment in this project amounted to US$8.6 million (S/.22 million) and our portion of the performance guarantee amounted to US$9.5 million (S/.31.9 million).
Termination of the Gasoducto Sur Peruano Concession
In September 2015, we entered into a memorandum of understanding to invest US$215 million (S/.722 million) for a 20% stake in GSP, a company that had previously been awarded the concession for the design, construction and operation of the southern gas pipeline, a project to deliver natural gas to the southern region of Peru, particularly to the provinces of Cuzco, Arequipa, Puno and Moquegua. With our 20% investment commitment made on November 2, 2015, an affiliate of Odebrecht owned a 55% interest and an affiliate of Enagás International, S.L. (“Enagas”) owned a 25% interest in GSP. As of the date of this annual report, we have made total investments in the project in an amount of US$243 million (S/.811 million).
On January 24, 2017, the Peruvian government terminated the concession due to GSP’s failure to obtain the required project financing by the stipulated deadline. As a result, we recognized impairments with respect to our investment in GSP and our participation in the related construction consortium (Consorcio Constructor Ductos del Sur).
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In accordance with the concession contract, the Peruvian government is required to carry out an auction process to sell GSP’s assets and obtain a new concessionaire within one year of the contract termination, with the funds raised in the sale to be used to pay the existing concessionaire for its investment in the project. The amount of the termination payment is required to be no more than 100% and no less than 72.25% of the net carrying amount ( valor contable neto ), as defined in the concession contract. Consequently, the auction process should initiate with a base price equivalent to 100% of the net carrying amount. If the auction is unsuccessful in the first round, the government is required to undertake a second round, with a base price equal to 85% of the net carrying amount; and, if the second round is unsuccessful, the government is required to undertake a third round, with a base price equal to 72.25% of the net carrying amount. If a successful bidder is not obtained from such auction processes within one year of the termination of the contract, the termination payment to the existing concessionaire would be 72.25% of the net carrying amount.
The Peruvian Ministry of Energy and Mines announced on April 18, 2017 that the auction process for the new concessionaire of the project assets would be carried out during the first quarter of 2018, notwithstanding the requirements under the concession contract. On April 28, 2017, a third party was appointed, through an adjudication process, as temporary custodian and administrator of the gas pipeline assets until the new bidder is awarded the concession. Although the concession contract provides that payment be made within one year of termination, the Peruvian Ministry of Energy and Mines has not made payment or, to our knowledge, initiated the auction or payment process. Because this payment has not been made, GSP’s right to compensation pursuant to the concession contract should be 100% of the net carrying amount.
In 2016, in connection with efforts to restructure or sell Odebrecht’s participation in GSP, due to the corruption scandal surrounding Odebrecht, Odebrecht contractually agreed to subordinate its claims under the concession to the other project partners, Enagás and ourselves. As a result, we and Enagas may be entitled to repayment of our percentage payment under the concession contract prior to Odebrecht. However, on January 3, 2018, Odebrecht commenced arbitration proceedings against us, our subsidiary GyM and Enagás, seeking to invalidate the contractual subordination.
On December 4, 2017, GSP voluntarily commenced bankruptcy proceedings in Peru. GSP’s assets will be liquidated purusant to Peruvian law. GSP’s only substanttialy asset is the claim for government payment described above, as contemplated under the concession contract in the event of termination.
As of the date of this annual report, we have made investments in the GSP project of US$243 million (S/.811 million), which we financed in part with borrowings. We have also assumed our proportional obligation to repay the project’s bridge loan in an amount of US$129 million (S/.433 million) and the project’s performance guarantee in amount of US$52.5 million (S/.176 million) and recorded them as other financial liabilities and other accounts payable, respectively, in our consolidated financial statements as of December 31, 2017. We also recorded an account receivable for the same amounts, since we have the right to collect these amounts from GSP. According to our estimates, under the terms of the concession contract, taking into account the subordination arrangement, and based on receiving payment equal to 72.25% of the net carrying amount, in accordance with IFRS, we recorded an impairment to our equity investment in GSP in the amount of S/.593.1 million (approximately US$176.5 million) to reflect a write-off of equity value in GSP. Although GSP’s right to compensation pursuant to the concession contract, due to the Peruvian government’s failure to pay, is 100% of the net carrying amount, the company has accounted for 72.25% due to political uncertainty, GSP’s bankruptcy process with INDECOPI, and disagreements with the other GSP shareholders. In addition, our gross profit decreased by S/.15.2 million (US$4.5 million) due to the impact of the early termination of the construction consortium (Consorcio Ductos del Sur), in accordance with IFRS. Also, we registered a discount of the related long term account receivable in financial expenses of S/.76.9 million (US$22.9 million). Adding these three effects, plus the deferred tax effect, we had a net impact of S/.498.0 (US$148.2 million) on our income statement for the year ended December 31, 2016.
In addition, the termination of the GSP gas pipeline concession has reduced our backlog as of December 31, 2016, by US$855 million, representing 30.2% of our E&C backlog and 21.4% of our total backlog.
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The effects of the termination of the GSP gas pipeline concession recorded in our consolidated financial statements as of and for the year ended December 31, 2016 are based on our estimates, based on the terms of the concession contract, taking into account the subordination arrangement, receiving payment equal to 72.25% of the net carrying amount and with the information that we have available to date. The actual impact on our results, however, could change materially from our estimates. Moreover, we cannot assure you that we will receive the government payment provided for under the GSP gas pipeline concession contract on a timely basis or at all. For more information, see notes 5(e) and 5(f) to our annual audited consolidated financial statements included in this annual report.
Investigations
The Lava Jato commission of the Peruvian congress, which was formed in November 2016 to investigate alleged bribes made by Brazilian companies to Peruvian public officials, has initiated congressional inquiries into the company and other construction companies in Peru. These investigations have required certain of the company’s former board members and executive officers to provide testimony at hearings before the commission.
Separately, a former employee of GyM has been included in a criminal investigation for collusion and other alleged crimes, though neither the company nor GyM have been formally included in these criminal investigations.
Peruvian prosecutors have included José Graña Miró Quesada, the former Chairman of the company, in an investigation for the crime of collusion, and Hernando Graña Acuña, a shareholder, a former board member of the company and chairman of our subsidiary GyM, for the crime of money laundering against the Peruvian government, each in connection with the IIRSA South project concession (tranches II and III), in which we participated with Odebrecht. Gonzalo Ferraro Rey, the former Chief Infrastructure Officer of the company, has also been included in an investigation for the crime of money laundering in connection with the same project.
In connection with investigations relating to the IIRSA South project concession (tranches II and III), the Peruvian criminal prosecutor moved to charge the company and our construction subsidiary, GyM, as criminal defendants in connection with the projects. Separately, an Ad Hoc Public Prosecutor appointed by the Peruvian executive branch to investigate matters of corruption moved to directly include the company as a civilly-responsible third party. In response, the Peruvian First National Preparatory Investigation Court ( Primer Juzgado de Investigación Preparatoria Nacional ) notified us of its decision to formally include the company and GyM in its criminal investigation. We appealed the court’s decision and, on June 22, 2018, the First Court of Appeals of the Superior Court of Lima revoked the judicial order No. 05 dated February 28, 2018 that indicted the company and GyM, among other corporate defendants, in the criminal investigation on charges of collusion and other crimes, and rejected the petition, without prejudice, made by the prosecutor to incorporate both companies in the aforementioned process. Nevertheless, we cannot assure you that the criminal prosecutor will not appeal this decision, or file a new claim, against the company and GyM, or that our position will ultimately prevail. Furthermore, a decision from the Peruvian judiciary on whether our company will be included in the investigation proceedings as a civilly responsible third party remains pending, and we cannot assure you that our company will not be included or that our position would ultimately prevail.
On February 19, 2018, we also received notice from the Ad Hoc Prosecutor seeking to directly include our subsidiary, GyM S.A., as a civilly-responsible third party in the investigation relating to Tranches 1 and 2 of Line 1 of the Lima Metro. If our subsidiary’s officer or former or current officers are included and convicted, it may be required to pay civil damages to the Peruvian government. A decision from the Peruvian judiciary regarding these matters remains pending, and we cannot assure you that our subsidiary will not be included or that our position would ultimately prevail.
In July 2017, media reports alleged that certain construction companies in Peru, Brazil and Spain, including our company, colluded as a “construction club” to receive public contracts. As a result of these reports, INDECOPI has initiated an investigation regarding the anti-competitive activities of construction companies in Peru, including our company. In July 2017, the Peruvian government conducted a search of our facilities related to these allegations. In January 2018 criminal prosecutors conducted a search of our facilities regarding the “construction club” investigation. We have provided the information requested by the Peruvian criminal prosecutors. A former employee of GyM has been included in the investigation for collusion and other alleged crimes. To date, there is no formal investigation of the company.
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We cannot assure you that other of our former or current board members and executive officers will not be included in the foregoing proceedings as civilly-responsible third parties or criminal defendants as well.
A conviction of corruption or resolutions with government authorities may lead to criminal and civil fines as well as penalties, sanctions, injunctions against future conduct, profit disgorgement, disqualifications from directly and indirectly engaging in certain types of business, the loss of business licenses or permits or other restrictions. Moreover, our involvement in corruption investigations, and any findings of wrongdoing in such investigations, could further damage our reputation and have a material adverse impact on our ability to compete for business. Such investigations may also adversely affect our ability to pursue strategic projects, and could potentially result in the termination or modification of certain existing contracts or relationships. Also, such investigations may affect the company’s ability to secure financing in the future.
Emergency Decree and Subsequent Legislation
On February 13, 2017, the President of Peru issued an emergency decree ( decreto de urgencia N° 003-2017), prohibiting groups that have been, or whose officers or representatives have been convicted of, or have admitted to, corruption, money-laundering or similar crimes (whether in Peru or elsewhere) from, among other things, transferring or selling any assets related to investments in Peru, including the proceeds of asset or equity sales, or sending money abroad without a governmental authorization. Section II of Law 30737, promulgated in March 2018 to replace the aforementioned emergency decree, includes companies that have been consortium partners of groups that have been, or whose officers or representatives have been, convicted of, or have admitted to, corruption, money-laundering or similar crimes. Our company and our subsidiary GyM are two such companies. The law requires that they: suspend money transfers abroad; implement a compliance program and disclose information to competent authorities; and create a trust of assets to guarantee eventual compensation in favor of the Peruvian government. A Peruvian prosecutor will determine the amount of such guarantee, pursuant to Law 30737. On May 9, 2018, Supreme Decree No. 096-2018-EF was passed, which provides guidelines for such determination. We estimate that we may be required to include in the trust assets worth approximately US$41 million and that our potential liability should not exceed approximately $51 million, based on the guidelines. We cannot assure you of the amount of this potential liability, nor can we assure you that the company will have sufficient assets to include in the trust. Furthermore, we cannot assure you that these laws will not be expanded, or that subsequent laws will not be passed, that impose further obligations or restrictions on our company and our subsidiaries.
Strategic Action Plan
In response to the events described above, we have instituted a multi-step strategic action.
Negotiation with Creditors
We have renegotiated three debt instruments related to GSP as follows:
| • | Syndicated Loan Related to our Equity Investment in GSP : As a result of the termination of the GSP gas pipeline concession, our syndicated loan used to finance our equity investment in GSP became due. The principal amount outstanding under our syndicated loan was US$81.1 million (S/.263.2 million) as of December 31, 2017, and is US$76.3 million (S/.249.9 million) as of the date of this annual report. On June 27, 2017, we entered into an amendment to the credit agreement. According to the terms of the amendment our syndicated loan matures on 2020, with required prepayments to be made with the proceeds of asset sales of 40% in the first year and an additional 30% in the second year of the amendment. The syndicated loan continues to accrue interest at LIBOR plus 4.90% per year. In addition, we are prohibited from paying dividends until the loan is repaid in full. Also, we have provided additional security interests, including: (i) a first lien on our shares of GyM and Concar; (ii) a second priority lien on our shares of Almonte; (iii) a first lien on certain real estate properties in Surquillo; (iv) liens on certain related amounts; (v) a second priority lien on our shares of CAM and CAM Servicios del Perú S.A.; and (vi) a first lien on cash flows from the sale of certain assets. For additional information on our syndicated loan, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources”; |
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| • | Proportional guarantee of the GSP Bridge Loan: As a result of the termination of the GSP gas pipeline concession, our proportional guarantee of the GSP bridge loan became due. On June 27, 2017 we entered in a new, US$78.7 million (S/.264.8 million) term loan with Natixis, BBVA, SMBC and MUFJ, the proceeds of which were used to repay the GSP bridge loan. The new term loan matures on 2020, with required prepayments to be made with the proceeds of asset sales of 40% in the first year and an additional 30% in the second year of the closing date. The term loan accrues interest at LIBOR plus 4.50% per year, which will increase to 5.00% during the second year and to 5.50% during the third year. In addition, we will be prohibited from paying dividends until our guarantee is repaid in full. Also, we have provided the following security interests to secure repayment of the term loan: (i) a first lien on our rights to receive the termination payment derived from the GSP termination, (ii) a second priority lien on our shares of GyM and Concar; (iii) a second priority lien on our shares of Almonte; (iv) a second priority lien on certain real estate properties in Miraflores and Surquillo; (v) a second priority lien on our shares of CAM and CAM Servicios del Perú S.A.; and (vi) a first lien on cash flows from the sale of certain assets. The principal amount outstanding under the new term loan was US$72.4 million (S/.235.2 million) as of December 31, 2017, and as of the date of this annual report, there is US$72.4 million outstanding on the term loan. |
| • | Proportional Repayment Obligations under the GSP Performance Guarantee : As a result of the termination of the GSP gas pipeline concession, the government exercised the GSP performance guarantee. As of December 31, 2017, we had US$15.6 million (S/.50.8 million) in obligations outstanding and, as of the date of this annual report, we have US$6.8 million (S/.22.1 million) in obligations outstanding. On March 31, 2017, we renegotiated the terms of our repayment obligations owed to Chubb Insurance Company regarding our proportional share of the performance guarantee issued in connection with the GSP gas pipeline concession. The new terms required repayment by March 31, 2018, extended until September 30, 2018, with interest accruing at 6% per year, and provide a security interest over our shares in CAM and over the cash flows from the sale of certain assets. |
| • | In addition, in July 2017, we entered into a financial stability framework agreement with certain banks providing for new lines of credit to support our financial stability and liquidity. The principal amount outstanding under this Agreement was US$150.7 million (S/.489.0 million) as of December 31, 2017, and as of the date of this annual report, we had US$77.1 million (S/.250.2 million) outstanding. For more information, see “—Liquidity and Capital Resources—Indebtedness.” |
We are currently in default of certain of the covenants under these financial instruments. For more information, see “Item 13. Defaults, Dividend Arrearages and Delinquencies.”
Asset Sales
In order to strengthen our liquidity and financial flexibility, particularly in the event of potential delays in receiving the government payment contemplated under the GSP gas pipeline concession contract, and make payments on our debt related to the GSP project, our board has approved the sale of non-strategic assets in the amount of up to US$350 million (S/.1,176 million) in proceeds.
As of the date of this annual report, we have entered into the following transactions:
| • | Sale of Cuartel San Martín : On February 3, 2017, our subsidiary Viva GyM sold all of its interests in the Cuartel San Martín real estate project, which represented a 50% stake in the project, to its partner Urbi Propiedades S.A. for US$50 million (S/.163 million); |
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| • | Sale of Promoción Inmobiliaria del Sur: On February 24, 2017, our subsidiary Viva GyM sold all of its interests in PRINSUR, which owns undeveloped land located in Lurin, representing 22.5% of the share capital, to its partner Inversiones Centenario S.A.A. for US$25 million (S/.81 million); |
| • | Sale of Shares in Red Eagle Mining Corporation : In February and March 2017, our subsidiary Stracon GyM sold shares of Red Eagle Mining Corporation, representing 9.97% of the share capital, in a stock exchange transaction for US$13.3 million (S/.43.0 million). Stracon GyM continues to own 2.70% of the share capital of Red Eagle Mining Corporation; |
| • | Sale of our Interest in COGA : On April 24, 2017, we sold our 51% interest in COGA to our partners Enagas and Carmen Corporation for a price of US$21.5 million (S/.69.8 million). COGA is in charge of the operation and maintenance of TGP, the trans-Andean gas pipeline from Camisea to the Pacific coast in Peru; |
| • | Sale of our Interest in GMD : On June 6, 2017, we sold our 89.19% interest in GMD, our IT services subsidiary, to Advent International for a price of US$84.7 million (S/.269.9 million); |
| • | Sale of the building Petit Thouars : On September 29, 2017, we sold a building located in block 49 of Petit Thouars Avenue to VOLCOMCAPITAL Deuda Perú for a price of US$20.5 million (S/.68.9 million); and |
| • | Sale of Almonte Properties . On May 31, 2018, Almonte signed an agreement to sell 4,208,769 square meters of land for the price of US$92.7 and a second agreement for the sale of additional land subject to certain conditions. In this case, the amount corresponding to the company is proportional to its 50.45% stake. |
Refinancing operations for GSP debt reduction
Additionally, on June 11, 2018, we signed an investment agreement with BCI Perú, to monetize future dividends of Norvial. The amount of the transaction is US$42.3 million. We will continue to possess voting rights with respect to Norvial.
Other Sales for GyM Debt Reduction
Sale of Interest in Stracon GyM : On April 11, 2018, we sold our 88% interest in Stracon GyM for a price of US$77 million (S/.249 million).
Internal Investigation
In light of the recent events described above, we conducted an internal investigation led by external counsel with respect to our participation in consortia with Odebrecht. The new Risk, Compliance and Sustainability Committee of our board of directors was charged with monitoring the progress of the internal investigation. The internal investigation, which concluded on November 1, 2017, identified no evidence to conclude that any company personnel engaged in bribery in connection with any of the company’s public projects in Peru with Odebrecht or its subsidiaries, or that any company personnel was aware of, or knowingly participated in, any corrupt payments made in relation to such projects.
Strengthening of Anti-Corruption Program
We have approved a plan to continue strengthening our anti-corruption compliance program. This has included the creation of a Risk, Compliance and Sustainability Committee of our board of directors, the creation of a Corporate Risk and Compliance Function, the hiring of a Chief Risk and Compliance Officer, and the reinforcement of our procedures related to the third-party risk evaluation and mitigation.
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New CEO, New Board of Directors and Board Committee
On February 27, 2017, our former chairman of the board, our former CEO and board member, and our board member and the former chairman of the board of our subsidiary GyM resigned from their positions. Effective March 2, 2017, we appointed a new CEO. On March 31, 2017, our shareholders at the annual shareholders’ meeting appointed a new board of directors, replacing seven of our nine existing directors. For more information, see “Item 6. Directors, Senior Management and Employees.”
Securities Class Action
Two securities class action complaints have been filed against us and certain of our former directors and current and former executive officers in the Eastern District of New York during the first quarter of 2017. These complaints were consolidated into a single class action. The plaintiffs filed a consolidated amended compliant on May 29, 2018. We believe that we have meritorious defenses to the claims asserted, and we intend to defend ourselves vigorously in these matters.
Restatement of Financial Results for Fiscal Year 2015
As more fully described in “Item 16.F. Change in Registrant’s Certifying Accountant,” we appointed Moore Stephens to re-audit our financial results for fiscal year 2015. The previously issued consolidated financial statements of the company for the 2015 fiscal year (and the related audit opinion) included in the company’s annual report on Form 20-F for the year ended December 31, 2015 should not be relied upon. The restatement of the 2015 fiscal year has resulted in certain significant changes to the company’s consolidated financial statements. For more information, see note 2.30 to our audited annual consolidated financial statements for the year ended December 31, 2016 included in our annual report on Form 20-F for that year.
Reclassification of GMD
On June 6, 2017, we sold our 89.19% interest in our former subsidiary, GMD. As a result, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the year ended December 31, 2017. We have reclassified our consolidated financial statements for the years ended December 31, 2015 and 2016 included in this annual report, to show GMD as a discontinued operation for those years as well.
Internal Control over Financial Reporting
In 2017, we identified material weaknesses regarding our internal control over financial reporting. For more information, see “Item 3. Key Information—D. Risk Factors —We have identified material weaknesses in our internal control over financial reporting, and if we cannot maintain effective internal control 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” and “Item 15. Controls and Procedures.”
Factors Affecting Our Results of Operations
General
Peruvian, Chilean and Colombian Economic Conditions
72.0%, 73.5% and 72.0% of our revenues in 2015, 2016 and 2017 were derived from activities in Peru. Accordingly, our results of operations are substantially affected by economic conditions in the country and our growth is driven in significant part by growth in the Peruvian economy. In addition, 12.5%, 11.4% and 17.3% of our revenues in 2015, 2016 and 2017 were derived from activities in Chile and 10.3%; 9.2% and 4.7% of our revenues in 2015, 2016 and 2017 were derived from activities in Colombia.
The Peruvian real GDP has grown at an average rate of 3.3% during the three years from 2015 to 2017. With increasing disposable income and an expanding middle class, private consumption grew at an average annual rate of 3.3% in real terms from 2015 to 2017. In 2015, 2016 and 2017 private investment decreased at an average rate of 4.3%, 5.9% and increased 0.1%, respectively, in real terms, primarily due to lower investment in mining. Inflation in Peru, as measured by the change in the consumer price index, was 4.4% in 2015, 3.2% in 2016 and 1.7% in 2017. The sol depreciated versus the U.S. dollar by 14.2% in 2015, and appreciated by 1.6% in 2016 and by 3.3% in 2017. Peru’s sovereign debt has been rated investment grade by S&P, Fitch and Moody’s. At the end of 2017, Peruvian sovereign debt had one of the highest credit ratings in the South American region, rated BBB+ by S&P (August 2013) and Fitch (March 2018), and A3 by Moody’s (August 2017).
The Chilean economy grew at an average annual rate of 1.7% during the three years from 2015 to 2017 in real terms. Total fixed investment declined at an annual average rate of 4.7% in real terms during the three years from 2015 to 2017. Inflation in Chile, as measured by the change in the consumer price index, was 4.4% in 2015, 2.7% in 2016 and 2.3% in 2017. The Chilean peso depreciated versus the U.S. dollar by 16.4% in 2015, and appreciated by 5.7% in 2016 and by 7.8% in 2017. Chilean sovereign debt has the highest rating in the South America region, rated A+ by S&P (July 2017), Aa3 by Moody’s (August 2017) and A by Fitch (February 2018).
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The Colombian real GDP grew at an average annual rate of 2.3% during the three years from 2015 to 2017. Inflation has increased during recent years, with inflation of 6.8% in 2015, 5.8% in 2016 and 4.1% in 2017. The Colombian peso depreciated against the U.S. dollar by 31.6% in 2015, and appreciated by 4.7% in 2016 and by 0.6% in 2017. Colombia’s sovereign debt was rated BBB by Fitch in March 2018, BBB- by S&P in December 2017, and Baa2 by Moody’s in February 2018.
From 2013 to 2017 our revenues grew at a compound annual growth rate (CAGR) of 0.5% ((1.54)% excluding acquisitions and asset sales). Our organic revenues decreased 5.9% in 2017 from 2016, principally as a result of lower activity levels in our E&C segment in 2017.
Fluctuations in Exchanges Rates
We estimate that in 2017, 39.3%, 43.8% and 16.9% of our revenues were denominated in soles, U.S. dollars and other currencies respectively, while 63.9%, 18.3% and 17.8% of our cost of sales during the year were denominated in soles, U.S. dollars and other currencies. In addition, as of December 31, 2017, 25.4%, 60.3% and 14.3% of our total debt was denominated in soles, U.S. dollars and other currencies, respectively. Accordingly, fluctuations in the value of these currencies can materially affect our results of operations. When the sol appreciates against the U.S. dollar, our operating margins tend to decrease; when the sol depreciates against the U.S. dollar, our operating margins tend to increase (if everything else were held equal). Conversely, the appreciation of the sol against the U.S. dollar tends to decrease our indebtedness and financial expenses as expressed in soles; and the depreciation of the sol against the U.S. dollar tends to increase our indebtedness and financial expenses as expressed in soles. We enter into derivatives, from time to time, to hedge part of our financial exposure to currency fluctuations. The value of the sol to the U.S. dollar depreciated in 2014 and 2015, and appreciated slightly in 2016, which impacted our results of operations. See “Item 3.A. Key Information—Selected Financial Data—Exchange Rates.”
We have included estimates of the approximate effects of fluctuations in exchange rates on our consolidated and segment revenues and costs of sales in “—Results of Operations.” These estimates were calculated based on daily average exchange rates and estimated aggregate revenues and cost of sales denominated in U.S. dollars, Chilean pesos and Colombian pesos, and were not calculated on a transaction by transaction basis. For additional information on the effect of exchange rate fluctuations on our results of operations, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk.”
Cost of Labor, Third-Party Services and Inputs
The largest components of our costs are: labor, which in 2017 represented 29.9% of our cost of sales and 47.8% of our administrative expenses; services provided by third parties, which in 2017 represented 31.0% of our cost of sales and 28.3% of our administrative expenses; and inputs (including raw materials), which in 2017 represented 21.0% of our cost of sales. For a breakdown of our cost of sales and administrative expenses, see note 27 to our audited annual consolidated financial statements included in this annual report.
Our cost of labor is influenced by, among other factors, the number of our employees, as well as inflation, competition we face for personnel in each of our business segments and the availability of qualified candidates. From 2015 to 2016 our personnel charges decreased by 30.0% and from 2016 to 2017 our personnel charges increased by 13.5%. Services provided by third parties include: subcontracting in our E&C segment, such as carpentry work; advisory and consultancy work, including external audit and legal services; and renting of equipment. From 2015 to 2016 our costs related to services provided by third parties decreased by 20.5% and from 2016 to 2017 our costs related to services provided by third parties decreased by 27.7%. The principal inputs we use are fuel, cement and steel, which in the aggregate represented 21.0% of our total input costs in 2017. Our costs for these inputs are affected by, among other factors, the growth or decline of our operations, market prices, including global prices in the case of fuel, and transportation costs. We do not have long-term contracts for the supply of our key inputs. From 2015 to 2016, our input costs decreased by 16.0% and from 2016 to 2017, our input costs increased by 26.1%. Our cost of labor, third party services and inputs decreased in 2017 primarily due to lower activity levels in our E&C segment.
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Acquisitions and Dispositions
In November 2014, we acquired an additional 13.5% interest of Stracon GyM for S/.74.7 million (US$25 million), increasing our stake in Stracon GyM to 87.6%. On April 11, 2018, we sold our stake in Stracon GyM to the former Chief Executive Officer of Stracon GyM for a price of US$76.4 million (S/.248.2 million). In December 2014, we acquired a 70% interest in Morelco for S/.277.1 million (US$93.7 million). This transaction represents our first acquisition in Colombia, which is a key part of our international strategy. The results of Morelco are included in our results of operations beginning in January 2015.
In December 2014, we also acquired 51% of the share capital of Tecgas, which holds 100% the share capital of COGA for a total of S/.75.8 million (US$25.4 million). This investment included goodwill resulting from the purchase amounting to S/.61.4 million. On April 24, 2017, we sold our 51% interest in COGA to our partners Enagas and Carmen Corporation for a price of US$21.5 million (S/.69.8 million).
In August 2015, we acquired 44% of Adexus, an information technology firm in Chile, for an approximate value of US$13.8 million (S/.44.1 million) through a participation in a capital increase. In January 2016 we acquired an additional 8% stake in Adexus for an approximate value of US$2.5 million (S/.8.3 million), and in August 2016 we increased our stake in Adexus to 91% for an approximate value of US$4.2 million (S/.14 million). In June 2018, we increased our stake to 100%.
In September 2015, we acquired a 20% participation in the shareholder´s equity of Gasoducto Sur Peruano, the concessionaire of the southern gas pipeline project for a total of US$215 million (S/.722 million). In addition, our subsidiary GyM participates with a 29% stake in the construction consortium for this project (Consorcio Ductos del Sur), which represented approximately US$1.0 billion of our backlog as of December 31, 2015. The GSP gas pipeline concession was terminated on January 24, 2017, and as a result, we recognized impairments with respect to our investment in GSP and our participation in the related construction consortium (Consorcio Constructor Ductos del Sur). For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
As of the date of this annual report, in order to strengthen our liquidity and financial flexibility, particularly in the event of potential delays in receiving the government payment contemplated under the GSP gas pipeline concession contract, and make payments on our debt related to the GSP project, our board has approved the sale of non-strategic assets in the amount of up to US$350 million (S/.1,176 million) in proceeds. For a detailed description of the sale of these non-strategic assets, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
Cyclicality
Our Engineering and Construction segment is cyclical as a result of being closely linked to the conditions, performance and growth of 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. These industries tend to be cyclical in nature and tend to be affected by factors such as 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. As a result, although downturns impact our entire company, our Engineering and Construction segment 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. 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. Furthermore, prevailing prices and expectations about future prices for minerals or oil and gas, costs of exploration, production and delivery of product and similar factors can have a significant impact on our clients’ exploration and production activities and, as a result, on their demand for our engineering and construction services.
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Our Real Estate segment is also cyclical and is significantly affected by changes in general and local economic conditions, such as employment levels and job growth, availability of financing for home buyers, interest rates, foreclosure rates, inflation, consumer confidence and housing demand. In addition, in our Infrastructure segment, our Energy line of business is cyclical and affected by global supply and demand for oil.
Seasonality
Our business, on a consolidated basis, has not historically experienced seasonality. In our Infrastructure segment, we have experienced moderate seasonality at (i) Norvial, due to heightened vehicular traffic activity during the summer season in the first quarter of the year, and (ii) GMP’s gas processing plant, which typically closes for maintenance during the rainy season in the first quarter of the year, as demand for gas is lower during this time.
Engineering and Construction
The principal driver of our E&C results is economic growth in Peru, particularly private and public investment in the country’s mining, power, oil and gas, transportation, real estate and other infrastructure sectors. See “—Peruvian and Chilean Economic Conditions.”
Appropriate pricing and budgeting of our engineering and construction projects is also key to our results of operations in our E&C segment and can be affected by such factors as competition, direct negotiations with clients as opposed to competitive bidding processes, the accuracy of our estimation of project costs and unexpected cost overruns. The types of contracts in this segment consist of cost-plus fee, unit price, lump-sum and EPC contracts. For a description of our E&C contracts, see “Item 4.B. Information on the Company—Business Overview—Engineering and Construction—Contracts.” The nature of our contractual arrangements can affect our margins, both because, depending on the type of contract, the burden of cost overruns may be placed on the client or on us, and because certain contractual arrangements tend to have lower gross margins. For the years from 2016 to 2017, our E&C segment has trended towards more contractual arrangements based on cost—plus fee and EPC contracts. The types of contractual arrangements we enter into in our E&C segment vary significantly from period to period.
During 2015, we suffered losses of S/.138.2 million from a dispute with respect to an E&C contract with Hochschild Mining for the Inmaculada mining project, which affected our operating results. The dispute was terminated in August 2015, and we expect no further losses to be incurred on account of this project. Additionally, we incurred losses for a total amount of S/.59.7 million because of the cancellation of the El Nuble hydroelectric project, for which our subsidiary Vial y Vives was carrying on civil works in Chile. As a consequence of the cancellation of this project, we also wrote down US$155 million of our consolidated backlog. We expect no further losses to be incurred on account of this project. Delays in obtaining payments from our E&C clients during 2015, in particular in the mining sector, increased financing needs for working capital. We managed to stabilize working capital requirements by the end of 2015.
During 2016, we suffered lower activity levels in our E&C segment due to the completion of two large mining projects at the end of 2015 (Las Bambas and Cerro Verde). These lower activity levels were not fully compensated by new works at the GSP gas pipeline project in Peru and, to a lesser extent, works in Chile and Colombia. Additionally, Stracon GyM completed one mining services contract for our E&C segment, which was not renewed, and had another contract reduced in scope. The 2016 presidential elections in Peru and the subsequent change in administration also contributed to lower activity levels in our E&C segment during 2016.
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During 2017, activity levels in our E&C segment remained low as a result of the cancellation of the GSP and Chavimochic projects, and also due to the ending of the bioenergy Zona Franca project in Colombia. Lower activity in Stracon GyM is related to the decrease in income from the Mina Constancia project. The activity levels in 2017 in the E&C segment have been affected by political and other issues related to the investigations described in “Item 5.A. Operating and Financial Review and Prospects—Recent Developments.”
Infrastructure
Traffic and Fees for Toll Roads
The majority of our toll roads revenues derive from the Norvial concession. Unlike our other toll road concessions, our revenues from the Norvial concession depend on traffic volume. Traffic volume on the Norvial road increased 7.1% from 2015 to 2016 and 3.2% from 2016 to 2017 (based on vehicle equivalents, as defined in “Item 4.B. Information on the Company—Business Overview—Infrastructure—Principal Infrastructure Activities—Toll Roads—Norvial”) due to the lower traffic resulting from the climactic phenomenon “El Niño,” which generated floods and mudslides in northern Peru. For the Norvial toll road, the toll rate is set out in the Norvial concession agreement and adjusted in accordance with a contractual formula that takes into account the sol/U.S. dollar exchange rate and Peruvian and United States inflation. Under our Survial and Canchaque road concessions, our revenues consist of annual fees paid by the Peruvian Ministry of Transport and Communications in consideration for the operation and maintenance of the roads, which can vary depending on the amount of road maintenance required due to road wear and tear.
Under the Norvial concession, we are required to expand certain stretches of the highway, by, among other things, adding two additional lanes. The first stage of construction was completed in 2008 and the second stage started on April 2014 and is expected to be completed by March 2019 due to delays in the government’s delivery of lands required for the project. We estimate that Norvial’s capital investment for the second stage will be approximately US$95 million (S/.319.2 million).
Mass Transit
We generate revenue from our Lima Metro concession based on kilometers travelled per train, with the fee per kilometer, the number of trains required to be in operation and the number of kilometers that we are required to travel established by the terms of the concession. Our revenues do not depend on passenger traffic volume. Our results in this concession between 2015 and 2017 were influenced by the timely acquisition, set up, reliability and proper operation of our trains as well as by the timing of the government’s completion of the 12.1 kilometer second stretch of Line One. We currently have all 34 trains in operation (including three backup trains). In addition, the second tranche of Line One was completed in the third quarter of 2014. As of December 31, 2017, GyM Ferrovías has spent a total of US$290 million (S/.941.0 million) in capital expenditures in connection with the Lima Metro.
On July 11, 2016, we entered into the fourth addendum to the Lima Metro concession contract in order to expand the transportation capacity of Line One. In accordance with the fourth addendum, the expansion project involves: (i) the purchase of 20 new trains with five-car from Alstom; (ii) the purchase of 39 new cars from Alstom, to be coupled with the 19 existing Alstom trains and 20 new Alstom trains, resulting in a consolidated fleet of 39 Alstom trains with a six-car configuration; and (iii) the expansion and improvement of the existing infrastructure, including revamping and improvement of five stations, improvements in the electrical systems, a new access route to the maintenance workshop and new switches on the main track.
Energy
A part of the revenues in our Infrastructure segment depends on global prices for oil. Under our hydrocarbon extraction service contracts, we are entitled to a variable fee, which is based on the level of production of each field and a basket of international crude oil prices. Under our contracts, we acquire the extracted hydrocarbons and pay royalties, which are also based on a basket of international crude prices and the level of production. Historically, oil prices have been volatile and are likely to be volatile again in the future. During 2015, 2016 and 2017, average Brent crude prices were approximately US$52.46, US$43.55 and US$53.02 per barrel, and
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the average fee we received in these years was US$45.59, US$38.54 and US$49.19 per barrel of extracted oil, respectively. During the first quarter of 2018, the Brent crude price was approximately US$68.81 per barrel and our fee was approximately US$64.37 per barrel of extracted oil. Because our activities are conducted in mature oil fields, which have been producing oil for over 100 years in the case of Block I, approximately 100 years in the case of Block III, approximately 95 years in the case of Block IV and for over 50 in the case of years Block V, our oil production depends primarily on the level of our drilling and production activities.
Our Pariñas gas processing plant has a long-term delivery and gas processing and fractionation contract with Empresa Eléctrica de Piura S.A. (“EEPSA”), a thermal power generation subsidiary of the Endesa group. Under this contract, EEPSA delivers natural gas that it purchases from onshore and offshore gas producers in the Talara area. We are responsible for all operating costs of the gas processing plant but are entitled to keep revenues from the sale of all resulting natural gas liquids to third parties after delivery of all dry gas and payment of a variable royalty to EEPSA. Approximately 75% of the total volume of natural gas processed by our Pariñas gas processing plant depend upon gas volumes demanded by EEPSA for its gas-fired turbines, which can vary significantly. The other 25% of the volume of natural gas is extracted from our Block I. Prices for natural gas liquids can also fluctuate significantly and are affected by market prices for crude oil. We processed 31.7 MMcf per day during 2015, 33.2 MMcf per day during 2016 and 30.57 MMcf per day during 2017 . These volumes vary per month and depend upon the power dispatch curve of EEPSA among Peruvian power generation plants. In rainy months (December to April) where hydroelectric power generation in Peru is typically higher, gas volumes demanded by EEPSA are lower than in dryer months (May to November) in which activity of thermal generators tends to be higher.
In connection with our fuel storage terminal business, under three operation contracts with Petroperu, we receive revenues related to monthly reserved volume in storage tanks for refined crude products (storage fee) and for volumes loaded and delivered into railroad cars or cistern trucks to each terminal (throughput fee). These fees are adjusted annually to account for U.S. inflation. Our fuel storage activities in the North and Central terminals are carried out under 20-year contracts, which expire in 2034. Our contract for the operation of the South terminals was to expire in August 2017 but was extended for an additional year until August 2018. On June 6, 2018, the concessionaire, Consorcio Terminales, received a letter from Petroperú to initiate negotiations to extend the contract up to one more year.
Awarding and Timing of Infrastructure Concessions and Government Contracts
The results of operations of our Infrastructure segment are affected by our ability to win new concessions and government contracts, which depend in part on government policies and our ability to compete effectively. As of December 31, 2017, we have seven concessions as well as long-term government contracts in this segment. These include the concession for Via Expresa Sur, for which contract negotiations are currently stalled, and the concession for Chavimochic, for which Chavimochic has requested the termination of the concession in light of the government’s failure to deliver the required lands for the project. Joint operations in which we participate have been awarded one additional concession for Via Expresa Javier Prado for the expansion of another major highway within the city of Lima. We cannot assure you that we will be able to negotiate the pending concessions on favorable terms or at all. A consortium led by Odebrecht Latinvest, in which we acquired a 20% stake in September 2015, was awarded the concession for the southern gas pipeline project in July 2014, however, the GSP gas pipeline concession was terminated by the Peruvian Ministry of Energy and Mines on January 24, 2017. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
Our results in the operation and maintenance of infrastructure assets depend on our ability to obtain contracts from the government or infrastructure concessionaires, such as those in our Infrastructure segment, which depend on government policies and our ability to compete effectively. In 2015, we obtained four new contracts (Sullana, La Merced, Iacapal and Bappo); in 2016, we received two new contracts (Chiquibambilla and Chincaypuijio, each with Provías Nacional); and in 2017, we were awarded two new contracts (Cora Cora and C.V. Pasco, also with Provías Nacional). We typically obtain higher revenues from these contracts during the commencement of services as we bring the road to proper operating condition, and lower revenues at the end of the contract term as services wind down.
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Our results in our Infrastructure segment are also affected by the timing of the commencement of operations under our concessions, as well as when we were required to undertake significant capital investments or major construction works under the terms of our concessions. Under our Norvial and Lima Metro concessions, we are required to undertake capital investments during the initial years of the concessions for which we are compensated throughout the term of the concessions by our toll rate in the case of the Norvial concession and tariffs in the case of the Lima Metro concession. Under our Survial, Canchaque and La Chira concessions, we generate revenues in our Infrastructure segment from our construction activities during the pre-operational phase, and once operations commence we generate revenues from fees related to operation and maintenance. Survial, Canchaque and La Chira have financed their construction costs through the sale of government certificates of construction to financial institutions at a discount from face value. Certificates of construction are negotiable instruments that the Peruvian government typically delivers upon completion of each stage of a project and which entitle the holder to receive payment from the government equal to the capital investment made in the corresponding stage upon completion of the entire project. Accordingly, the results of our Infrastructure segment may be affected by the discount rates obtained on the sale of government certificates of construction. For more information on our obligations and compensation under our concessions, see “Item 4.B. Information on the Company—Business Overview—Infrastructure.”
Real Estate
The results of operations of our Real Estate segment are driven by the number of units we develop and deliver in a reporting period, our mix of unit sales (affordable housing versus housing), unit prices, land purchase prices and our costs of construction. These results are also affected by a number of factors that may impact the Peruvian real estate sector as a whole, including: the availability of government subsidies for affordable housing; prices of suitable land in particular areas; regulation of real estate development imposed by national, regional and local laws and regulators, and the time required to obtain applicable construction permits and licenses; the unemployment rate and wage levels; prevailing interest rates and availability of financing; the supply in the market; the level of customer interest in our new projects; and our costs, such as the price of labor, materials, insurance, taxes and other public charges. We delivered 833, 934 and 1,418 units in 2015, 2016 and 2017, respectively.
The results of operations of our Real Estate segment are also significantly affected by our sales of land parcels. Due to the appreciation of land prices in Peru, and because we record our land holdings at book value (i.e., without marking to market), our recent land sales have resulted in high margins. Our board has approved the sale of non-strategic assets and, consequently, we have sold our interests in certain real estate projects as fully described in “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
In addition, 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 “—Results of Operations—General—Real Estate.”
Technical Services
The results of operations of our Technical Services segment, especially our activities relating to IT and electricity networks services, are affected by the economic growth of the countries in which we operate. As companies expand in response to economic growth, they tend to outsource certain activities in order to focus on their core businesses.
Critical Accounting Estimates and Judgments
For information on critical accounting estimates and judgments, see note 4 to our audited annual consolidated financial statements included in this annual report.
New Accounting Pronouncements, Amendments and Interpretations
For information on new accounting pronouncements, amendments and interpretations, see note 3.1 to our audited annual consolidated financial statements included in this annual report.
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Results of Operations
General
Accounting for Subsidiaries, Joint Operations, Joint Ventures and Associated Companies
Results of our subsidiaries, joint operations, joint ventures and associated companies are reflected in our financial results. We refer to our subsidiaries as those entities over which we exercise control. 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 “profit attributable to non-controlling interests” in our income statement. Our consolidation of the results of our subsidiaries include subsidiaries in which we have less than 50% of the equity. We refer to business activities in which we share control with unrelated entities as joint arrangements, including joint operations and joint ventures, which are typically conducted through an agreement with a third party to carry out specific projects. We contribute our assets to these projects and derive revenue from their use. In our financial statements we recognize, in relation to our interest in a joint operation, our assets and liabilities, including our share of any asset or liability we hold jointly with our partner, as well as our share of revenue and expense from the joint operation. We refer to our associated companies as those entities over which we have significant influence but do not control. We reflect the results of our associated companies and joint ventures 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. For further information, including a list of our subsidiaries, joint operations, joint ventures and associated companies, see notes 6a, 6c and 16 to our audited annual consolidated financial statements included in this annual report.
Intersegment Transactions
Some of our segments from time to time provide services to our other segments. In 2017, we obtained 1.4% of the revenues in our E&C segment from the construction of the highway at Norvial for our Infrastructure segment and the construction of real estate for our Real Estate segment; and 29.2% of the revenues in our operation and maintenance of infrastructure assets line of business derived from services provided to Norvial, Survial, Canchaque and the Lima Metro. Accordingly, in such circumstances, the segment providing services recognizes revenues and the segment receiving such services recognizes costs of sales relating to the services provided. For example, in the case of La Chira, in which our E&C segment provides services to our Infrastructure segment, our E&C segment recognizes revenues and our Infrastructure segment recognizes costs of sales with respect to the fees charged by our E&C segment for those services. In consolidation, these intersegment revenues and cost of sales are eliminated in our financial results. Nonetheless, our Infrastructure segment, in particular, may recognize gross profits or losses based on the difference between the fees the segment charges in accordance with concession terms and costs it incurs relating to services provided by our other segments. For more information on our segments, see note 7 to our audited annual consolidated financial statements.
Engineering and Construction
We obtain revenues in our E&C segment from the engineering and construction services we provide to our clients, which we recognize under the percentage-of-completion method of accounting. For further information, see note 2.25 to our audited annual consolidated financial statements included in this annual report. We receive unrestricted client advances in a substantial majority of our E&C projects, on average equal to approximately 23.5% of the contract price in 2017, which we record as an account payable. We typically invoice our clients on a periodic basis as each project progresses, deducting from the related advances on a proportional basis. For further information, see note 21 to our audited annual consolidated financial statements included in this annual report. Our cost of sales in our E&C segment includes labor, subcontractor expenses, materials, equipment, and project-specific general expenses.
Infrastructure
In our Infrastructure segment, we recognize revenues and cost of sales as follows:
(1) Toll Roads:
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| • | For Norvial, we obtain revenues for toll fees collected, minus deductions required to be transferred to the government as described in “Item 4.B. Information on the Company—Business Overview—Infrastructure—Principal Infrastructure Activities—Toll Roads—Norvial,” which we recognize upon receipt. Cost of sales for Norvial include fees paid to third parties (primarily our subsidiary Concar) for operation and maintenance services as well as the amortization of the road concession registered as an intangible asset in our financial statements; and |
| • | For Survial and Canchaque, we obtain revenues for routine and periodic maintenance services, which we recognize in the period in which the services are performed. Cost of sales for Survial and Canchaque include fees paid to third parties (primarily our subsidiary Concar) for operation and maintenance services. We do not recognize the Survial and Canchaque concessions as intangible assets and therefore do not amortize the concessions. |
For further information, see notes 2.15(iii) and 18 to our audited annual consolidated financial statements included in this annual report.
(2) Mass Transit: We obtain revenues from our Lima Metro concession based on a tariff per kilometer traveled by our trains in operation in accordance with a schedule established in our concession agreement, which we recognize in the period in which the services are performed. Under the concession, the tariff is comprised of three components: (i) fees related to our operation and maintenance services; (ii) fees related to the Peruvian government’s repayment of the amounts we invest to purchase trains, ongoing capital expenditures and other infrastructure for the Peruvian government; and (iii) fees related to interest we charge to the Peruvian government in connection with the amounts we invest to purchase such trains, ongoing capital expenditures and other infrastructure. In 2017, the fees related to items (i), (ii) and (iii) were S/.168.8 million, S/.10.2 million and S/.43.0 million, respectively. We only recognize in our income statement the portion of the tariff that relates to items (i) and (iii) We record the amounts paid by us that relate to item (ii) as long-term accounts receivables from the Peruvian government. Accordingly, tariff payments received relating to item (ii) reduce our accounts receivables but do not impact our income statement, and we do not amortize our investments in our income statement as our investment in the concession is recorded as an account receivable with the government rather than a depreciable investment.
We entered into the fourth addendum to the Lima Metro concession contract on July 11, 2016, in order to expand transportation capacity. In accordance with the fourth addendum, the expansion project will involve: (i) the purchase of 20 new trains; (ii) the purchase of 39 new cars; and (iii) the improvement and expansion of the existing infrastructure. As compensation for the investments of the expansion project, we will be entitled to receive the following: (i) an advance payment of 30% of each investment component; and (ii) the balance of 70% of each investment component, compensated through the annual payment for additional investments ( pago anual por inversiones complementarias ). We register the estimated compensation related to the direct cost in the income statement, plus a margin in the same period. In 2017, the income related to the investment components was S/.146.8 million.
For further information, see note 11 to our audited annual consolidated financial statements included in this annual report. Cost of sales for the Lima Metro include fees paid to third parties (primarily our E&C segment, our subsidiary Concar and other subcontractors) for construction and operation and maintenance services, energy, and our financing costs related to the purchase of trains.
(3) Water Treatment: We obtain revenues from the engineering design and construction of La Chira waste water treatment plant, which we recognize based on the percentage-of-completion method of accounting. Since the plant began operating in August 2016, we obtain revenues only for operation and maintenance services, which we recognize in the period in which the services are performed. During the construction phase, cost of sales for La Chira included fees paid to third parties, primarily our E&C segment, for engineering and construction services. During the operation phase, cost of sales for La Chira include personnel charges and maintenance of infrastructure.
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(4) Energy: We obtain revenues from extraction services and license contracts related to oil and gas production, fuel storage services, and the sale of natural gas liquids derived from our gas processing and fractionation services, which we recognize in the period in which the services are performed and, in the case of sale of natural gas liquids, when the sale is made. Cost of sales for our energy line of business includes labor, materials, amortization of oil wells, depreciation of the gas plant, maintenance and general expenses.
(5) Operation and Maintenance of Infrastructure Assets: We obtain revenues from our operation and maintenance of infrastructure assets line of business for the operation and maintenance services we provide to the government and concessionaires (currently concessions within our Infrastructure segment), which we recognize in the period in which the services are performed. We receive unrestricted advances with respect to our service contracts with the government, that vary from approximately 10% to 30% of the contract price, which we record as an account payable. We typically invoice our clients on a periodic basis as the project progresses, deducting from the related advances on a proportional basis. For further information, see note 22 to our audited annual consolidated financial statements included in this annual report. Our cost of sales in this line of business includes personnel costs, services provided by third parties, machinery and other materials (primarily trucks), and depreciation of equipment utilized to provide services. Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment.
Real Estate
We obtain revenues in our Real Estate segment from sales of affordable housing and housing units, commercial buildings and land parcels, which we recognize at the time of delivery of the unit or building and, in the case of land parcels, at the time of the sale. We typically pre-sell our affordable housing and housing units prior to and during construction, and use the related proceeds we receive to finance the construction of the units. These pre-sale funds are restricted and released from escrow to us periodically as construction progresses. Our Real Estate cost of sales includes the cost to purchase land, costs of architectural design and construction (which usually includes payments to third parties, primarily our E&C segment), licensing and permit costs, personnel costs, and fees to third parties related to sanitation or electrical engineering. In 2017, our cost of land that is allocated to units delivered during these periods amounted to S/.74.0 million. We recognize land purchases as inventory, and, accordingly, do not mark-to-market the value of our land for changes in fair value. For further information, see note 15 to our audited annual consolidated financial statements included in this annual report.
In our Real Estate segment, we have significant net profit attributable to non-controlling interests. We hold a significant portion of our land bank through Almonte in which we have a 50.4% interest, and we consolidate Almonte’s results in our financial statements. In addition, we undertake a significant number of our real estate projects through entities in which we may have a majority interest, co-equal interest or minority interest; when we have control over these entities, we consolidate their results in our financial statements regardless of whether we own a majority of the capital. Furthermore, in connection with our affordable housing projects, we generally partner with real estate investment funds and insurance companies that provide between 60% and 70% of the total capital required to purchase the land and cover certain pre-construction costs in exchange for equity in the project. Although we typically own a minority interest in these projects, we consolidate their results in our financial statements because we exercise control over the project. Accordingly, we reflect the profit corresponding to our real estate partners under net profit attributable to non-controlling interests in our income statement. See “—Accounting for Subsidiaries, Joint Operations, Joint Ventures and Associated Companies.”
Technical Services
In our Technical Services segment, we recognize revenues and cost of sales as follows:
(1) IT Services: We obtain revenues from our IT services line of business for IT and outsourcing services we perform for government and private sector clients, which we recognize in the period in which the services are performed. Our IT services cost of sales includes personnel costs, services provided by third parties, equipment and other materials, depreciation of equipment utilized to provide services, and amortization of software.
(2) Electricity Networks Services: We obtain revenues from the electrical services we provide to our clients, which we recognize in the period in which the services are performed. Our cost of sales in this line of business includes personnel costs, services provided by third parties, machinery and other materials (primarily trucks and meters), and depreciation of equipment utilized to provide services.
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Comparison of Results of Operations of 2016 and 2017
The following table sets forth the components of our consolidated income statement for 2016 and 2017.
Revenues
Our total revenues decreased by 1.8%, or S/.110.2 million, from S/.6,190.3 million for 2016 to S/.6,080.1 million for 2017. Revenues decreased due mainly to a reduction of revenues in the E&C segment as a consequence of fewer projects under execution. This was offset, in part, by an increase in revenues of GMP due to an increase in the average price of oil, as well as an increase in production. Revenues in the Mass Transit business increased due to expansion works, along with major maintenance works by Survial and new contracts awarded during 2016 that initiated works in 2017 for Concar. Revenues in the Real Estate segment increased due to the sale of Cuartel San Martín and also due to an increase in units delivered.
The following table sets forth a breakdown of our revenues by segment for 2016 and 2017.
| Year ended December 31, | ||||||||||||||||||||
| 2016 | 2017 | Variation | ||||||||||||||||||
|
(in millions of S/.) |
% of Total |
(in millions of S/.) |
% of Total | % | ||||||||||||||||
|
Engineering and Construction |
4,159.5 | 67.2 | 3,353.2 | 55.2 | (19.4 | ) | ||||||||||||||
|
Infrastructure |
1,174.8 | 19.0 | 1,447.9 | 23.8 | 23.2 | |||||||||||||||
|
Real Estate |
411.5 | 6.6 | 647.5 | 10.6 | 57.4 | |||||||||||||||
|
Technical Services |
841.1 | 13.6 | 1,061.0 | 17.5 | 26.1 | |||||||||||||||
|
Corporate |
62.1 | 1.0 | 70.0 | 1.2 | 12.7 | |||||||||||||||
|
Eliminations |
(458.7 | ) | (7.4 | ) | (499.5 | ) | (8.2 | ) | 8.9 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
6,469.6 | 100.0 | 6,080.1 | 100.0 | (1.8 | ) | ||||||||||||||
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Cost of Sales
Our total cost of sales decreased by 4.0%, or S/. 225.6 million, from S/.5,633.0 million for 2016 to S/.5,407.4 million for 2017. This decrease is mainly due to the reduction of revenues.
Gross Profit
Our gross profit increased by 20.7% or S/.115.4 million, from S/.557.3 million for 2016 to S/.672.7 million for 2017. Our gross margin (i.e. gross profit as a percentage of revenues) for 2017 was 11.1% compared to 9.0% for 2016. In 2016, gross profit was impacted by the early termination of GSP construction consortium in our E&C segment and partially offset by the profit generated by the sale of land of Almonte in our Real Estate segment. During 2016, gross profit was also impacted in our Infrastructure segment by the decrease in oil price. During 2017, gross profit was impacted in our E&C segment by efficiencies in the projects under execution, in our Infrastructure Segment by an increase in oil price, in our Real Estate segment by the sale of Cuartel San Martín, and in our Technical Services segment due to the write off of provisions and account receivables in CAM.
The following table sets forth a breakdown of our gross profit by segment for 2016 and 2017.
| Year ended December 31, | ||||||||||||||||||||
| 2016 | 2017 | Variation | ||||||||||||||||||
|
(in millions of S/.) |
% of Total |
(in millions of S/.) |
% of Total | % | ||||||||||||||||
|
Engineering and Construction |
224.6 | 40.3 | 290.3 | 43.2 | 29.3 | |||||||||||||||
|
Infrastructure |
211.4 | 37.9 | 260.2 | 38.7 | 23.1 | |||||||||||||||
|
Real Estate |
136.5 | 24.5 | 147.4 | 21.9 | 8.0 | |||||||||||||||
|
Technical Services |
77.3 | 13.9 | 57.8 | 8.6 | (25.2 | ) | ||||||||||||||
|
Corporate |
(0.2 | ) | 0.0 | (37.8 | ) | (5.6 | ) | N.A. | ||||||||||||
|
Eliminations |
(92.4 | ) | (16.6 | ) | (45.2 | ) | (6.7 | ) | (51.2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
557.3 | 100.0 | % | 672.7 | 100 | 20.7 | ||||||||||||||
Administrative Expenses
Our administrative expenses increased by 12.2%, or S/.46.8 million, from S/.382.4 million for 2016 to S/.429.2 million for 2017. This increase is mainly due to an increase in services provided by third parties principally relating to legal, accounting and tax consultancy. As a percentage of revenues, our administrative expenses increased to 7.1% in 2017 from 6.2% in 2016.
Other Income (Expenses)
Our other income (expenses) increased by 65.4%, or S/.8.3 million, from S/.12.7 million in expenses for 2016 to S/.21.0 million in expenses for 2017. In 2016, our other income included the sale of machinery and equipment, price adjustments as well as a reversion of legal and tax provisions in connection with the acquisition of Morelco, and extraordinary income from the settlement agreement reached in connection with the legal proceeding related to the Collahuasi project in Chile. In 2017, our other income included the sale of machinery and equipment, as well as the impairment of the Vial y Vives DSD brand.
Profit from Sale of Investments
We registered a profit of S/.274.4 million from the sale of the certain investments, mainly due to the sales of Red Eagle Mining, PRINSUR, GMD and COGA in 2017.
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The following table sets forth a breakdown of our operating profit by segment for 2016 and 2017.
Operating Profit
Our operating profit increased 109.8%, or S/.260.3 million, from S/.237.0 million for 2016 to S/.497.3 million for 2017. Our operating margin (i.e., operating profit as a percentage of revenues) was 8.2% for 2017 compared to 3.7% for 2016. The increase in operating margin is primarily due to the increase in profit from the sales of investments and, to a lesser extent, to the increase in gross profit.
| Year ended December 31, | ||||||||||||||||||||
| 2016 | 2017 | Variation | ||||||||||||||||||
|
(in millions of S/.) |
% of Total |
(in millions of S/.) |
% of Total | % | ||||||||||||||||
|
Engineering and Construction |
(43.2 | ) | 20.8 | 42.3 | 8.5 | NM | ||||||||||||||
|
Infrastructure |
146.1 | 70.3 | 202.5 | 40.7 | 38.6 | |||||||||||||||
|
Real Estate |
108.9 | 52.4 | 171.5 | 34.5 | 57.5 | |||||||||||||||
|
Technical Services |
11.4 | 5.5 | (7.7 | ) | (1.5 | ) | NM | |||||||||||||
|
Corporate |
4.6 | 2.2 | 67.4 | 13.6 | 1,365.2 | |||||||||||||||
|
Eliminations |
(20.0 | ) | (9.6 | ) | 21.5 | 4.3 | (207.5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
207.8 | 100 | 497.3 | 100 | 139.3 | |||||||||||||||
The following discussion analyzes our key results of operations on a segment basis. For further information on our business segments, see note 7 to our audited annual consolidated financial statements included in this annual report.
Engineering and Construction
The table below sets forth selected financial information related to our E&C segment.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Revenue |
4,159.5 | 3,353.2 | (19.4 | ) | ||||||||
|
Gross profit |
224.6 | 290.3 | 29.3 | |||||||||
|
Operating profit |
(43.2 | ) | 42.3 | NM | ||||||||
Revenues . Our E&C revenues decreased 19.4%, or S/.806.3 million, from S/.4,159.5 million for 2016 to S/.3,353.2 million for 2017.
The reduction is due to fewer projects under execution resulting from lower levels of private investment in Peru. The following tables set forth variations in our E&C revenues by business activities, types of contracts and end-markets:
| Year ended December 31, | ||||||||
| 2016 | 2017 | |||||||
| % | % | |||||||
|
Engineering services |
3.0 | 5.0 | ||||||
|
Electromechanic construction |
39.0 | 28.7 | ||||||
|
Civil construction |
11.9 | 24.1 | ||||||
|
Contract mining |
32.9 | 34.9 | ||||||
|
Building construction activities |
11.5 | 6.5 | ||||||
|
Other Services |
1.8 | 0.9 | ||||||
|
|
|
|
|
|||||
|
Total |
100.0 | 100.0 | ||||||
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| Year ended December 31, | ||||||||
| 2016 | 2017 | |||||||
| % | % | |||||||
|
Cost + fee |
32.0 | 8.4 | ||||||
|
Unit price |
25.6 | 31.2 | ||||||
|
Lump sum |
35.1 | 49.7 | ||||||
|
EPC contracts |
7.3 | 10.7 | ||||||
|
|
|
|
|
|||||
|
Total |
100.0 | 100.0 | ||||||
| Year ended December 31, | ||||||||
| 2016 | 2017 | |||||||
| % | % | |||||||
|
Mining |
38.3 | 49.6 | ||||||
|
Real estate buildings |
10.9 | 7.2 | ||||||
|
Power |
12.6 | 0.0 | ||||||
|
Oil and gas |
31.0 | 20.8 | ||||||
|
Transportation |
3.9 | 15.2 | ||||||
|
Water and sewage |
3.1 | 1.3 | ||||||
|
Other end markets |
0.2 | 5.9 | ||||||
|
|
|
|
|
|||||
|
Total |
100.0 | 100.0 | ||||||
The breakdown of E&C revenues by different business activities, types of contracts and end-markets tends to vary from period to period due to a variety of factors, including the timing of the execution of larger projects in any particular period, which is typically outside of our control.
Gross Profit . Our E&C gross profit increased 29.3%, or S/.65.7 million, from S/.224.6 million for 2016 to S/.290.3 million for 2017. Our E&C gross margin for 2017 was 8.7% compared to 5.4% for 2016. This increase in our E&C gross profit was mainly due to efficiencies implemented in the different projects under execution.
Other income (expenses) . Other income (expenses) increased in our E&C segment, from S/.9.2 million in expenses for 2016 to a S/.42.7 million expenses in 2017, mainly because while this item usually includes sales of machinery and equipment, in 2017, it also included the impairment of the Vial y Vives DSD brand.
Operating Profit . Our E&C operating profit increased S/.85.5 million, from a S/.43.2 million loss for 2016 to a S/.42.3 million profit for 2017, due to an increase of gross profit, a reduction of administrative expenses, related to a reduction of personnel and lower expenses relating to bid proposals, and the profit from the sale of the shares of Red Eagle Mining owned by Stracon. Our E&C operating margin was 1.3% for 2017 compared to (1.0)% for 2016.
In addition, our E&C segment had a S/.0.3 million profit in 2017, compared to a S/.5.7 million loss in 2016, relating to minority interests held by Vial y Vives in several of its projects undertaken in Chile, as well as the minority participation of GyM in Viva GyM reflected under “share of profit and loss in associates” in our audited annual consolidated financial statements.
Infrastructure
The table below sets forth selected financial information related to our Infrastructure segment.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Revenue |
1,174.8 | 1,447.9 | 23.2 | |||||||||
|
Gross profit |
211.4 | 260.2 | 23.1 | |||||||||
|
Operating profit |
146.1 | 202.5 | 38.6 | |||||||||
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Revenues . The table below sets forth the breakdown of our Infrastructure revenues by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Toll Roads |
264.4 | 263.8 | (0.2 | ) | ||||||||
|
Mass Transit |
247.0 | 365.8 | 48.1 | |||||||||
|
Water Treatment |
18.5 | 3.2 | (82.7 | ) | ||||||||
|
Energy |
382.2 | 436.9 | 14.3 | |||||||||
|
Operation and Maintenance of Infrastructure Assets |
262.7 | 378.3 | 44.0 | |||||||||
|
|
|
|
|
|||||||||
|
Total |
1,174.8 | 1,447.9 | 23.2 | |||||||||
Our Infrastructure revenues increased 23.2% or S/.273.1 million, from S/.1,174.8 million for 2016 to S/.1,447.9 million for 2017. The variation in our Infrastructure revenues principally reflected the following:
| • | Toll Roads : a 0.2%, or S/.0.6 million, decrease in revenues, from S/.264.4 million for 2016 to S/.263.8 million for 2017, primarily due to the timing of the work for the second stage of the Norvial toll road and partially offset by an increase in revenues in Survial due to more maintenance works executed on the road; |
| • | Mass Transit : a 48.1%, or S/.118.8 million, increase in revenues, from S/.247.0 million for 2016 to S/.365.8 million for 2017, primarily due to the revenues recognized for the advance of the construction of the infrastructure expansion; |
| • | Water Treatment : a 82.7%, or S/.15.3 million, decrease in revenues, from S/.18.5 million for 2016 to S/.3.2 million for 2017, primarily due to conclusion of the construction works of the La Chira waste water treatment plant. The operation of the plant started in the second quarter of 2016; |
| • | Energy: a 14.3%, or S/.54.7 million, increase in revenues, from S/.382.2 million for 2016 to S/.436.9 million for 2017, primarily due to an increase in our barrel daily production (3,140 barrel daily production in 2017 versus 2,756 in 2016), as well as an increase in international oil prices (average price per basket of oils of US$52.84 bbl in 2017 versus US$41.8 bbl in 2016), and better results in our fuel terminals business (3.39 MM barrels in storage per month in 2017 versus 3.18 MM barrels in storage per month in 2016, and 3.43 MM barrels dispatched per month in 2017 versus 3.34 MM barrels dispatched per month in 2016). Additionally, even though gas processing levels in our gas processing plant were lower (33.2 MMcf per day in 2016 to 30.57 MMcf per day in 2017), this was partially offset by the increase in prices of liquefied petroleum gas (“LPG”). The price of LPG went from US$41.87/bbl in 2016 to US$48.18/bbl in 2017 and the price of HAS (CGN) went from US$35.64/bbl in 2016 to US$49.44/bbl in 2017; and |
| • | Operation and Maintenance of Infrastructure Assets : a 44.0%, or S/.115.6 million, increase in revenues, from S/.262.7 million for 2016 to S/.378.3 million, due to new contracts awarded during 2016 that initiated works in 2017. |
Gross Profit . The table below sets forth the breakdown of our Infrastructure gross profit by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Toll Roads |
75.8 | 89.9 | 18.6 | |||||||||
|
Mass Transit |
42.5 | 48.7 | 14.6 | |||||||||
|
Water Treatment |
5.7 | 0.4 | (93.0 | ) | ||||||||
|
Energy |
42.1 | 71.8 | 70.5 | |||||||||
|
Operation and Maintenance of Infrastructure Assets |
45.3 | 49.3 | 8.8 | |||||||||
|
|
|
|
|
|||||||||
|
Total |
211.4 | 260.2 | 23.1 | |||||||||
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Our Infrastructure gross profit increased 23.1%, or S/.48.8 million, from S/.211.4 million for 2016 to S/.260.2 for 2017. Our Infrastructure gross margin was 18% for 2017 and 18% for 2016 as well. The variation in our Infrastructure gross profit principally reflected the following:
| • | Toll Roads : a 18.6%, or S/.14.1 million, increase in gross profit, from S/.75.8 million for 2016 to S/.89.9 million for 2017. Our Toll Roads gross margin increased from 28.7% for 2016 to 34.1% for 2017, as a consequence of the fewer construction works that have lower margins during 2017; |
| • | Mass Transit : a 14.6%, or S/.6.2 million, increase in gross profit, from S/.42.5 million for 2016 to S/.48.7 million for 2017, primarily due to more expansion works in 2017. Our gross margin for 2017 was 13.3%, compared to 17.2% for 2016, due to lower margins in those expansion works; |
| • | Water Treatment : a 93.0%, or S/.5.3 million, decrease in gross profit for 2017, from S/.5.7 million gross profit for 2016 to S/.0.4 million gross profit for 2017, due to the conclusion of construction works. Our Water Treatment gross margin was 12.5% for 2017 compared to 30.8% for 2016; |
| • | Energy: a 70.5%, or S/.29.7 million, increase in gross profit, from S/.42.1 million for 2016 to S/.71.8 million for 2017, primarily due to the increase of international oil prices. Our Energy gross margin was 16.4% for 2017 compared to 11.0% for 2016; and |
| • | Operation and Maintenance of Infrastructure Assets : a 8.8%, or S/.4.0 million, increase in gross profit, from S/.45.3 million for 2016 to S/.49.3 million for 2017, due to new contracts awarded during 2016 that initiated works. Our Operation and Maintenance of Infrastructure Assets gross margin was 13.0% for 2017 compared to 17.2% for 2016, arising largely from certain high-costs delays in financing working capital. |
Operating Profit. The table below sets forth the breakdown of our Infrastructure operating profit by principal lines of business .
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Toll Roads |
65.7 | 80.1 | 21.9 | |||||||||
|
Mass Transit |
29.5 | 33.4 | 13.2 | |||||||||
|
Water Treatment |
4.9 | 0.1 | (98.0 | ) | ||||||||
|
Energy |
25.4 | 61.1 | 140.6 | |||||||||
|
Operation and Maintenance of Infrastructure Assets |
20.6 | 27.7 | 34.5 | |||||||||
|
|
|
|
|
|||||||||
|
Total |
146.1 | 202.5 | 38.6 | |||||||||
Our Infrastructure operating profit increased 38.6%, or S/.56.4 million, from S/.146.1 million for 2016 to S/.202.5 million for 2017. Our Infrastructure operating margin was 14.0% for 2017 compared to 12.4% for 2016. The variation in our Infrastructure operating profit principally reflected the following:
| • | Toll Roads : a 21.9%, or S/.14.4 million, increase in operating profit, from S/.65.7 million for 2016 to S/.80.1 million for 2017, primarily due to the increase in gross profit given that administrative expenses remained at the same level. Our Toll Roads operating margin was 30.4% for 2017 compared to 24.8% for 2016; |
| • | Mass Transit : a 13.2%, or S/.3.9 million, increase in operating profit, from an operating profit of S/.29.5 million for 2016 to S/.33.4 million for 2017, primarily due to the increase of gross profit, partially offset by an increase in administrative expenses due to structuring fees and costs of the financing of the expansion. Our Mass Transit operating margin for 2017 was 9.1%, compared to 11.9% for 2016; |
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| • | Water Treatment : a 98.0%, or S/.4.8 million, decrease in operating profit, from an operating profit of S/.4.9 million for 2016 to S/.0.1 million in 2017, mainly due to the decrease in gross profit. Our Water Treatment operating margin for 2017 was 3.1% compared to 26.5% for 2016; and |
| • | Energy: a 140.6%, or S/.35.7 million, increase in operating profit, from S/.25.4 million for 2016 to S/.61.1 million for 2017, primarily due to the increase in gross profit given that the administrative expenses remained at the same level. Our Energy operating margin was 14.0% for 2017 compared to 6.6% for 2016; and |
| • | Operation and Maintenance of Infrastructure Assets : a S/.34.5%, or S/.7.1 million increase in operating profit, from a S/.20.6 million profit for 2016 to a S/.27.7 million profit in 2017, primarily due to the increase in gross profit given that the administrative expenses remained at the same level as 2016. Our Operation and Maintenance of Infrastructure Assets operating margin was 7.3% for 2017 compared to 7.8% for 2016. |
Real Estate
The table below sets forth selected financial information related to our Real Estate segment.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Revenue |
411.5 | 647.5 | 57.4 | |||||||||
|
Gross profit |
136.5 | 147.4 | 8.0 | |||||||||
|
Operating profit |
108.9 | 171.5 | 57.5 | |||||||||
Revenues . Our Real Estate revenues increased 57.4%, or S/.236.0 million, from S/.411.5 million for 2016 to S/.647.5 million for 2017. The increase is primarily due to the sale of Cuartel San Martín in 2017 for S/.162.3 million, compared to the sale of land in Almonte for S/.97.0 million in 2016, as well as more units delivered in 2017 (1,418 units in 2017 and 938 units in 2016).
Gross Profit . Our Real Estate gross profit increased 8.0%, or S/.10.9 million, from S/.136.5 million for 2016 to S/.147.4 million for 2017, mainly as a result of sale of Cuartel San Martín and units delivered during 2017 with higher margins. Our Real Estate gross margin was 22.8% for 2017 compared to 33.2% for 2016, this is due to the fact that the sale of Almonte had larger margins than the sale of Cuartel San Martín.
Operating Profit . Our Real Estate operating profit increased 57.7%, or S/.62.6 million, from S/.108.9 million for 2016 to S/.171.5 million for 2017, primarily as a result of the increase in our gross profit and the sale of an investment, PRINSUR.
Technical Services
The table below sets forth selected financial information related to our Technical Services segment.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Revenue |
841.1 | 1,061.0 | 26.1 | % | ||||||||
|
Gross profit |
77.3 | 57.8 | (25.2 | ) | ||||||||
|
Operating profit |
11.4 | (7.7 | ) | (167.5 | ) | |||||||
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Revenues . The table below sets forth the breakdown of our Technical Services revenues by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of $/.) | ||||||||||||
|
IT Services |
113.2 | 284.2 | 151.1 | |||||||||
|
Electricity Networks Services |
727.9 | 776.8 | 6.7 | |||||||||
|
|
|
|
|
|||||||||
|
Total |
841.1 | 1,061.0 | 26.1 | |||||||||
Our Technical Services revenues increased 26.1% or S/.219.9 million, from S/.841.1 million for 2016 to S/.1,061.0 million for 2017. The variation in our Technical Services revenues principally reflected the following:
| • | IT Services : a 151.1%, or S/.171.0 million, increase in revenues, from S/.113.2 million for 2016 to S/.284.2 million for 2017, due to the consolidation of Adexus for the 2017 year. |
| • | Electricity Networks Services : a 6.7%, or S/.48.9 million, increase in revenues, from S/.727.9 million for 2016 to S/.776.8 million for 2017, due to an increase in revenues in Chile due to new contracts awarded during 2017. |
Gross Profit. The table below sets forth the breakdown of our Technical Services gross profit by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of $/.) | ||||||||||||
|
IT Services |
15.7 | 44.4 | 182.8 | |||||||||
|
Electricity Networks Services |
61.6 | 13.5 | (78.1 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Total |
77.3 | 57.8 | (25.2 | ) | ||||||||
Our Technical Services gross profit decreased 25.2%, or S/.19.5 million, from S/.77.3 million for 2016 to S/.57.8 million for 2017. Our Technical Services gross margin was 5.4% for 2017 compared to 9.2% for 2016. The variation in our Technical Services gross profit principally reflected the following:
| • | IT Services : a 182.8%, or S/.28.7 million, increase in gross profit, from S/.15.7 million for 2016 to S/.44.4 million for 2017, due to the consolidation of Adexus for the 2017 year. Our IT Services gross margin was 15.6% for 2017 compared to 13.9% for 2016; and |
| • | Electricity Networks Services : a 78.1%, or S/.48.1 million, decrease in gross profit, from S/.61.6 million for 2016 to S/.13.5 million for 2017. Our Electricity Networks Services gross margin was 1.7% for 2017 compared to 8.5% for 2016, mainly due to the impairment of provisions and accounts receivables and to ineffiencies in certain services provided . |
Operating Profit. The table below sets forth the breakdown of our Technical Services operating profit by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
IT Services |
(0.7 | ) | 10.3 | NM | ||||||||
|
Electricity Networks Services |
12.1 | (18.0 | ) | NM | ||||||||
|
|
|
|
|
|||||||||
|
Total |
11.4 | (7.7 | ) | NM | ||||||||
Our Technical Services operating profit decreased S/.19.1 million, from S/.11.4 million for 2016 to a S/.7.7 million loss for 2017. Our Technical Services operating margin for 2017 was (0.7)% compared to 1.4% for 2016. The variation in our Technical Services operating profit principally reflected the following:
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| • | IT Services : a S/.11.0 million increase in operating profit, from S/.0.7 million loss for 2016 to S/.10.3 million profit for 2017, due to the consolidation of Adexus for a whole year. Our IT Services operating margin was 3.6% for 2017 compared to (0.6)% for 2016; and |
| • | Electricity Networks Services : a S/.30.1 million decrease in operating profit, from a S/.12.1 million profit for 2016 to a S/.18.0 million loss for 2017. Our Electricity Network Services operating margin was (2.3)% for 2017 compared to 1.7% for 2016, mainly due to the decrease in gross profit partially offset by a reduction in administrative expenses. |
Financial (Expense) Income, Net
Our net financial expense decreased S/.31.0 million from net financial expenses of S/.201.0 million in 2016 to net financial expenses of S/.170.0 million in 2017. Excluding foreign exchange differences, our net financial expense decreased 6.8%, or S/.12.9 million, from net financial expenses of S/.189.2 million for 2016 to net financial expenses of S/.176.3 million for 2017 due to a reduction of debt and due to the fact that no additional discounts in long term accounts receivables of GSP beyond those registered in 2016 were registered in 2017. Our net exchange difference increased S/.18.8 million, from a loss of S/.12.5 million for 2016 to a profit of S/.6.3 million for 2017. This increase is due to the appreciation of the sol against the U.S. dollar from 2016 to 2017.
Share of Profit and Loss in Associates
Our share of profit and loss in associates increased S/.591.0 million from a loss of S/.589.7 million in 2016 to a profit of S/.1.3 million in 2017. In 2016 we registered the impairment of our investment in GSP as a consequence of the cancellation of the concession on January 24, 2017. There were no additional impairments in 2017. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
Income Tax
Our income tax increased S/.242.3 million, from S/.(119.3) million for 2016 to S/.123 million for 2017. This increase in income tax was primarily due to an increase in profit before tax. Our effective tax rates for 2017 and 2016 were 37.4% and 20.5%, respectively.
Net Profit
Our net profit increased 146.3%, or S/.660.8 million, from a S/.451.6 million loss for 2016 to a S/.209.2 million profit for 2017. Net profit attributable to controlling interests decreased 129.2%, while net profit attributable to non-controlling interests increased 4.1%. Net profit attributable to non-controlling interests increased primarily due to increases arising from our Real Estate segment. See “—General—Accounting for Subsidiaries, Joint Operations, Joint Ventures and Associated Companies.”
Comparison of Results of Operations of 2015 and 2016
The following table sets forth the components of our consolidated income statement for 2015 and 2016.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of $/.) | ||||||||||||
|
Revenues |
7,582.9 | 6,190.3 | (18.4 | ) | ||||||||
|
Cost of sales |
(6,969.9 | ) | (5,633.0 | ) | (19.2 | ) | ||||||
|
|
|
|
|
|||||||||
|
Gross profit |
613.0 | 557.3 | (9.1 | ) | ||||||||
|
Administrative expenses |
(394.2 | ) | (382.4 | ) | (3.0 | ) | ||||||
|
Other income (expenses) |
54.7 | (12.7 | ) | (123.2 | ) | |||||||
|
Other (losses) gains, net |
(0.1 | ) | (0.7 | ) | NM | |||||||
|
Profit from sale of investments |
(8.3 | ) | 46.3 | NM | ||||||||
|
|
|
|
|
|||||||||
|
Operating profit |
265.1 | 207.8 | (21.6 | ) | ||||||||
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| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of $/.) | ||||||||||||
|
Financial (expense) income, net |
(130.4 | ) | (201.0 | ) | 54.1 | |||||||
|
Share of profit and loss in associates |
7.7 | (589.7 | ) | NM | ||||||||
|
|
|
|
|
|||||||||
|
Profit (loss) before income tax |
142.4 | (582.9 | ) | (509.3 | ) | |||||||
|
Income tax |
(95.9 | ) | 119.3 | NM | ||||||||
|
|
|
|
|
|||||||||
|
Net profit (loss) from continuing OP. |
46.5 | (463.6 | ) | NM | ||||||||
|
Profit from discontinued operations |
9.1 | 12.0 | 31.9 | |||||||||
|
|
|
|
|
|||||||||
|
Net profit (loss) |
55.6 | (451.6 | ) | (912.2 | ) | |||||||
|
Net profit (loss) attributable to controlling interest |
7.1 | (509.7 | ) | NM | ||||||||
|
Net profit attributable to non-controlling interest |
48.5 | 58.1 | 19.8 | |||||||||
Revenues
Our total revenues decreased by 18.4%, or S/.1,392.6 million, from S/.7,582.9 million for 2015 to S/.6,190.3 million for 2016. Revenues decreased due mainly to lower revenues in our E&C segment as a result of the completion of two large mining projects at the end of 2015 (Las Bambas and Cerro Verde), which were not fully compensated by new works at the GSP project in Peru and, to a lesser extent, works in Chile and Colombia. The 2016 presidential elections in Peru and the subsequent change in administration also contributed to lower activity levels in our E&C segment during 2016. Additionally, Stracon GyM completed one mining services contract for our E&C segment, which was not renewed, and had another contract reduced in scope. On the other hand, in the Infrastructure segment, revenues decreased mainly due to the timing of works on the second stage of the Norvial toll road, lower amount of maintenance works on the Survial highway and lower revenues due to the termination of two Concar contracts, Red Vial 3 and Covial, both by the end of 2015. This reduction is partially offset by: the increase in revenues in the Real Estate segment, which is the result of the sale of land in Almonte for S/.97.0 million in 2016 compared to S/.12.0 million in 2015, as well as by more units delivered in 2016 (938 units versus 835 units in the previous year), and the increase in revenues of the Technical Services segment due to the consolidation of Adexus acquisition as of August 2016 and higher revenues in CAM for the new contracts awarded during the year.
The following table sets forth a breakdown of our revenues by segment for 2015 and 2016.
| Year ended December 31, | ||||||||||||||||||||
| 2015 | 2016 | Variation | ||||||||||||||||||
|
(in millions of S/.) |
% of Total |
(in millions
of S/.) |
% of Total | % | ||||||||||||||||
|
Engineering and Construction |
5,829.4 | 76.9 | 4,159.5 | 67.2 | % | (28.6 | ) | |||||||||||||
|
Infrastructure |
1,353.1 | 17.8 | 1,174.8 | 19.0 | % | (13.2 | ) | |||||||||||||
|
Real Estate |
215.8 | 2.8 | 411.5 | 6.6 | % | 90.7 | ||||||||||||||
|
Technical Services |
563.9 | 7.4 | 841.1 | 13.6 | % | 49.2 | ||||||||||||||
|
Corporate |
70.5 | 0.9 | 62.1 | 1.0 | % | (11.9 | ) | |||||||||||||
|
Eliminations |
(449.8 | ) | (5.8 | ) | (458.7 | ) | (7.4 | )% | 2.0 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
7,582.9 | 100.0 | 6,190.3 | 100.0 | % | (18.4 | ) | |||||||||||||
Cost of Sales
Our total cost of sales decreased by 19.2%, or S/.1,336.9 million, S/.6,969.9 million for 2015 to S/.5,633.0 million for 2016. This decrease is mainly due to the reduction of revenues.
Gross Profit
Our gross profit decreased by 9.1% or S/.55.7 million, from S/.613.0 million for 2015 to S/.557.3 million for 2016. Our gross margin (i.e. gross profit as a percentage of revenues) for 2016 was 9.0% compared to 8.1% for 2015. In 2015 gross profit was impacted by losses incurred from a dispute with respect to an E&C contract with Hochschild Mining for the Inmaculada mining project and losses incurred because of the cancellation of the El Nuble hydroelectric plant project, for which our subsidiary Vial y Vives was carrying on civil works in Chile. In 2016, gross profit was impacted by the early termination of GSP construction consortium in our E&C segment and partially offset by the profit generated by the sale of land of Almonte in our Real Estate segment. During 2016, gross profit was also impacted in our Infrastructure segment by the decrease in oil price.
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Table of Contents
The following table sets forth a breakdown of our gross profit by segment for 2015 and 2016.
| Year ended December 31, | ||||||||||||||||||||
| 2015 | 2016 | Variation | ||||||||||||||||||
|
(in millions of S/.) |
% of Total |
(in millions of S/.) |
% of Total | % | ||||||||||||||||
|
Engineering and Construction |
312.8 | 51.0 | 224.6 | 40.3 | (28.2 | )% | ||||||||||||||
|
Infrastructure |
245.9 | 40.1 | 211.4 | 37.9 | (14.0 | )% | ||||||||||||||
|
Real Estate |
51.8 | 8.5 | 136.5 | 24.5 | 163.5 | % | ||||||||||||||
|
Technical Services |
76.8 | 12.5 | 77.3 | 13.9 | 0.7 | % | ||||||||||||||
|
Corporate |
(7.0 | ) | (1.1 | ) | (0.2 | ) | 0.0 | (97.1 | )% | |||||||||||
|
Eliminations |
(67.2 | ) | (11.0 | ) | (92.4 | ) | (16.6 | ) | 37.5 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
613.0 | 100.0 | 557.3 | 100.0 | % | (9.1 | )% | |||||||||||||
Administrative Expenses
Our administrative expenses decreased by 3.0%, or S/.11.8 million, from S/394.2 million for 2015 to S/.382.4 million for 2016. This decrease is mainly due to a reduction in services provided by third parties principally relating to legal, accounting and tax consultancy. As a percentage of revenues, our administrative expenses increased to 6.2% in 2016 from 5.2% in 2015.
Other Income (Expenses)
Our other income (expenses) decreased by 123.2%, or S/.67.4 million, from S/.54.7 million in income for 2015 to S/.12.7 million in expenses for 2016. In 2015 our other income included the reversion of tax and labor provisions in connection with the acquisition of CAM, the sale of machinery, equipment and scrap and dividend payments from our subsidiary TGP, and in 2016, our other income included the sale of machinery and equipment, price adjustments as well as a reversion of legal and tax provisions in connection with the acquisition of Morelco, and extraordinary income from the settlement agreement reached in connection with the legal proceeding related to the Collahuasi project in Chile.
Profit from Sale of Investments
We registered a profit of S/.46.3 million from the sale of the certain investments, mainly the sale of our 1.64% stake in TGP in April 2016.
Operating Profit
Our operating profit decreased 21.6%, or S/.57.3 million, from S/.265.1 million for 2015 to S/.207.8 million for 2016. Our operating margin (i.e., operating profit as a percentage of revenues) was 3.4% for 2016 and 3.5% for 2015 as well.
The following table sets forth a breakdown of our operating profit by segment for 2015 and 2016.
| Year ended December 31, | ||||||||||||||||||||
| 2015 | 2016 | Variation | ||||||||||||||||||
|
(in millions of S/.) |
% of Total |
(in millions of S/.) |
% of Total | % | ||||||||||||||||
|
Engineering and Construction |
54.2 | 20.5 | (43.2 | ) | (20.8 | ) | (179.7 | ) | ||||||||||||
|
Infrastructure |
180.8 | 68.2 | 146.1 | 70.3 | (19.2 | ) | ||||||||||||||
|
Real Estate |
33.0 | 12.5 | 108.9 | 52.4 | 230.0 | |||||||||||||||
|
Technical Services |
19.8 | 7.5 | 11.4 | 5.5 | (42.4 | ) | ||||||||||||||
|
Corporate |
(25.8 | ) | (9.7 | ) | 4.6 | 2.2 | (117.8 | ) | ||||||||||||
|
Eliminations |
3.0 | 1.1 | (20.0 | ) | (9.6 | ) | (766.7 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
265.1 | 100.0 | 207.8 | 100 | (21.6 | ) | ||||||||||||||
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Table of Contents
The following discussion analyzes our key results of operations on a segment basis. For further information on our business segments, see note 7 to our audited annual consolidated financial statements included in this annual report. Beginning on April 1, 2017, we have transferred Concar from our Technical Services segment to our Infrastructure segment. For ease of comparison, the historical segment financial information included in this annual report presents Concar in the Infrastructure segment. This change does not impact our consolidated financial results.
Engineering and Construction
The table below sets forth selected financial information related to our E&C segment.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Revenue |
5,829.4 | 4,159.5 | (28.6 | ) | ||||||||
|
Gross profit |
312.8 | 224.6 | (28.2 | ) | ||||||||
|
Operating profit |
54.2 | (43.2 | ) | (179.7 | ) | |||||||
Revenues . Our E&C revenues decreased 28.6%, or S/.1,669.9 million, from S/.5,829.4 million for 2015 to S/.4,159.5 million for 2016. This decrease is the result of the completion of two large mining projects at the end of 2015 (Las Bambas and Cerro Verde), which were not fully compensated by the works at the GSP project in Peru and, to a lesser extent, works in Chile and Colombia. Additionally, Stracon GyM completed one mining services contract for our E&C segment, which was not renewed, and had another contract reduced in scope. The 2016 presidential elections in Peru and the subsequent change in administration also contributed to lower activity levels in our E&C segment during 2016.
The following tables set forth variations in our E&C revenues by business activities, types of contracts and end-markets:
| Year ended December 31, | ||||||||
| 2015 | 2016 | |||||||
| % | % | |||||||
|
Engineering services |
2.9 | 3.0 | ||||||
|
Electromechanic construction |
27.6 | 39.0 | ||||||
|
Civil construction |
23.3 | 11.9 | ||||||
|
Contract mining |
35.4 | 32.9 | ||||||
|
Building construction activities |
10.8 | 11.5 | ||||||
|
Other services |
— | 1.8 | ||||||
|
|
|
|
|
|||||
|
Total |
100.0 | 100.0 | ||||||
| Year ended December 31, | ||||||||
| 2015 | 2016 | |||||||
| % | % | |||||||
|
Cost + fee |
28.0 | 32.0 | ||||||
|
Unit price |
49.0 | 25.6 | ||||||
|
Lump sum |
11.0 | 35.1 | ||||||
|
EPC contracts |
12.0 | 7.3 | ||||||
|
|
|
|
|
|||||
|
Total |
100.0 | 100.0 | ||||||
| Year ended December 31, | ||||||||
| 2015 | 2016 | |||||||
| % | % | |||||||
|
Mining |
60.0 | 38.3 | ||||||
|
Real estate buildings |
9.0 | 11.0 | ||||||
|
Power |
10.0 | 12.6 | ||||||
|
Oil and gas |
15.9 | 30.9 | ||||||
|
Transportation |
3.0 | 3.9 | ||||||
|
Water and sewage |
2.0 | 3.1 | ||||||
|
Other end markets |
— | 0.2 | ||||||
|
|
|
|
|
|||||
|
Total |
100.0 | 100.0 | ||||||
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The breakdown of E&C revenues by different business activities, types of contracts and end-markets tends to vary from period to period due to a variety of factors, including the timing of the execution of larger projects in any particular period, which is typically outside of our control.
Gross Profit . Our E&C gross profit decreased 28.2%, or S/.88.2 million, from S/.312.8 million for 2015 to S/.224.6 million for 2016. Our E&C gross margin for 2016 was 5.4% compared to 5.4% for 2015. This decrease in our E&C gross profit was mainly due to a decline in revenues and the impact of the early termination of the GSP construction consortium.
Operating Profit . Our E&C operating profit decreased 179.7%, or S/.97.4 million, from S/.54.2 million profit for 2015 to S/.43.2 million loss for 2016, due to reduction of gross profit, partially offset by the decrease in administrative expenses, related to a reduction of personnel and lower expenses relating to bid proposals. Our E&C operating margin was (1.0)% for 2016 compared to 0.9% for 2015.
Other income (expenses) . Other income (expenses) increased in our E&C segment, from S/.30.7 million income for 2015 to S/.9.2 million in expenses in 2016, mainly as a result of the settlement agreement reached in connection with the legal proceeding related to the Collahuasi project in Chile and the reversion of legal and tax provisions in connection with the acquisition of Morelco.
In addition, our E&C segment had S/.5.7 million in expenses in 2016, compared to S/.9.3 million in income in 2015, relating to minority interests held by Vial y Vives in several of its projects undertaken in Chile, as well as the minority participation of GyM in Viva GyM reflected under “share of profit and loss in associates” in our audited annual consolidated financial statements.
Infrastructure
The table below sets forth selected financial information related to our Infrastructure segment.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of US$) | % | |||||||||||
|
Revenue |
1,353.1 | 1,174.8 | (13.2 | ) | ||||||||
|
Gross profit |
245.9 | 211.4 | (14.0 | ) | ||||||||
|
Operating profit |
180.8 | 146.1 | (19.2 | ) | ||||||||
Revenues . The table below sets forth the breakdown of our Infrastructure revenues by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of US$) | % | |||||||||||
|
Toll Roads |
394.5 | 264.4 | (33.0 | ) | ||||||||
|
Mass Transit |
206.5 | 247.0 | 19.6 | |||||||||
|
Water Treatment |
28.0 | 18.5 | (33.9 | ) | ||||||||
|
Energy |
389.4 | 382.2 | (1.8 | ) | ||||||||
|
Operation and Maintenance of Infrastructure Assets |
334.8 | 262.7 | (21.5 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Total |
1,353.1 | 1,174.8 | (13.2 | ) | ||||||||
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Our Infrastructure revenues decreased 13.2% or S/.178.3 million, from S/.1,353.1 million for 2015 to S/.1,174.8 million for 2016. The variation in our Infrastructure revenues principally reflected the following:
| • | Toll Roads : a 33.0%, or S/.130.1 million, decrease in revenues, from S/.394.5 million for 2015 to S/.264.4 million for 2016, primarily due to the timing of the work for the second stage of the Norvial toll road and a decrease in revenues in Survial due to less maintenance executed on the road; |
| • | Mass Transit : a 19.6%, or S/.40.5 million, increase in revenues, from S/.206.5 million for 2015 to S/.247.0 million for 2016, primarily due to the revenues recognized for the advance of the construction of the infrastructure expansion; |
| • | Water Treatment : a 33.9%, or S/.9.5 million, decrease in revenues, from S/.28.0 million for 2015 to S/.18.5 million for 2016, primarily due to conclusion of the construction works of the La Chira waste water treatment plant. The operation of the plant started in the second quarter of 2016; |
| • | Energy: a 1.8%, or S/.7.2 million, decrease in revenues, from S/.389.4 million for 2015 to S/.382.2 million for 2016, primarily due to a reduction in our barrel daily production (2,756 barrel daily production in 2016 versus 3,356 in 2015), as well as a decrease in international oil prices (average price per basket of oils of US$41.8 bbl in 2016 versus US$50.9 bbl in 2015), partially offset by better results in our fuel terminals business (3.18 MM barrels in storage per month in 2016 versus 3.12 MM barrels in storage in 2015, and 3.34 MM barrels dispatched per month in 2016 versus 3.19 MM barrels dispatched per month in 2015), the fact that operations in Blocks III and IV commenced in April 2015 and higher processing levels at our gas processing plant which increased from 31.7 MMcf per day in 2015 to 33.2 MMcf per day in 2016; and |
| • | Operation and Maintenance of Infrastructure Assets : a 21.5%, or S/.72.1 million, decrease in revenues, from S/.334.8 million for 2015 to S/.262.7 million for 2016, primarily due to the termination of the Red Vial 3 and Covial contracts by the end of 2015. |
Gross Profit . The table below sets forth the breakdown of our Infrastructure gross profit by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of US$) | % | |||||||||||
|
Toll Roads |
78.5 | 75.8 | (3.4 | ) | ||||||||
|
Mass Transit |
40.5 | 42.5 | 4.9 | |||||||||
|
Water Treatment |
2.2 | 5.7 | 159.1 | |||||||||
|
Energy |
63.5 | 42.1 | (33.7 | ) | ||||||||
|
Operation and Maintenance of Infrastructure Assets |
61.1 | 45.3 | (25.9 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Total |
245.9 | 211.4 | (14.0 | ) | ||||||||
Our Infrastructure gross profit decreased 14.0%, or S/.34.5 million, from S/.245.9 million for 2015 to S/.211.4 million for 2016. Our Infrastructure gross margin was 18.0% for 2016 compared to 18.2% for 2015. The variation in our Infrastructure gross profit principally reflected the following:
| • | Toll Roads: a 3.4%, or S/.2.7 million, decrease in gross profit, from S/.78.5 million for 2015 to S/.75.8 million for 2016. Even though the gross profit decreased, due to the lower construction activities in Norvial, our Toll Roads gross margin increased from 19.9% for 2015 to 28.7% for 2016, as a consequence of a lesser impact on gross profit from lower construction activities in Norvial, because these activities have lower margins; |
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Table of Contents
| • | Mass Transit: a 4.9%, or S/.2.0 million, increase in gross profit, from S/.40.5 million for 2015 to S/.42.5 million gross profit for 2016, primarily due to the profit registered for the construction of the infrastructure expansion. Our gross margin for 2016 was 17.2%, compared to 19.6% for 2015; |
| • | Water Treatment: a 159.1%, or S/.3.5 million, increase in gross profit for 2016, from S/.2.2 million gross profit for 2015 to S/.5.7 million gross profit for 2016, due to financial gains from the refinancing of the project. Our Water Treatment gross margin was 30.8% for 2016 compared to 7.9% for 2015; |
| • | Energy: a 33.7%, or S/.21.4 million, decrease in gross profit, from S/.63.5 million for 2015 to S/.42.1 million for 2016, primarily due to lower fees resulting from the decrease in international oil prices. Our Energy gross margin was 11.0% for 2016 compared to 16.3% for 2015; and |
| • | Operation and Maintenance of Infrastructure Assets : a 25.9%, or S/.15.8 million, decrease in gross profit, from S/.61.1 million for 2015 to S/.45.3 million for 2016, due to the reduction of revenues and reworks required in connection with a project executed in prior years and additional costs recognized in the Red Vial 3 project. Our Operation and Maintenance of Infrastructure Assets gross margin was 17.2% for 2016 compared to 18.2% for 2015. |
Operating Profit. The table below sets forth the breakdown of our Infrastructure operating profit by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of US$) | % | |||||||||||
|
Toll Roads |
68.3 | 65.7 | (3.8 | ) | ||||||||
|
Mass Transit |
29.9 | 29.5 | (1.3 | ) | ||||||||
|
Water Treatment |
1.9 | 4.9 | 157.9 | |||||||||
|
Energy |
46.7 | 25.4 | (45.6 | ) | ||||||||
|
Operation and Maintenance of Infrastructure Assets |
34.0 | 20.6 | (39.4 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Total |
180.8 | 146.1 | (19.2 | ) | ||||||||
Our Infrastructure operating profit decreased 19.2%, or S/.34.7 million, from S/.180.8 million for 2015 to S/.146.1 million for 2016. Our Infrastructure operating margin was 12.4% for 2016 compared to 13.4% for 2015. The variation in our Infrastructure operating profit principally reflected the following:
| • | Toll Roads: a 3.8%, or S/.2.6 million, decrease in operating profit, from S/.68.3 million for 2015 to S/.65.7 million for 2016, primarily due to the decrease in gross profit given that administrative expenses remained at the same level. Our Toll Roads operating margin was 24.8% for 2016 compared to 17.3% for 2015; |
| • | Mass Transit : a 1.3%, or S/.0.4 million, decrease in operating profit, from an operating profit of S/.29.9 million for 2015 to S/.29.5 million for 2016, due to an increase in administrative expenses as a consequences of a tax fine from prior years and legal expenses for the negotiation of the credit agreement for the project expansion. Our Mass Transit operating margin for 2016 was 11.9% compared to 14.5% for 2015; |
| • | Water Treatment : a 157.9%, or S/.3.0 million, increase in operating profit, from an operating profit of S/.1.9 million for 2015 to S/.4.9 million for 2016, due to the increase in gross profit partially offset by an increase in administrative expenses due to an increase in legal expenses for the closing of the refinancing of the project. Our Water Treatment operating margin for 2016 was 26.5% compared to 6.8% for 2015; |
| • | Energy : a 45.6%, or S/.21.3 million, decrease in operating profit, from S/.46.7 million for 2015 to S/.25.4 million for 2016, primarily due to the decrease in gross profit given that the administrative expenses remained at the same level. Our Energy operating margin was 6.6% for 2016 compared to 12.0% for 2015; and |
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| • | Operation and Maintenance of Infrastructure Assets : a S/.13.4 million decrease in operating profit, from a S/.34.0 million profit for 2015 to a S/.20.6 million profit for 2016, primarily due to the decrease in gross profit. Our Operation and Maintenance of Infrastructure Assets operating margin was 7.8% for 2016 compared to 10.2% for 2015. |
Real Estate
The table below sets forth selected financial information related to our Real Estate segment.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Revenue |
215.8 | 411.5 | 90.7 | |||||||||
|
Gross profit |
51.8 | 136.5 | 163.5 | |||||||||
|
Operating profit |
33.0 | 108.9 | 230.0 | |||||||||
Revenues . Our Real Estate revenues increased 90.7%, or S/.195.7 million, from S/.215.8 million for 2015 to S/.411.5 million for 2016. The increase is primarily due to the sale of land in Almonte for S/.97.0 million in 2016, compared to S/.12.0 million from land sales in 2015, as well as more units delivered in 2016 (938 units in 2016 and 835 units in 2015).
Gross Profit . Our Real Estate gross profit increased 163.5%, or S/.84.7 million, from S/.51.8 million for 2015 to S/.136.5 million for 2016, mainly as a result of the sale of land in Almonte, partially offset by lower margins in units delivered in 2016, specifically the Rancho project, compared to 2015, when more housing units with higher margins were delivered. Our Real Estate gross margin was 33.2% for 2016 compared to 24.0% for 2015.
Operating Profit . Our Real Estate operating profit increased 230.0%, or S/.75.9 million, from S/.33.0 million for 2015 to S/.108.9 million for 2016, primarily as a result of the increase in our gross profit partially offset by an increase in administrative expenses due to write-offs of pre-operational costs for projects that were not executed.
Technical Services
The table below sets forth selected financial information related to our Technical Services segment.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
Revenue |
563.9 | 841.1 | 49.2 | |||||||||
|
Gross profit |
76.8 | 77.3 | 0.7 | |||||||||
|
Operating profit |
19.8 | 11.4 | (42.4 | ) | ||||||||
Revenues . The table below sets forth the breakdown of our Technical Services revenues by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of S/.)) | % | |||||||||||
|
IT Services |
— | 113.2 | NM | |||||||||
|
Electricity Networks Services |
563.9 | 727.9 | 29.1 | |||||||||
|
|
|
|
|
|||||||||
|
Total |
563.9 | 841.1 | 49.2 | |||||||||
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Our Technical Services revenues increased 49.2% or S/.277.2 million, from S/.563.9 million for 2015 to S/.841.1 million for 2016. The variation in our Technical Services revenues principally reflected the following:
| • | IT Services : S/.113.2 million, increase in revenues, from S/.0 million for 2015 to S/.113.2 million for 2016, primarily as a result of the consolidation of Adexus, as of August 2016. |
| • | Electricity Networks Services : a 29.1%, or S/.164.0 million, increase in revenues, from S/.563.9 million for 2015 to S/.727.9 million for 2016, primarily due to an increase in revenues in the electric and telecommunications division in Chile and Colombia as a consequence of contracts awarded during 2016. |
Gross Profit. The table below sets forth the breakdown of our Technical Services gross profit by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
IT Services |
— | 15.7 | NM | |||||||||
|
Electricity Networks Services |
76.7 | 61.6 | (19.7 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Total |
76.7 | 77.3 | 0.7 | |||||||||
Our Technical Services gross profit increased 0.7%, or S/.0.5 million, from S/.76.7 million for 2015 to S/.77.3 million for 2016. Our Technical Services gross margin was 9.2% for 2016 compared to 13.6% for 2015. The variation in our Technical Services gross profit principally reflected the following:
| • | IT Services : S/.15.7 million, increase in gross profit, from S/.0 million for 2015 to S/.15.7 million for 2016, due to the consolidation of Adexus as of August 2016. Our IT Services gross margin was 13.9% for 2016; and |
| • | Electricity Networks Services : a 19.7%, or S/.15.1 million, decrease in gross profit, from S/.76.7 million for 2015 to S/.61.6 million for 2016. Our Electricity Networks Services gross margin was 8.5% for 2016 compared to 13.6% for 2015, primarily due to the initial stages of the new contracts, which tend to have lower margins in the initial stage. |
Operating Profit. The table below sets forth the breakdown of our Technical Services operating profit by principal lines of business.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | Variation | ||||||||||
| (in millions of S/.) | % | |||||||||||
|
IT Services |
— | (0.7 | ) | NM | ||||||||
|
Electricity Networks Services |
19.8 | 12.1 | (38.9 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Total |
19.8 | 11.4 | (42.4 | ) | ||||||||
Our Technical Services operating profit decreased S/.8.4 million, from S/.19.8 million for 2015 to a S/.11.4 million profit for 2016. Our Technical Services operating margin for 2016 was 1.4% compared to 3.5% for 2015. The variation in our Technical Services operating profit principally reflected the following:
| • | IT Services : S/.0.7 million, decrease in operating profit, from S/.0 million for 2015 to S/.0.7 million loss for 2016, due to the administrative expenses incurred in Adexus. Our IT Services operating margin was (0.6)% for 2016; and |
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| • | Electricity Networks Services : a 38.9%, or S/.7.7 million, decrease in operating profit, from S/.19.8 million for 2015 to S/.12.1 million for 2016, In 2015, the operating profit was impacted by the sale of the division in Brazil of CAM at a value lower than book value. Our Electricity Network Services operating margin was 1.7% for 2016 compared to 3.5% for 2015. |
Financial (Expense) Income, Net
Our net financial expense increased S/.70.6 million from net financial expenses of S/.130.4 million in 2015 to net financial expenses of S/.201.0 million in 2016. Excluding foreign exchange differences, our net financial expense increased 290.1%, or S/.140.7 million, from net financial expenses of S/.48.5 million for 2015 to net financial expenses of S/.189.2 million for 2016 due to the interest paid on our syndicated loan and a discount of the long term account receivable related to the termination of the GSP gas pipeline concession. Our net exchange difference decreased S/.69.5 million, from a loss of S/.82.0 million for 2015 to a loss of S/.12.5 million for 2016. This decrease is due to the appreciation of the sol against the U.S. dollar from 2015 to 2016.
Share of Profit and Loss in Associates
Our share of profit and loss in associates decreased S/.597.4 million from a profit of S/.7.7 million in 2015 to a loss of S/.589.7 million in 2016. This decrease is primarily due to the impairment of our investment in GSP as a consequence of the cancellation of the concession on January 24, 2017. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
Income Tax
Our income tax decreased 224.4%, or S/.215.2 million, from S/.(95.9) million for 2015 to S/.119.3 million for 2016. This decrease in income tax was primarily due to a decrease in profit before tax. Our effective tax rates for 2016 and 2015 were (20.5)% and 67.3%, respectively.
Net Profit
Our net profit decreased S/.507.2 million, from S/.55.6 million for 2015 to a loss of S/.451.6 million for 2016. Net profit attributable to controlling interests decreased S/.516.8 million, while net profit attributable to non-controlling interests increased 19.8% or S/.9.6 million. Net profit attributable to non-controlling interests increased primarily due to our Real Estate segment. See “—General—Accounting for Subsidiaries, Joint Operations, Joint Ventures and Associated Companies.”
B. Liquidity and Capital Resources
Our principal sources of liquidity have historically been cash flows from operating activities and, to a lesser extent, equity capitalization and indebtedness. We conducted an initial public offering of ADSs in July 2013 from which we received approximately US$411.3 million in net proceeds. During 2015 we entered into a medium term loan credit agreement for up to US$200 million (S/.672 million) with Credit Suisse and our subsidiaries GyM Ferrovías and Norvial issued bonds for S/.629 million (US$184.3 million) and S/.365 million (US$106.9 million), respectively.
As a result of the termination of the GSP gas pipeline concession, we have renegotiated three debt instruments as follows: (i) we amended the terms of our syndicated loan related to our equity investment in GSP; (ii) we repaid our proportional guarantee of the GSP bridge loan and entered a new term loan in a principal amount of US$78.7 million (S/.264.8 million); and (iii) we amended the terms of our proportional repayment obligations under the GSP performance guarantee. In order to strengthen our liquidity and financial flexibility, particularly in the event of potential delays in receiving the government payment contemplated under the GSP gas pipeline concession contract, and make payments on our debt related to the GSP project, our board has approved the sale of non-strategic assets in the amount of up to US$350 million (S/.1,176 million) in proceeds. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
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Table of Contents
Our principal uses of cash (other than in connection with our operating activities) have historically been: capital expenditures in all our business segments, including acquisitions and investments in our infrastructure concessions; servicing of our debt; and payment of dividends. We believe that these sources of cash will be sufficient to cover our working capital needs in the ordinary course of business. We believe that our cash from operations, our current financing sources and the sale of non-strategic assets, as described in “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments”, are sufficient to satisfy our current capital expenditures and debt service obligations through the next twelve months.
We had credit lines with various financial institutions for a total amount of US$2,877.4 million as of December 31, 2016 and for a total amount of US$1,427.3 million as of December 31, 2017. However, our banks have currently restricted us from taking out further lines of credit to finance new operations. See “Recent Developments— Emergency Decree and Subsequent Legislation.”
We are currently in default of certain of the covenants under these financial instruments. For more information, see “Item 13. Defaults, Dividend Arrearages and Delinquencies.”
At December 31, 2017, our cash and cash equivalents totaled S/.638.2 million (US$196.7 million), of which S/.53.2 million (US$16.4 million) was held by our foreign subsidiaries. We intend to distribute any excess cash to our company. We are not currently required to accrue or pay any material taxes associated with the repatriation of these funds. In addition, our foreign subsidiaries have no contractual restrictions, and we are not aware of any material legal restrictions, on their ability to transfer funds to us in the form of cash dividends, loans or advances.
Cash Flows
The table below sets forth certain components of our cash flows for 2015, 2016 and 2017.
| Year ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| (in millions of S/.) | ||||||||||||
|
Net cash provided by (used in) operating activities |
(292.3 | ) | 332.5 | 456.3 | ||||||||
|
Net cash provided by (used in) investing activities |
(551.1 | ) | (373.7 | ) | 348.9 | |||||||
|
Net cash provided by (used in) financing activities |
579.0 | (85.8 | ) | (786.1 | ) | |||||||
|
Net increase (net decrease) in cash |
(264.4 | ) | 44.6 | 19.1 | ||||||||
Cash Flow from Operating Activities
Net cash flow used in operating activities in 2017 was greater than in 2016. For 2017 this reflects an increase in account payables during the year, due to the renegotiation of terms with our suppliers to pay in longer periods.
Net cash flow used in operating activities in 2016 was greater than in 2015. For 2016 this reflects a reduction in account receivables in the E&C segment mainly explained by the termination of two significant mining projects to the end of 2015.
Cash Flow from Investing Activities
Net cash flow used in investing activities in 2017 was lower than in 2016. In 2017, there was more cash flow from the sale of assets than cash flow used in investments.
Net cash flow used in investing activities in 2016 was lower than in 2015. In 2016 we continued with the equity contribution to the GSP consortium.
Cash Flow from Financing Activities
Net cash flow provided by financing activities in 2017 was lower than in 2016. This is primarily due to the reduction of GSP debt with the sale of assets.
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Net cash flow provided by financing activities in 2016 was lower than in 2015. This is primarily due to a reduction of indebtedness in our E&C segment due to the collection of account receivables and a reduction of debt in the Real Estate segment due to more projects in execution, with sufficient cash flows to repay their debt, partially offset by an increase in the Infrastructure and Technical Services segments, mainly due to the increase in the Norvial bond and consolidation of Adexus. Additionally, in 2016 less dividends were paid and there was an increase in the participation of Vial y Vives –DSD.
Indebtedness
As of December 31, 2017, we had a total outstanding indebtedness of S/.2,637.6 million (US$812.8 million) as set forth in the table below.
|
Segment |
Type | Currency |
Total in
millions of S/. |
Total in
millions of US$ |
Weighted
average interest rate |
Range of Maturity Dates | ||||||||||||||||||||||||||||
|
(in millions
of US$) |
(in millions
of S/.) |
(in millions
of CLP) (1) |
(in millions
of COP) |
Minimum | Maximum | |||||||||||||||||||||||||||||
|
E&C |
Leasing | 20.5 | 1.1 | 3,136.7 | 3,678.0 | 88.2 | 27.2 | 3.91 | % | 01/01/2018 | 02/01/2023 | |||||||||||||||||||||||
| Promissory Note | 91.0 | 279.7 | 6,857.2 | 18,586.3 | 631.6 | 194.6 | 5.71 | % | 02/01/2018 | 01/11/2019 | ||||||||||||||||||||||||
|
Infrastructure |
Leasing | 1.4 | 8.6 | — | — | 13.0 | 4.0 | 6.17 | % | 01/01/2018 | 01/07/2020 | |||||||||||||||||||||||
| Long term loan | 36.6 | 947.6 | — | — | 1,066.2 | 328.6 | 5.98 | % | 25/07/2019 | 25/11/2039 | ||||||||||||||||||||||||
| Promissory Note | 6.3 | 0.8 | — | — | 21.3 | 6.6 | 5.07 | % | 05/01/2018 | 28/02/2018 | ||||||||||||||||||||||||
|
Real Estate |
Leasing | — | 16.4 | — | — | 16.4 | 5.1 | 7.84 | % | 01/06/2018 | 01/07/2022 | |||||||||||||||||||||||
| Promissory Note | — | 157.6 | — | — | 157.6 | 48.6 | 7.60 | % | 25/01/2018 | 18/11/2018 | ||||||||||||||||||||||||
|
Technical Services |
Leasing | 0.2 | 0.5 | 3,543.2 | 5,409.5 | 25.9 | 8.0 | 8.08 | % | 23/01/2018 | 22/01/2022 | |||||||||||||||||||||||
| Long term loan | — | — | 4,552.8 | — | 24.3 | 7.5 | 5.69 | % | 15/05/2018 | 27/10/2020 | ||||||||||||||||||||||||
| Promissory Note | — | — | 19,087.3 | 13,084.3 | 116.1 | 35.8 | 7.51 | % | 01/01/2018 | 18/12/2019 | ||||||||||||||||||||||||
|
Corporate |
Leasing | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Long term loan | 146.99 | — | — | — | 477.0 | 147.0 | 6.19 | % | 27/06/2020 | 10/12/2020 | ||||||||||||||||||||||||
| Promissory Note | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| Total | 303.0 | 1,412.3 | 37,177.3 | 40,758.0 | 2,637.6 | 812.8 | ||||||||||||||||||||||||||||
| (1) | Includes debt held by CAM and its subsidiaries that is denominated in Chilean pesos and Colombian pesos, all of which is presented in Chilean pesos in the table above. |
| (2) | Does not include our payable to Chubb Insurance Company related to our proportional repayment obligation under the GSP performance guarantee. |
As of April 30, 2018, S/.145.2 million (US$44.7 million) of our total indebtedness indicated in the table above has matured, of which S/.90.4 million (US$27.8 million) was repaid and S/.54.8 million (US$16.9 million) was renewed by extending the maturities. The weighted average interest rate of this renewed indebtedness and additional indebtedness was 7.2% from February 26, 2018 to September 9, 2018. Stracon GyM, which we sold on April 11, 2018, has not been included in this calculation. Stracon GyM’s outstanding debt as of December 31, 2017 was US$29.2 million.
Below is a description of our material outstanding indebtedness as of December 31, 2017. As of such date, we were not in compliance with certain of the financial covenants related to our syndicated loan. We subsequently entered into an amendment of the syndicated loan, which modified the effective date of compliance with the covenants. However, as of the date of this annual report, we were in continuing default under the syndicated loan and certain of our other debt instruments due to, among other things, the delay in furnishing the company’s 2016 and 2017 audited consolidated financial statements. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments,” and “Item 13. Defaults, Dividends, Arreages and Delinquencies.”
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Leasing . As of December 31, 2017, we were party to numerous leasing agreements with several financial institutions which in the aggregate amounted to approximately S/.143.6 (US$44.3 million). We entered into such agreements primarily for the purpose of leasing the equipment and other assets necessary to run our operations. Upon maturity of each leasing agreement, we have the option to purchase or return the equipment or assets to the lessor. The amounts owed under these leasing agreements are generally repaid in monthly installments, subject to a minimum guaranteed payment corresponding to the minimum amount for which the equipment or assets could be sold to a third-party.
Citibank, N.A. Secured Loan . Our subsidiary GMP has a secured loan with Citibank, N.A. under a loan agreement dated September 19, 2008 and amended on August 27, 2012, with an outstanding principal amount of S/.31.2 million (US$9.6 million) as of December 31, 2017 and as of the date of this annual report. This loan accrues interest at an annual rate of three month LIBOR plus: (i) 1.70% if, at the installment payment date, the exchange rate between the sol and U.S. dollar remains between S/.2.60 to S/.2.75 per US$1.00 or (ii) 1.95%, if otherwise. The loan matures in August 2020. The proceeds of the loan were used by our subsidiary GMP to finance the construction, equipment and operation of the Gas Pariñas plant in Talara. The agreement is secured by certain land, equipment and accounts receivable of GMP. The agreement contains certain customary covenants, including restrictions on the ability of GMP to pay dividends if it is in default under the loan and the obligation by GMP to maintain the following financial covenants during the term of the agreement: (a) Leverage Ratio (as defined therein) shall not be greater than 1.50; (b) Debt Service Coverage Ratio (as defined therein) shall not be less than 1.20; (c) Liquidity Ratio (as defined therein) shall not be less than 1.10; and (d) Debt Coverage Ratio (as defined therein) shall not be greater than 2.20.
Norvial Corporate Bonds. In July 2015, Norvial established its first corporate bond program on the Lima Stock Exchange, for a total amount of S/.365 million (US$106.9 million). The first tranche under this program was issued for an amount of S/.80 million, due 2020 with an annual interest rate of 6.75%. The second tranche was issued for an amount of S/.285 million, due 2027 with an annual interest rate of 8.375%, structured in three disbursements. In July 2015 we received the first disbursement for S/.105 million, in January 2016 we received the second disbursement for S/.100 million and in July 2016 we received the third disbursement of S/.80 million. These bonds are secured by: (i) certain cash flows; (ii) a mortgage on the Norvial concession; (iii) a lien over Norvial shares; (iv) the assignment of Norvial’s rights over a performance bond provided by GMP; and (v) any additional guarantees granted in favor of other secured creditors. The proceeds of these bonds were used to pay S/.85 million of debt outstanding under a short-term loan agreement with Banco de Crédito del Perú (BCP) for a total S/.150 million, and the rest was used to finance the construction of the second stage of Ancon – Huacho Pativilca highway and the value added tax linked to the implementation of the project expenses. As of December 31, 2017, Norvial had S/.344 million (US$106 million) outstanding under these bonds.
Senior Secured Notes. On February 2015, GyM Ferrovías issued a total of S/.629,000,000 (US$184.3 million) Series A Senior Secured VAC-Indexed Notes due 2039, with an annual interest rate of 4.75% plus adjustments for inflation. The bonds are secured by (i) a mortgage on the Lima Metro concession, (ii) a lien on GyM Ferrovías shares, (iii) certain collection rights, (iv) certain cash flows and (v) liens on certain accounts. The proceeds from the issuance were used to repay a short term loan provide by Banco de Crédito del Perú-BCP for S/.400 million, funding of the reserve accounts, payment of the issuance expenses, and for the partial repayment of a subordinated loan provided by certain shareholders of GyM Ferrovías to GyM Ferrovías. According to the indenture, in order to make any payment of a subordinated loan or distribute any dividends, our Debt Service Coverage Ratio (as defined therein) should be at least 1.2x. Under the indenture GyM Ferrovías has fund the debt service reserve account on a quarterly basis with the equivalent of the amounts due in the next two succeeding interest payment dates. Moreover, the operation and maintenance reserve account must be funded annually with an amount equal to twenty-five percent (25%) of operation and maintenance costs of the corresponding current annual budget. As of December 31, 2017, GyM Ferrovías had S/.629.0 million (US$193.8 million) outstanding under these notes.
Financing of the Expansion Project of the Lima Metro Concession. On August 23, 2017, GyM Ferrovias entered into a US$396 million financing structure with Mizuho Bank, Ltd and Sumitomo Mitsui Banking Corporation. The particular structure for the expansion project of the Lima Metro involves the securitization of
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irrevocable and unconditional payment obligations of the Government of Peru (CPAOs), which have been sold by GyM Ferrovias to a borrower under a long-term loan facility. The expansion project includes the improvement of civil works and the purchase of additional rolling stock, including trains and cars that will be designed, built, operated and maintained by GyM Ferrovías, as concessionaire under the Lima Metro concession. The financing is structured as a long-term loan facility and a working capital facility. As of December 31, 2017, there was no debt outstanding under this financing structure. As of the date of this annual report, there is US$36.0 million outstanding under the financing structure.
As of the date of this annual report, GyM Ferrovias is in continuing default under the financing of the expansion project due to the non-delivery of our audited consolidated financial statements for the 2016 and 2017 fiscal year, in our capacity as guarantor of the obligations of GyM Ferrovias under the agreement. We have requested waivers from lenders, which are pending.
BCP Loan. In December 2015, our subsidiary GMP S.A. and Oiltanking Peru S.A.C. subscribed in equal parts to a medium term loan credit agreement for up to US$100 million with Banco de Crédito del Peru, comprised of (i) a medium term tranche for up to US$70 million (for additional investments) with an annual interest rate of 6.04% and a term of five years, and (ii) a medium term tranche for up to US$30 million (for committed investments) with an annual interest rate of 6.32% and a term of eight years. The tranches of the loan mature in 2024 and 2027, respectively. The proceeds of this loan are to finance Terminales del Peru’s obligations in the operation contracts that it maintains with Petroperu in regards to the Central Terminal (corresponding to the Callao Port), and North Terminals (corresponding to the Etén, Salaverry, Chimbote and Supe Ports). As of December 31, 2017, GMP S.A. had US$23.0 million (S/.74.7 million) outstanding under this loan.
Syndicated Loan. In December 2015 we entered into a medium term loan credit agreement for up to US$200 million (S/.672 million) with Credit Suisse AG, Cayman Islands Branch, and Credit Suisse Securities (USA) LLC. The term of the loan is five years, with quarterly installments starting on the 18th month. The loan accrued interest at a rate of three months Libor plus 3.9% per year. The proceeds were used to finance our equity participation in Gasoducto Sur Peruano (“GSP”), which was the concessionaire of the southern gas pipeline project. As of December 31, 2017, the principal amount outstanding under this loan was US$81.1 million (S/.263.2 million) and, as of the date of this annual report, the principal amount outstanding under this loan is US$76.3 million (S/.247.6 million).
As a result of the termination of the GSP gas pipeline concession, in June 2017, we entered into an amendment to the credit agreement. According to the terms of the amendment, our syndicated loan matures in December 2020, with required prepayments to be made with the proceeds of asset sales of 40% in the first year and an additional 30% in the second year of the amendment. The syndicated loan continues to accrue interest at LIBOR plus 4.90% per year. In addition, we are prohibited from paying dividends until the loan is repaid in full. Also, we have provided additional security interests, so that the amended syndicated loan will be secured by: (i) a first lien on our shares of GyM and Concar; (ii) a first lien on our shares of Almonte; (iii) a first lien on certain real estate properties in Surquillo; (iv) liens on certain related accounts; (v) a second priority lien on our shares of CAM and CAM Servicios del Perú S.A.; and (vi) a first lien on cash flows from the sale of certain assets.
The amendment to the credit agreement contains certain covenants, including the obligation by us to maintain the following financial ratios during the term of the agreement: (i) the Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined therein) shall not be less than 3.5:1.0 commencing on April 1, 2018 and thereafter; (ii) the Consolidated Leverage Ratio (as defined therein) shall not be greater than (a) 3.5:1.0 at any time during the period commencing on December 31, 2016 and ending on March 31, 2017; (b) 3.5:1.0 at any time during the period commencing on April 1, 2017 and ending on June 30, 2017; (c) 3.0:1.0 at any time during the period commencing on July 1, 2017 and ending on September 30, 2017; and (d) 2.5:1.0 at any time thereafter; and (iii) the Debt Service Coverage Ratio (as defined therein) as of the last day of any fiscal quarter of the borrower, falling on or after the first anniversary of the closing date, shall not be less than 1.5:1.0 commencing on April 1, 2018 and thereafter. Furthermore, the agreement contains a covenant restricting the CAM Chile Leverage Ratio (as defined therein) from exceeding 2.5:1.0 at any time. The agreement also imposes limitations, in an event of default, on ours and our subsidiaries’ ability to distribute dividends, including, among others, that we may only distribute cash dividends to our stockholders out of 40% of our net income available for distribution in accordance with IFRS, as reflected in our audited consolidated financial statements for the fiscal year most recently ended.
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As of the date of this annual report, and due to the accounting adjustments in connection to the termination of the GSP concession, we are again under certain continuing defaults under the syndicated loan with respect to the financial ratios and the non-delivery of the company’s audited consolidated financial statements for the fiscal years 2016 and 2017 on time. We have requested a waiver from the lenders, which is pending.
GSP Bridge Loan and New Term Loan. With the termination of the GSP gas pipeline concession, our proportional guarantee under the GSP bridge loan became due. As of December 31, 2016, there was US$129 million (S/.433.4 million) of principal amount outstanding under our corporate guarantee. As of the date of this annual report the principal amount outstanding under the GSP bridge loan has been entirely paid. On June 27, 2017 we entered into a new US$78.7 million (S/.264.8 million) term loan with Natixis, BBVA, SMBC and MUFJ, the proceeds of which were used to prepay GSP bridge loan. The new term loan matures on 2020, with required prepayments to be made with the proceeds of asset sales of 40% in the first year and an additional 30% in the second year of the amendment. The agreement with respect to such term loan contains a covenant restricting the Consolidated Leverage Ratio (as defined therein) from exceeding 3.5:1.0 at any time and the CAM Chile Leverage Ratio (as defined therein) from exceeding 2.5:1.0 at any time. The term loan accrues interest at LIBOR plus 4.50% per year, which will increase to 5.00% during the second year and to 5.50% during the third year. In addition, we will be prohibited from paying dividends until the loan is repaid in full. Also, the term loan will be secured by: (i) a first lien on our rights to receive the termination payment derived from the GSP termination (the “VCN”), (ii) a second priority lien on our shares of GyM and Concar; (iii) a second priority lien on our shares of Almonte; (iv) a second priority lien on certain real estate properties in Surquillo; (v) a second priority lien on our shares of CAM; (vi) a second priority lien on our shares of CAM Servicios del Perú S.A.; and (vii) a first lien on cash flows from the sale of certain assets. As of the date of this annual report, there is US$72.5 million outstanding on the GSP bridge loan.
As of the date of this annual report, we are under certain continuing defaults under the term loan with respect to the financial ratios and the non-delivery of the audited consolidated financial statements of the company for the 2016 and 2017 fiscal years on time. We have requested a waiver from the lenders, which is pending.
GSP Performance Guarantee. Upon the termination of the GSP gas pipeline concession, our proportional repayment obligations under the GSP performance guarantee from Chubb Insurance Company became due. As of December 31, 2017, we had US$15.6 million (S/.50.6 million) in obligations outstanding and, as of the date of this annual report, we had US$6.8 million (S/.22.1 million) in obligations outstanding. We recorded this amount as other accounts payable in our financial statements as of December 31, 2017. On March 31, 2017, we renegotiated the terms of our repayment obligations. The new terms require repayment by March 31, 2018, and were extended until September 30, 2018, with interest accruing at 6% per year. The new terms also provide a security interest over our shares in CAM and over cash flows from the sale of certain assets.
Financial Stability Framework Agreement. On July 31, 2017, we, and certain of our subsidiaries, GyM, CAM Peru S.A., Vial y Vives — DSD and Concesionaria Vía Expresa Sur S.A., entered into a Financial Stability Framework Agreement (together with certain complementary contracts, the “Framework Agreement”) with the following financial entities: Scotiabank Perú S.A., Banco Internacional del Perú S.A.A., BBVA Banco Continental, Banco de Crédito del Perú, Citibank del Peru SA and Citibank N.A. The Framework Agreement aims to: (i) grant GyM a syndicated revolving line of credit for working capital for up to US$1,630,538 and S/.143,934,533, which may be increased by an additional US$14,000,000 subject to certain conditions; (ii) grant GyM a line of credit of up to US$51,566,849 and S/.33,563,807; (iii) grant us, GyM, CAM Peru S.A., Vial y Vives – DSD and Concesionaria Vía Expresa Sur S.A. a non-revolving line of credit to finance reimbursement obligations under performance bonds; (iv) grant a syndicated line of credit in favor of us and GyM for the issuance of performance bonds up to an amount of US$100,000,000 (which may be increased by an additional US$50,000,000, subject to compliance with certain conditions); and (v) to commit to maintain existing standby letters of credit issued at the request of GyM and us, as well as the request of CAM Peru S.A., Vial y Vives – DSD and Concesionaria Vía Expresa Sur S.A. In April of 2018, we repaid US$73.9 million of the facility with the proceeds of the sale of Stracon. As of December 31, 2017 and the date of this annual report, there was US$150.7 million and US$77.1 million outstanding under this agreement, respectively.
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As of the date of this annual report, we are under continuing default due to the non-delivery of our audited consolidated financial statements and those of our subsidiary, GyM, for the 2016 and 2017 fiscal years. We have requested a waiver from the lenders, which is pending.
Derivative Financial Instruments
In August 2012, our subsidiary GMP entered into two interest rate swaps with Citibank, N.A. to hedge its exposure to fluctuations in LIBOR under its unsecured loan with Citibank, N.A. described above. These interest rate swaps establish a fixed annual rate of 5.05%, payable at each interest payment date under the loan.
In August 2014, our subsidiary CAM Chile entered into two forward foreign exchange agreements for US$0.9 million and US$0.8 million, respectively. In addition, in February 2015, CAM entered into two forward foreign exchange agreements for US$0.9 million and US$0.5 million respectively.
We did not execute any derivative financial instruments from 2013 until the date hereof, other than as described above. For additional information about our derivative financial instruments and borrowings, see notes 2.9 and 19 to our audited annual consolidated financial statements included in this annual report.
Capital Expenditures
The table below provides our total capital expenditures incurred in 2015, 2016 and 2017.
| Year ended December 31, | ||||||||||||||||
| 2015 | 2016 | 2017 | 2017 | |||||||||||||
| (in millions of S/.) |
(in millions
of US$) |
|||||||||||||||
|
Engineering and Construction(1)(2) |
124.2 | 116.8 | 37.6 | 11.6 | ||||||||||||
|
Infrastructure |
252.8 | 146.8 | 122.6 | 37.8 | ||||||||||||
|
Real Estate(3) |
41.4 | 49.7 | 3.4 | 1.0 | ||||||||||||
|
Technical Services(4) |
60.5 | 54.2 | 34.0 | 10.5 | ||||||||||||
|
Corporate(2) |
469.1 | 421.9 | (122.3 | ) | (37.7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
948.0 | 789.3 | 75.2 | 23.2 | ||||||||||||
| (1) | In our consolidated financial statements, in accordance with IFRS, we record in “cash flow used in investing activities” with respect to equipment leases only the amounts paid during the period as opposed to the total amount of lease payments, which is included in the table above. |
| (2) | Includes S/.415.9 million, S/.73.4 million and S/.0 million of capital expenditures related to acquisitions in 2015, 2016 and 2017, respectively. |
| (3) | Includes S/.0 million, S/.13.9 million and S/.1.0 million in investments in 2015, 2016 and 2017, respectively, for the purchase of land by our Real Estate segment, which in accordance with IFRS are recorded in our consolidated financial statements as “inventory.” |
| (4) | In our consolidated financial statements, in accordance with IFRS, we record as “cash flow used in investing activities” with respect to equipment leases only the amounts paid during the period as opposed to the total amount of lease payments which is included in the table above. |
Capital expenditures for our E&C segment of approximately S/.124.2 million (US$36.4 million), S/.116.8 million (US$34.8 million) and S/.37.6 million (US$11.6 million) in 2015, 2016 and 2017, respectively, primarily correspond to the purchase of equipment and machinery and, to a lesser extent, investments relating to mining services contracts. In 2015 capital investments in the E&C segment also included S/.25.1 million (US$7.3 million), with respect to the acquisition of 20% of the participation of Red Eagle in the San Ramon Project (Colombia). In 2016 capital investments in the E&C segment also included S/.51.18 million (US$15.1 million) with respect to an additional stake in Vial y Vives- DSD. In 2017, capital investments in the E&C segment only included the purchase of equipment and machinery.
Capital expenditures for our Infrastructure segment of approximately S/.252.8 million (US$74.0 million), S/.146.8 million (US$43.7 million) and S/.122.6 million (US$37.8 million) in 2015, 2016 and 2017, respectively, correspond to periodic maintenance and the construction of the second stage of our Norvial toll road concession and,
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in our Energy line of business, oil development drilling activities as well as improvements for our gas processing plant and investments in Metro de Lima. In 2015, capital expenditures for our Infrastructure segment also included the purchase of trains for Line One of the Lima Metro and the construction of the railway maintenance and repair yard, while in 2016 we only had capital expenditures relating to work maintenance of our trains and infrastructure. In 2017, capital expenditures for our Infrastructure segment included the purchase of trains for Line One of the Lima Metro, and also investments incurred in preparing wells in Blocks III and IV.
Capital expenditures for our Real Estate segment of approximately S/.41.4 million (US$12.4 million), S/.49.7 million (US$14.8 million) and S/.3.4 million (US$1.0 million) in 2015, 2016 and 2017, respectively, primarily correspond to the purchase of land for real estate projects, including the Ancon project in 2015, the Pezet and Paul Harris projects in 2016 and an additional purchase for the Paul Harris project in 2017.
Capital expenditures for our Technical Services segment of approximately S/.60.5 million (US$17.7 million), S/.54.2 million (US$16.1 million) and S/.34.0 million (US$10.5 million) in 2015, 2016 and 2017, respectively, primarily correspond to maintenance of equipment relating to CAM and GMD.
In 2015, corporate segment investments include S/.346.5 million (US$115.9) for the acquisition of a 20% stake of Concesionaria Gasoducto Sur Peruano S.A. and S/.47.4 million (US$13.9 million) for the acquisition of Adexus. In 2016, corporate segment investments include S/.426.7 million (US$127 million) for the acquisition of our 20% stake in GSP and S/.22.3 million (US$6.7 million) for an additional stake in Adexus. In 2017, there were no relevant corporate segment investments, as the company initiated a divestment process of non-strategic assets.
Divestitures in 2015 consisted of approximately S/.10.4 million (US$2.9 million) relating to the sale of equipment of GyM. Divestitures in 2016 consisted of S/.107.6 million (US$32.0 million) relating to the sale of our 1.64% stake in Transportadora de Gas del Perú S.A. (TGP) and also the sale of equipment of GyM. Divestitures in 2017 consisted of approximately S/.172.8 million (US$53.3 million) relating to the sale of our stake in Red Eagle in Stracon GyM, the sale of our 22.5% stake held in our associate, PRINSUR, the sale of our 89.19% interest in GMD, our IT services subsidiary, and the sale of our 51% interest in COGA to our partners, Enagas and Carmen Corporation, and relating to sale of equipment of GyM.
We have budgeted S/.237.9 million (US$73.3 million) in capital expenditures for 2018. Our current plans for our E&C segment contemplate capital expenditures in 2018 of approximately S/.43.6 million (US$13.4) million, mainly for the purchase of equipment and machinery. Our current plans for our Infrastructure segment contemplate capital expenditures in 2018 of approximately S/.114.4 million (US$35.3 million) principally for the construction of the second stage of Norvial, the expansion of the Line 1 of the Lima Metro and for investments in oil development drilling activities. Our current plans for our Real Estate segment contemplate expenditures in 2018 of approximately S/.43.3 million (US$13.3 million) for the purchase of land for real estate development projects. Our current plans for our Technical Services segment contemplate capital expenditures in 2018 of approximately S/.36.6 million (US$11.3 million) principally for the purchase of equipment used in our operations. Our current plans for our Corporate segment contemplate divestitures in 2018 of approximately S/.94.6 million (US$29.1 million). In addition, we have entered into a financial stability framework agreement providing for new lines of credit. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
These estimates are subject to change. We routinely evaluate acquisitions, new infrastructure concessions, land purchases and other investment or divestiture opportunities that are aligned with our strategic goals, particularly in Peru, Chile and Colombia. We cannot assure you that we will find opportunities on terms that we consider to be favorable to us, whether we will be able to take advantage of such opportunities should they arise, or the timing of and funds required by such opportunities. In addition, should we undertake any such investments, we expect to finance these opportunities with a combination of cash on hand, new borrowings and/or financial contributions from partners, depending on a variety of commercial considerations at such time. See “Part I. Introduction—Forward-Looking Statements.”
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C. Research and Development, Patents and Licenses
Not applicable.
Our Main Market: Peru
The following sets forth key macroeconomic trends in our markets, Peru, Chile and Colombia. For additional information on trends in our business, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Factors Affecting our Results of Operations” and “Item 4.B. Business Overview—Backlog.”
Overview of the Peruvian Economy
Our results are substantially affected by economic conditions prevailing in Peru. The Peruvian economy has been one of the fastest growing economies globally during the period from 2013 to 2017. According to the Peruvian Central Bank, Peruvian real GDP grew at an average rate of 3.5% during that period, one of the highest rates in South America. The economic expansion during this period was a result of robust domestic demand, increase in investment, price stability, increase in foreign direct investment, and an improvement in public finances, among other factors.
Nominal GDP per capita has increased from S/.17,645 in 2013 to S/.22,046 in 2017, a 24.9% increase. Average annual inflation, measured by the change in the CPI index, was 3.0% in the period from 2013 to 2017. On the other hand, Peru’s Sol, depreciated from an average of S/.2.70 per US$1.00 in 2013 to an average of S/.3.26 per US$1.00 in 2017, a depreciation of 21%. Peru’s sovereign debt has been granted investment grade rating by S&P, Fitch and Moody’s. At the end of 2017, Peruvian sovereign debt had one of the highest credit ratings in the South American region, rated BBB+ by S&P (August 2013) and Fitch (October 2013) and A3 by Moody’s (July 2014).
The following table sets forth the main economic indicators of the Peruvian economy from 2013 to 2017:
| 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||
|
Nominal GDP (US$ billions) |
202.1 | 202.8 | 192.3 | 195.3 | 215.1 | |||||||||||||||
|
Nominal GDP / capita (US$) |
6,529.6 | 6,455.0 | 6,172.7 | 6,204.5 | 6,756.7 | |||||||||||||||
|
Real GDP growth rates (% based on local currency GDP) |
5.0 | % | 2.4 | % | 3.3 | % | 4.0 | % | 2.5 | % | ||||||||||
|
Private consumption growth rate |
5.2 | % | 3.9 | % | 4.0 | % | 3.3 | % | 2.5 | % | ||||||||||
|
Private investment growth rate |
3.9 | % | (2.3 | %) | (4.3 | %) | (5.9 | %) | 0.1 | % | ||||||||||
|
Foreign direct investment growth rate |
(24.0 | %) | (15.2 | %) | 4.9 | % | (17.0 | %) | (1.4 | %) | ||||||||||
|
Public expenditure (consumption and investment) growth rate |
9.4 | % | 3.6 | % | 3.6 | % | (0.2 | %) | 1.1 | % | ||||||||||
|
Total private and public fixed investment growth rate (1) |
5.9 | % | (2.1 | %) | (5.3 | %) | (4.6 | %) | 0.0 | % | ||||||||||
|
Exports growth rate |
1.0 | % | (0.9 | %) | 4.0 | % | 9.5 | % | 8.5 | % | ||||||||||
|
Imports growth rate |
5.1 | % | (1.4 | %) | 2.4 | % | (2.2 | %) | 4.0 | % | ||||||||||
|
Inflation (measured by change in CPI) |
2.9 | % | 3.2 | % | 4.4 | % | 3.2 | % | 1.4 | % | ||||||||||
|
Average exchange rate (S/./US$) |
2.70 | 2.84 | 3.19 | 3.38 | 3.26 | |||||||||||||||
|
End of period exchange rate (S/./US$) |
2.80 | 2.99 | 3.41 | 3.36 | 3.25 | |||||||||||||||
|
Central Bank interest rate (end of period) |
4.00 | % | 3.50 | % | 3.75 | % | 4.25 | % | 3.25 | % | ||||||||||
|
Population (million)(1) |
30.9 | 31.4 | 31.1 | 31.5 | 31.8 | |||||||||||||||
|
Unemployment rate(1) |
7.5 | % | 6.0 | % | 6.4 | % | 6.7 | % | 6.7 | % | ||||||||||
|
Total public debt (US$ billions) |
38.3 | 38.6 | 41.8 | 46.7 | 53.6 | |||||||||||||||
|
Public debt/nominal GDP (%) |
19.6 | % | 20.0 | % | 23.3 | % | 23.8 | % | 24.8 | % | ||||||||||
|
Net reserves (US$ billions) |
65.7 | 62.3 | 61.5 | 61.7 | 63.6 | |||||||||||||||
|
Net reserves/nominal GDP (%) |
32.5 | % | 30.7 | % | 32.0 | % | 31.6 | % | 29.6 | % | ||||||||||
|
Fiscal surplus (deficit)/nominal GDP (%) |
0.9 | % | (0.3 | %) | (2.1 | %) | (2.6 | %) | (3.1 | %) | ||||||||||
Source: Peruvian Central Bank, SBS, Ministry of Economy and Finance, National Statistical Institute of Peru (INEI), IMF.
| (1) | 2017 projected by IMF. |
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The following table sets forth real gross domestic product by expenditure for the years indicated.
|
GDP by Expenditure (% of GDP unless otherwise stated) |
2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||
|
Government consumption |
11.2 | 12.2 | 12.6 | 12.0 | 11.8 | |||||||||||||||
|
Private consumption |
61.5 | 63.0 | 65.5 | 65.5 | 64.8 | |||||||||||||||
|
Total fixed investment |
27.9 | 26.3 | 24.6 | 22.6 | 21.1 | |||||||||||||||
|
Public sector |
5.8 | 5.6 | 5.0 | 4.8 | 4.6 | |||||||||||||||
|
Private sector |
20.7 | 20.1 | 19.3 | 17.8 | 16.9 | |||||||||||||||
|
Change in inventories(1) |
1.4 | 0.6 | 0.3 | (0.0 | ) | (0.5 | ) | |||||||||||||
|
Exports of goods and services |
24.1 | 22.4 | 21.0 | 22.1 | 24.3 | |||||||||||||||
|
Imports of goods and services |
24.8 | 24.0 | 23.7 | 22.2 | 22.0 | |||||||||||||||
|
Net exports |
(0.7 | ) | (1.6 | ) | (2.7 | ) | (0.1 | ) | 2.3 | |||||||||||
|
GDP (in billions of US$) |
202.1 | 202.8 | 192.3 | 195.3 | 215.1 | |||||||||||||||
Source: Peruvian Central Bank
| (1) | Defined as the difference between the volume at the end of the period and the volume at the beginning of the period; valued at the average price over the period. |
Key Industry Sectors Relating to Our Business in Peru
Construction and Infrastructure
The Peruvian construction industry nominal GDP is estimated at US$12.4 billion and accounted for 5.8% of the country’s nominal GDP in 2017 according to the Peruvian Central Bank. Construction GDP grew at an average of 4.2% annually in nominal terms during the five years from 2013 to 2017. The following table illustrates, from 2013 to 2017, the average real growth rate in both private investment and construction in Peru vis-à-vis the average real GDP growth rate.
Growth of Real Private Investment GDP and Real Construction Sector GDP vs. Real GDP
Source: Peruvian Central Bank.
Mining
Peru is a poly-metallic resources producer and exports several metals including silver, copper, zinc, gold and lead, among others. Peru is also a major contributor to global metal reserves. According to the U.S. Geological Survey of 2018, Peru holds 17.5% of global silver reserves, 12.2% of global zinc reserves, 10.3% of global copper reserves and 4.3% of global gold reserves, as of January 2018. According to the Peruvian Central Bank, mining exports reached approximately US$27.2 billion and represented 60.5% of total Peruvian exports in 2017.
Upcoming mining projects comprise estimated capital expenditures of approximately US$18.9 billion from 2015 to 2017, according to APOYO Consultoría. As of December 2017, the Peruvian Ministry of Energy and Mines estimates 46 mining projects at various stages of development involving an estimated investment of US$46.1 billion.
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Mining Investment Projects by Level of Development
|
Number of
Projects |
US$
billion |
|||||||
|
Expansion |
5 | 5.2 | ||||||
|
With approved Environmental Impact Assessment (“EIA”) |
14 | 15.7 | ||||||
|
With EIA under evaluation |
2 | 0.6 | ||||||
|
Exploration |
25 | 24.5 | ||||||
|
Total |
46 | 46.1 | ||||||
Source: Peruvian Ministry of Energy and Mines.
Power and Utilities
The power and utilities market in Peru has shown sustained growth with maximum electricity demand reaching 6,596 MW and growing at an average annual rate of 4.5% during the five years from 2013 to 2017, according to the Economic Operations Committee of Peru’s National Interconnected System. The growth of the power and utilities market has led to the construction of power generation facilities, as well as the expansion of the power transmission and distribution network.
According to the Economic Operation Committee of the National Interconnected System (“COES SINAC”), Peru had an installed generation capacity of 11,970 MW as of December 2017. As of 2017, the Peruvian market was served by 54 generation companies. As of December 2017, the nation’s power transmission network spanned approximately 28,537 kilometers, according to the COES SINAC. As of 2017, there were 13 electric distribution companies across Peru.
Oil and Gas
The oil and gas activity in Peru has decreased with a sector nominal GDP average annual growth rate of (1.6)% during the five years from 2013 to 2017. Oil and gas activity includes the exploration and production, and transportation and commercialization of hydrocarbon products and derivatives.
According to the Peruvian Ministry of Energy and Mines, during 2017, local production of hydrocarbons was approximately 16 MMbbl of Petroleum, 33 MMboe of liquefied natural gas (LNG) and 81 MMboe of natural gas. These levels decreased an average of 3.3% annually from 2013 to 2017. Peruvian gas production increased considerably since 2004, when the Camisea project, the largest gas project in Peruvian history, began operations. The Peruvian Ministry of Energy and Mines reports that as of 2016 proven reserves of oil and gas amounted to 3,906 MMboe. These reserves have increased since 2009, due to increased exploration activities, as evidenced in the chart below. The Peruvian government’s reserves methodology may differ materially from the one mandated by the SEC.
Hydrocarbons Proven Reserves and Production Evolution in Peru (in MMboe)
Source: Peruvian Ministry of Energy and Mines
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Our Other Markets: Chile and Colombia
Chile
Overview of the Chilean Economy
Our activities in Chile span across the E&C and power services sectors. The following table sets forth the main economic indicators of the Chilean economy for the period from 2013 to 2017.
|
Values in nominal US$ billion unless otherwise stated |
2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||
|
Nominal GDP |
278.5 | 261.1 | 244.0 | 250.1 | 276.9 | |||||||||||||||
|
Nominal GDP / capita (US$) |
15,797.4 | 14,655.5 | 13,548.4 | 13,743.8 | 15,057.6 | |||||||||||||||
|
Real GDP growth rate (%) |
4.2 | % | 1.9 | % | 2.2 | % | 1.3 | % | 1.5 | % | ||||||||||
|
Inflation (%, measured by change in CPI) |
3.0 | % | 4.6 | % | 4.4 | % | 2.7 | % | 2.3 | % | ||||||||||
|
Total private and public fixed investment |
69.1 | 57.1 | 49.6 | 47.6 | 49.1 | |||||||||||||||
|
Average exchange rate (CLP/US$) |
495.0 | 570.0 | 654.2 | 676.8 | 649.3 | |||||||||||||||
|
End of period exchange rate (CLP/US$) |
523.8 | 607.4 | 707.3 | 667.3 | 615.2 | |||||||||||||||
|
Population (million) (1) |
17.6 | 17.8 | 18.0 | 18.2 | 18.4 | |||||||||||||||
|
Unemployment rate (2) |
5.9 | % | 6.4 | % | 6.2 | % | 6.5 | % | 7.0 | % | ||||||||||
|
Public Debt / nominal GDP (%) |
12.0 | % | 14.0 | % | 16.0 | % | 21.3 | % | 24.9 | % | ||||||||||
|
Net reserves / nominal GDP (%) |
14.8 | % | 15.5 | % | 15.8 | % | 16.2 | % | 14.1 | % | ||||||||||
|
Fiscal surplus (deficit) / nominal GDP (%) |
(0.5 | %) | (1.5 | %) | (2.1 | %) | (2.7 | %) | (2.8 | %) | ||||||||||
Source: Chilean Central Bank, Chilean Government Budget Office, IMF, Global Insight
| (1) | 2017 and 2016 projected by the IMF |
| (2) | 2017 projected by the IMF |
The Chilean real GDP grew at an average annual rate of 2.2% during the five years from 2013 to 2017 in real terms. The country’s nominal GDP per capita has increased 25.0% from CLP 7,819,646 in 2013 to CLP 9,777,343 in 2017. This expansion was mainly driven by a strong domestic demand in real terms: total consumption grew on average at 3.2% per year during the five years from 2013 to 2017. Inflation has remained stable since 2013, averaging 3.4% between 2013 and 2017, in line with the Chilean Central Bank’s inflation target of 3% +/- 1%. Chile’s sovereign debt has the highest rating in the region, rated A+ by S&P (July 2017), Aa3 by Moody’s (July 2016) and A by Fitch (February 2018).
Colombia
Overview of the Colombian Economy
Our current activities in Colombia involve technical services provided primarily to the power services sector. The following table sets forth the main economic indicators of the Colombian economy for the period from 2013 to 2017.
|
Values in nominal US$ billion unless otherwise stated |
2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||
|
Nominal GDP |
380.0 | 377.9 | 288.4 | 280.4 | 309.2 | |||||||||||||||
|
Nominal GDP / capita (US$) |
8,065.2 | 7,928.1 | 5,983.0 | 5,751.6 | 6,272.4 | |||||||||||||||
|
Real GDP growth rate (%) |
4.9 | % | 4.6 | % | 3.1 | % | 2.0 | % | 1.8 | % | ||||||||||
|
Inflation (%, measured by change in CPI) |
1.9 | % | 3.7 | % | 6.8 | % | 5.8 | % | 4.1 | % | ||||||||||
|
Total private and public fixed investment |
92.2 | 97.6 | 76.2 | 68.9 | 70.7 | |||||||||||||||
|
Average exchange rate (COP/US$) |
1,868.9 | 2,001.1 | 2,771.5 | 3,051.0 | 2,951.3 | |||||||||||||||
|
End of period exchange rate (COP/US$) |
1,926.8 | 2,392.5 | 3,149.5 | 3,000.7 | 2,984.0 | |||||||||||||||
|
Population (million) (1) |
47.1 | 47.7 | 48.2 | 48.7 | 49.3 | |||||||||||||||
|
Unemployment rate (1) |
9.7 | % | 9.1 | % | 8.9 | % | 9.2 | % | 9.3 | % | ||||||||||
|
Public Debt / nominal GDP (%) |
34.5 | % | 37.7 | % | 41.4 | % | 42.8 | % | 45.3 | % | ||||||||||
|
Net reserves / nominal GDP (%) |
11.5 | % | 12.5 | % | 16.2 | % | 16.6 | % | 15.4 | % | ||||||||||
|
Fiscal surplus (deficit) / nominal GDP (%) |
(2.2 | %) | (2.6 | %) | (3.1 | %) | (3.9 | %) | (3.3 | %) | ||||||||||
Source: Colombian National Department of Administration of Statistics (DANE), Colombian Central Bank, Colombian Treasury Department, IMF, Global Insight
| (1) | 2017 and 2016 projected by the IMF |
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Colombian real GDP grew at an average annual rate of 3.3% during the five years from 2013 to 2017. The country’s nominal GDP per capita has increased 22.8% from COP 15,073,046 in 2013 to COP 18,511,888 in 2017. Inflation has increased in recent years, averaging 4.4% per year from 2013 to 2017, higher than the Colombian Central Bank’s inflation target of 3% +/- 1%. On the other hand, the Colombian peso depreciated from an average of COP 1,869 per US$1.00 in 2013 to an average of COP 2,951 per US$1.00 in 2017. Colombia’s sovereign debt currently holds BBB rating from Fitch (October 2017) BBB- from S&P (December 2017), and Baa2 from Moody’s (July 2014). Colombia is also recognized for its investor-friendly legal regime.
E. Off-Balance Sheet Arrangements
As of December 31, 2017, we did not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
For information about performance guarantees and similar instruments that we obtained in the ordinary course of business, see note 32 to our audited annual consolidated financial statements included in this annual report.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations with payment terms as of December 31, 2017.
| Payments Due By Period (in millions of S/.) | ||||||||||||||||||||
|
Less than
1 year |
1-2 years | 3-5 years |
More
than 5 Years |
Total | ||||||||||||||||
|
Indebtedness(1) |
1,027.2 | 317.5 | 359.3 | 805.3 | 2,509.3 | |||||||||||||||
|
Capitalized Lease Obligations(1) |
66.2 | 39.8 | 21.8 | 0.6 | 128.3 | |||||||||||||||
|
Interest(2) |
129.3 | 200.7 | 362.1 | 1,272.7 | 1,964.7 | |||||||||||||||
|
Purchase Obligations(3) |
50.8 | — | — | — | 50.8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total(4) |
1,273.5 | 557.9 | 743.1 | 2,078.6 | 4,653.1 | |||||||||||||||
| (1) | Includes principal only of our indebtedness and capitalized lease obligations. |
| (2) | Includes the effect of our interest swap agreements described in “—Derivative Financial Instruments.” |
| (3) | Includes the debt from performance guarantee with Chubb. |
| (4) | Excludes building leases, which are not material. |
See “Part I. Introduction—Forward-Looking Statements.”
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| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
General
Our business and affairs are managed by our board of directors in accordance with our by-laws, shareholder meeting rules of procedure, board of directors rules of procedure, internal rules of conduct and Peruvian Corporate Law No. 26887 (“Peruvian Corporate Law”). Our bylaws provide for a board of directors of between five and nine members. Our shareholders may appoint an alternate director for each director to act on his or her behalf when absent from meetings or unable to exercise his or her duties. Alternate directors have the same responsibilities, duties and powers of directors to the extent they are called to replace them.
Directors are elected at a shareholders’ meeting and hold office for three years. Directors may be elected to multiple terms. Our current board of directors is composed of nine directors and no alternates. If a director resigns or otherwise becomes unable to continue with the duties, a majority of our directors may appoint one of the alternate directors, or in the absence of alternate directors, any other person, to serve as director for the remaining term of the board. In the first board meeting held after the annual shareholders’ meeting where members of the board are elected, the board of directors must elect among its members a chairman and a vice chairman if the shareholders’ meeting did not elect them.
The board of directors typically meets in regularly scheduled quarterly meetings and when called by any director or our Chief Executive Officer. Resolutions must be adopted by a majority of the directors present at the meeting and the chairman is entitled to cast the deciding vote in the event of a tie.
Duties and Liabilities of Directors
Pursuant to Article 177 of Peruvian Corporate Law, directors are jointly and severally liable to a corporation, shareholders and third parties for any damages caused by abuse of power, fraud, willful misconduct or gross negligence. In addition, pursuant to Article 3 of Law No. 29720, as amended, directors of companies with common shares listed on the Lima Stock Exchange are liable to the company and its shareholders for damages caused by resolutions which are favorable to their individual interest (or the interest of a related party) to the detriment of the company’s interest if: (i) the listed company is a party to the transaction; (ii) the controlling shareholder of the listed company controls the legal entity acting as counterparty; (iii) the transaction is not carried out on an arm’s length basis; and (iv) at least 10% of the listed company’s assets are involved in the transaction. A director cannot be found liable if he/she did not participate in the respective meeting or if the director’s express disagreement is noted in the corresponding record.
Article 180 of the Peruvian Corporate Law requires a director with a conflicting interest on a specific matter to disclose such interest and abstain from the deliberation and decision-making process with respect to such matter. A director who violates this requirement is liable for any damages caused to us and may be removed by a majority of the board of directors upon request of any member of the board or by a majority vote of the shareholders.
Pursuant to Article 181 of Peruvian Corporate Law, shareholders are entitled to protect the interest of a company through derivative law suits against directors in order to remedy or prevent a wrong to the corporation. In addition, pursuant to Article 4 of Law No. 29720, with respect to companies listed on the Lima Stock Exchange, a shareholder holding shares which represent at least 10% of the paid capital may bring said action against the directors.
Board of Directors
The following sets forth our directors and their respective positions as of the date of this annual report. All directors were elected at our annual shareholders’ meeting held on March 31, 2017, and their term expires in March 2020, on the third anniversary from the date of election.
|
Name |
Position |
Year of
Birth |
Year of First
Appointment |
|||||||
|
Augusto Baertl Montori |
Chairman of the Board (Independent)* | 1945 | 2017 | |||||||
|
Rafael Venegas Vidaurre |
Vice Chairman of the Board (Independent)** | 1950 | 2017 | |||||||
|
Carlos Montero Graña |
Director | 1942 | 1996 | |||||||
|
Pedro Pablo Errazuriz Domínguez |
Director (Independent)** | 1961 | 2014 | |||||||
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|
Roberto Abusada Salah |
Director (Independent)** | 1946 | 2017 | |||||||
|
Alfonso de Orbegoso Baraybar |
Director (Independent)** | 1962 | 2017 | |||||||
|
Manuel del Río Jiménez |
Director (Independent)** | 1952 | 2017 | |||||||
|
Alfonso García Miró Peschiera |
Director | 1964 | 2017 | |||||||
|
José Antionio Rosas Dulanto |
Director (Independent)** |
1970 | 2017 |
| * | Independent member under Peruvian independence standards. |
| ** | Independent member under Peruvian and NYSE independence standards. |
The following sets forth selected biographical information for each of the members of our board of directors. The business address of each of our current directors is Av. Paseo de la República 4667, Surquillo, Lima 34, Perú.
Augusto Baertl Montori . Mr. Baertl is a mine engineer from the Universidad Nacional de Ingeniería with postgraduate programs at Harvard Business School and at Northwestern University. He has assumed important senior management positions in Peruvian and international mining and oil companies. For 30 years, Mr. Baertl held various positions in the mining company Milpo, ranging from mine superintendent, assistant manager and COO, to CEO. From 1997 to 2003, he served as president and CEO of Compañía Minera Antamina. Since 1997 he has been CEO of Agrícola Chapi S.A., and since 2003, he has been the executive president of Gestora de Negocios e Inversiones.
Mr. Baertl is the former chairman of the board of directors of the National Society of Mining, Oil and Energy at the Institute of Mining Engineers of Peru, as well as of the Latin American Business Council (CEAL) and of the Chamber of Commerce Canada- Peru. He has also been chairman of the board of Atlas Copco Peru, Downing Teal-Peru, and Petroperu. In addition, he has been member of the board of directors of different companies such as Milpo, Atacocha, Huarón, Chungar, Castrovirreyna Mining Corporation, Interbank, BISA, Graña y Montero S.A.A., Norsemont and of the Prospectors and Developers Association of Canada (PDAC). He is currently chairman of the board of Agrícola Chapi, as well as a member of the board of Alturas Minerals, Chinalco International, FIMA, Stevia One and Ligabue Catering Perú S.A.C. He is also an active member of the board of directors of the National Society of Mining, Petroleum and Energy and COMEX. He has also participated in the board of directors of various non-profit institutions.
Rafael Venegas Vidaurre . Mr. Venegas is an industrial and systems engineer from Universidad Nacional de Ingeniería and holds post-graduate specializations in administrative and finance processes at A.Andersen School in Chicago, and has completed the Management and CEO programs at the Graduate School Kellogg, as well as the strategic planning, human management and marketing program at Harvard University. He has been CEO of Banco Internacional de Colombia, Citibank Peru, BankBoston Peru, Banco Sudamericano, Hermes/Brinks and, from 2010 to 2016, of Rimac Seguros y Reaseguros.
In addition, Mr. Venegas has served as director of several institutions and companies such as Diners Peru, Profuturo AFP, Banco Financiero, Scotiabank Perú, Compass Group Peru and as chairman of the board of directors in Citileasing, Citicorp S.A.B., Clínica Internacional and Rímac EPS.
Carlos Montero Graña . Mr. Montero is a civil engineer from Universidad Nacional de Ingeniería, and completed postgraduate studies in the senior management program at the University of Piura. He has been director of Graña y Montero S.A.A. since August 1996 to date. Mr. Montero is also chairman of the board of our subsidiary Concar S.A. and director of our subsidiary GMP S.A. He previously served as managing director of our subsidiary GyM until 2007, and was director of IPAE, GMD, GMI and UNICON.
Pedro Pablo Errázuriz Domínguez. Mr. Errázuriz is a civil engineer from Universidad Católica de Chile, with a master’s degree in engineering sciences from the same university and a master’s degree in operational research (Finance) from the London School of Economics. He is currently a partner of Veta Tres and director of companies. Until March 2014, he served as Minister of Transport and Telecommunications in the Chilean administration of president Sebastián Piñera, a position he assumed in 2011. He has been a director of several companies representing the Ontario Teachers’ Pension Plan Holding and CEO of its investments’ subsidiary in Chile, AndesCan, between 2009 and 2011. At the same time, he served as chairman of the board of Biodiversa,
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Esval, Aguas del Valle and SAESA Group. He was CEO and president of the board of the health services company ESSBIO. He was also CEO of Lan Express between 2000 and 2006 and Vice President of corporate planning for Lan Chile between 1999 and 2000. Mr. Errázurriz has been a member of the Graña y Montero board from 2014 to date.
Roberto Abusada Salah. Mr. Abusada studied Economics at Universidad Católica del Perú and at Cornell and Harvard Universities in the USA. He holds a Bachelor’s degree in economics from Universidad Católica as well as a master’s and PhD in economics from Cornell University. He has been senior advisor to the Minister of Economy during the years of the Peruvian economic reform (1993 and 1997). In 1994 he co-founded the Peruvian Institute of Economics (IPE), which he presides over. Dr. Abusada has taught economics at Universidad Católica del Perú, Universidad del Pacífico, UPC, ESAN and Boston University. He was director of the program of graduates in economics of the Universidad Católica and in the 1980s he held the positions of vice minister of commerce, vice minister of economy and member of the board of directors of the Central Reserve Bank. He has been director of the Corporación Andina de Fomento, as well as of Graña y Montero S.A.A. and TECSUP. He has been a member of the Global Strategic Advisory Group (GSAG) of the Konrad Adenauer Foundation. He has been a consultant to the United Nations (UNIDO, Vienna) World Bank, Inter-American Development Bank and various governments. He is currently an Ad Honorem advisor of the Peruvian government for matters of the Pacific Alliance and representative of the presidency of the council of ministers to the board of the fiscal stabilization fund and chairman of the board of GMD S.A., director in GMP S.A. and UNACEM S.A.A.
Dr. Abusada has written several books and academic articles in various economic areas and is currently writing a fortnightly opinion column at El Comercio newspaper in Lima, Peru.
Alfonso de Orbegoso Baraybar . Mr. de Orbegoso is a lawyer from Pontificia Universidad Católica del Perú. He holds a master’s degree from Duke University School of Law and has completed specialization courses at the London School of Economics, Georgetown University and The McDonough School of Business. During 1991 and 1998 was partner of the Ludowieg, Andrade & Associates law firm and during 1998 to 2013 he served as legal vice president and regulatory affairs at Nextel del Perú S.A. During 2014 and 2015 he served as vice president legal, regulatory and interconnection at Nextel Telecomunicações Ltda, Brazil.
Manuel del Río Jiménez . Mr. Del Río is a mechanical engineer from Pontificia Universidad Católica del Perú and holds a master’s degree in industrial management from the Krannert Graduate School of Management — Purdue University — Indiana, USA. Since October 2016, Mr. Del Río has been serving as manager of administration and finance at MZM Mining. From July 2013 to September 2016, he was partner in tax & legal at KPMG in Peru and responsible for transactions, transfer pricing, corporate finance and business development.
During 2010 and 2013, he was the lead partner in the practice of advisory at KPMG in Peru. Previously, and since joining KPMG in 2004 until 2010, he was the managing partner of the transfer pricing division of KPMG Tax & Legal in Peru. He has more than nine years as leader of the financial control area and CFO of Citibank Perú. He was vice president of Profuturo AFP as well as member of the executive committee and director for ten years. In addition to this, he has been in charge of the professional and medical equipment business unit at Philips for eight years. Moreover, for ten years he has held various positions in the industrial and internal consulting sectors of Philips Peruana. He has taught several courses and lectures at the ESAN School of Business for Graduates and at the Pontificia Universidad Católica del Perú, as well as in private companies.
Alfonso García Miró Peschiera . Mr. Alfonso Garcia Miro holds a degree in economics and an MBA from the Universidad de Piura, Peru. He is chairman and CEO of IPN Investments, a real assets investment & holding company based in Peru. He also leads IPN Properties, a Peruvian real estate development firm, and Swissport GBH Honduras, an airport handling & cargo services company. Mr. Garcia Miro is Past President of CONFIEP, the National Confederation of Private Business Associations; board member and former president of COMEXPERU, the Peruvian Foreign Trade Association; board member of the Chilean-Peruvian business council, a private initiative tasked to foster the economic ties between these two countries.
He is also board member of Instituto Proeducación, an educational NGO; board member of IPE, the Peruvian Institute of Economics, a private think tank supporting free economy principles and practices; and board member of MALI, the Lima Art Museum. In the past, Mr. Garcia Miro sponsored, as founder, chairman and CEO of several infrastructure companies, such as GBH Investments, Swissport GBH Perú and Aeropuertos del Perú.
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José Antonio Rosas Dulanto . Mr. Rosas holds a bachelor’s degree in business administration and accounting from Universidad del Pacífico. He also holds an MBA in finance from the Wharton School de University of Pennsylvania and has completed the high potential leadership program and the advanced management program at Harvard Business School. He has been CFO of Supermercados Peruanos S.A. and of Intercorp Perú Ltd. In addition, he has served as vice president of finance at Interbank and as CEO of Universidad Tecnológica del Perú. He is currently director of the MLW Institute for the Development of DreamFutures and managing partner at Nexus Group.
Executive Officers
Our executive officers oversee our business and are responsible for the execution of the decisions of the board of directors. Our executive officers are appointed for an indefinite period of time and their term of office may be terminated by our board of directors at its discretion. The following table presents information concerning the current executive officers of the company and their respective positions:
|
Name |
Position |
Year of
Birth |
Year of
Appointment |
Year of First
Employment at the Company |
||||||||||
|
Luis Díaz Olivero |
Chief Executive Officer | 1970 | 2017 | 1993 | ||||||||||
|
Mónica Miloslavich Hart |
Chief Financial Officer | 1966 | 2009 | 1993 | ||||||||||
|
Antonio Rodríguez Canales |
Chief Investment Officer | 1963 | 2017 | 1999 | ||||||||||
|
Daniel Urbina Pérez |
Chief Legal Officer | 1969 | 2018 | 2018 | ||||||||||
|
Jorge Luis Izquierdo Ramirez |
Chief Human Resources Officer | 1973 | 2015 | 1999 | ||||||||||
|
Antonio Cueto Saco |
Chief Operating Officer | 1966 | 2017 | 1996 | ||||||||||
|
Rolando Ponce Vergara |
Chief Executive Officer of Viva GyM | 1963 | 2008 | 1993 | ||||||||||
|
Renato Rojas Balta |
Chief Executive Officer of GyM | 1972 | 2014 | 1995 | ||||||||||
|
Eduardo Villa Corta Lucchessi |
Chief Executive Officer of GMI | 1964 | 2014 | 1995 | ||||||||||
|
Reynaldo Llosa Martinto |
Chief Executive Officer of GMP | 1960 | 2014 | 2014 | ||||||||||
|
Oscar Pando Mendoza |
Chief Executive Officer of CONCAR | 1973 | 2016 | 2016 | ||||||||||
|
Manuel Wu Rocha |
Chief Executive Officer of GyM Ferrovías | 1977 | 2011 | 2001 | ||||||||||
|
Arturo Serna Henao |
Chief Executive Officer of Morelco | 1957 | 2014 | 2014 | ||||||||||
|
Pablo Ruiz Parrilla |
Chief Executive Officer of Vial y Vives-DSD | 1965 | 2017 | 2017 | ||||||||||
|
Luis Fukunaga Mendoza |
Roads Concessions Officer | 1970 | 2012 | 2002 | ||||||||||
|
Sergio Morales Contreras |
Chief Executive Officer of Adexus | 1958 | 2017 | 2016 | ||||||||||
|
Carlos Gómez Pinto |
Chief Audit Executive | 1961 | 2018 | 2018 | ||||||||||
|
Javier Vaca Terron |
Regional Manager of Engineering and Construction | 1970 | 2018 | 2008 | ||||||||||
|
Fernando Dyer Estrella |
Chief Risk and Compliance Officer | 1962 | 2017 | 2017 | ||||||||||
|
Manuel Fernández Pollan |
Executive Director, CAM and Adexus | 1958 | 2017 | 2016 | ||||||||||
|
Julia Sobrevilla Perea |
Corporate Affairs Offer | 1969 | 2018 | 2018 | ||||||||||
| * | Appointed by CAM in 2007. |
The following sets forth selected biographical information for each of our executive officers:
Luis Francisco Díaz Olivero . Mr. Díaz joined the group in 1993, and has been our chief executive officer since March 2, 2017 and was our deputy chief executive officer from February to March 2, 2017. Before that, he served as chief operating officer since 2015, as infrastructure officer between April 2013 and December 2014, and as the chief executive officer of our subsidiary GMP between 2011 and April 2013. He holds a degree in industrial engineering, and an MBA from University of Pittsburgh. He also served as the deputy chief executive officer of GMP from 2009 to 2011; chief financial officer of Graña y Montero from 2004 to 2009; and chief financial officer of our subsidiary GyM from 2001 to 2004. He is a member of the boards of directors of GyM, GMP, Viva GyM, Adexus and Stracon GyM.
Mónica Miloslavich Hart . Mrs. Miloslavich joined the group in 1993 and has served as our chief financial officer since 2009. She holds a degree in economics from Universidad de Lima. She worked as chief financial officer of Graña y Montero Edificaciones S.A.C. from 1998 to 2004, and as chief financial officer of our subsidiary GyM from 2004 to 2009.
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Antonio Rodriguez Canales . Mr. Rodríguez joined the group in 1999, and has been our chief commercial officer since 2017. Previously, he was our investment officer since 2017. Before that, he served as chief commercial officer since January 2015. He previously served as chief investment officer, from 2010 to 2014. He holds a degree in accounting from Universidad de Lima, a master’s in business administration from ESAN, and a master’s in business administration from Birmingham Business School in the UK. He was the chief executive officer of Larcomar from 1999 to 2010, and is currently a director of our subsidiaries CAM and GMD.
Daniel Urbina Pérez . Mr. Urbina joined the group in 2018 as Chief Legal Officer. Before that, he served as general counsel for Inkia Energy since 2008, as vice president for Standard Chartered Bank between July 2005 and October 2008, as head of legal and compliance for Banco Standard Chartered between March 2000 and July 2005, as director general of the legal department for the Ministry of the Presidency between June 1999 and March 2000, as advisor to the Minister for the Advancement of Women between July 1997 and July 1998 and as associate for Benites Mercado & Ugaz between July 1993 and July 1998. He holds a law degree and an LLM from Columbia University and is authorized to practice law in Peru and New York.
Jorge Luis Izquierdo Ramirez . Mr. Izquierdo joined the group in 1999, and was appointed chief human resources management officer in December 2015. Prior to that, he was our chief operational excellence officer between 2011 and 2015. In addition, from 2011 to 2013, he worked as chief officer of the Learning Center (currently known as Academia), and had previously served as project management officer. He holds a degree in civil engineering from Pontificia Universidad Católica del Perú, and a master’s degree in construction management from University of California, Berkeley.
Antonio Cueto Saco . Mr. Cueto joined the group in 1996 and has been our chief operating officer since 2017. Previously, he was our infrastructure area officer since January 2015. He formerly served as country manager in Chile and held different management positions in the group. He holds a degree in economics from Universidad Católica del Perú and has a Masters degree in business administration from Universidad del Pacífico. He also has master’s in management and finance from HEC (France). He is a director of our subsidiaries GMP, GyM Ferrovías, Norvial, La Chira, Concesionaria Vía Expresa Sur, Survial and GMI.
Rolando Ponce Vergara . Mr. Ponce joined the group in 1993 and has served as the chief executive officer of our subsidiary Viva GyM since 2008, and as our chief real estate area officer since 2014. He holds a degree in civil engineering from Universidad Ricardo Palma. He also holds a master’s degree in construction and real estate business management from Pontificia Universidad Católica de Chile-Politécnica de Madrid, Spain. He previously served as manager of GyM’s real estate division. He is currently a member of the boards of directors of our subsidiaries Viva GyM and Almonte.
Renato Rojas Balta . Mr. Rojas joined the group in 1995, and has served as the chief executive officer of GyM since February 2014. Prior to that, he held the position of manager of GyM’s civil works division from 2010 to 2014, and of assistant manager of that same division from 2002 to 2010. He holds a degree in civil engineering from Pontificia Universidad Católica del Perú. In addition, he pursued a master’s in company management at Universidad de Piura. He is currently a member of the boards of directors of GMI and GyM.
Eduardo Villa Corta Lucchessi . Mr. Villa Corta joined the group in 1995, and has served as chief executive officer of GMI since February 2014. He was the chief technical officer of GyM from 2010 to 2014; and GMI’s manager of the industry division from 2003 to 2010. In 2000 he joined GyM Mexico as its chief executive officer. He holds a degree in civil engineering from Pontificia Universidad Católica del Perú. In addition, he pursued an MBA at Universidad de Piura. He is currently a member of the board of directors of our subsidiary GMI.
Reynaldo Llosa Martinto . Mr. Llosa joined the group in 2014, and has served as the chief executive officer of GMP since February 2014. He holds a degree in mechanical engineering from University of Houston, as well as an MBA from Universidad de Piura. He has completed several technical and executive programs, including certificate programs at Rice University and Northeastern Kellogg School of Management. He served as the chief executive officer of BPZ Energy from 2010 to 2013. Prior to that, he had worked in Schlumberger for 25 years, the last 15 of which he spent in management positions.
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Oscar Pando Mendoza . Mr. Pando joined the group in May 2016, and is the chief executive officer of our subsidiary Concar. He is a business administrator at the Universidad de Lima with a master’s degree from Georgetown University. Mr. Pando has national and international experience of more than 20 years assuming various functional responsibilities, previously passed by Doe Run Perú, APC Corporation S.A., Philip Morris International, Securitas Peru, between other companies.
Manuel Wu Rocha . Mr. Wu is a civil engineer from the Pontificate Catholic University of Peru and holds a master’s degree in business administration from the University of Piura, Peru. He joined the group in 2001, and acted as chief technical officer for the oil and gas, electricity, infrastructure and sanitation areas of GyM S.A. from 2003 until 2007. He became manager of purchases and logistics of GyM S.A. in 2007, and general manager of the consortium Lima Actividades Comerciales comprised by GyM S.A. and Aguas de Barcelona from 2009 until 2011. Since 2011, he has worked as chief executive officer of GyM Ferrovias S.A.
Arturo Serna Henao . Mr. Serna has been part of the group since 2014, when we acquired the majority shareholding of Morelco where he now serves as chief executive officer. Mr. Serna has a degree in chemistry from Universidad del Valle, and over 35 years of experience. He has held the position of chief executive officer of Morelco for 17 years.
Pablo Ruiz Parrilla . Mr. Ruiz joined the group in 2017 and has been the chief executive officer of Vial y Vives – DSD S.A. since 2017. He holds a degree in civil engineering from the Polytechnic University of Madrid, he has a master degree in business administration from the University of La Laguna (Canary Island) and a master in civil engineering from the Universidad de Chile. Mr. Ruiz has more than 27 years of national and international experience in the construction of highways, roads, bridges, tunnels, environmental works, hydraulic works, marine works, railways, subways, industrial mining, urbanization and residential building, as well as a large design-build public-private partnerships on road and building projects. Mr. Ruiz previously worked as construction director at Acciona Construction and, chief operating officer of Habtoor Leighton Group and area southern cone area director of Dragados.
Luis Fukunaga Mendoza . Mr. Fukunaga joined the group in 2002 and has been our roads concessions manager in the infrastructure area since October 2012. In addition, he has held several management positions, including chief executive officer of Survial S.A and Concesión Canchaque S.A.C. He is a civil engineer with a degree from Universidad de Piura. He also completed a MBA at ESAN with studies at Kenan Flagler Business School–University of North Carolina at Chapel Hill, and completed a financial management Program at Universidad de Piura. He currently serves as director of our subsidiaries Survial, Norvial, Concesionaria Vía Expresa Sur and Concar.
Sergio Morales Contreras . Mr. Morales joined the group in 2016, and has served as the chief executive officer of Adexus S.A since April 2017. He holds a degree in civil industrial engineer from Santiago of Chile University. He has completed several technical and executive programs. He served as commercial manager of Adexus from June 2016 to April 2017. Prior to that, he worked at American Movil Group for nine years and also at Unisys Company for 11 years.
Javier Vaca Terron . Mr. Vaca graduated as a Civil Engineer, Channels and Ports from the Polytechnic University of Madrid in 1996. He joined the Spanish company, Ferrovial Agroman, participating in the study of international works and directing the execution of projects in Madrid. In 2004, he completed an Executive MBA master’s degree at IESE and joined Grupo Assignia as Director of International Production at the construction company, developing his work mainly in Latin America. In 2007, he was assigned new responsibilities within the Assignia group, as CEO of another group company, Eductrade, dedicated to foreign trade in the field of Health and Education. In 2014, he returned to the construction industry, this time directing the Business Development and Studies, Hiring and Institutional Relations Areas of the Spanish FCC. In 2016, he joined the OHL company as Southern Cone Zone Director, based in Santiago, Chile. In February 2018, he joined Graña y Montero as Regional Manager of the Engineering and Construction Area.
Carlos Gómez Pinto . Mr. Gómez has worked for Seagrams, Coca-Cola, Merril Lynch and Pacific Exploration & Production, in various leadership positions including as a CFO, Vice President of Internal Audit, Corporate Governance, Risks, Compliance, and Corporate Finance Manager. His experience includes
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responsibilities for implementing re-engineering processes, identifying non-value added activities and helping departments change their structure and improve work process efficiency. Currently, Mr. Gomez is a senior executive of Graña y Montero as Corporate Internal Auditor. Mr. Gomez is a Licensed International Financial Advisor and board member of certain companies and non-profit organizations. Mr. Gomez earned a bachelor’s degree in Economics at Rosario University, a top private university in Colombia. He also obtained a MBA from Southern New Hampshire University in the USA.
Fernando Dyer Estrella . Mr. Dyer is the Chief Risk and Compliance Officer of Graña y Montero, and is responsible for the company’s Corporate Risk and Compliance Program. Fernando has more than 30 years of international experience in audit, finance, internal controls, governance, ethics, compliance and management at leading multinationals. His experience includes the design, implementation, management and leading international programs on risk assessment, code of conduct, whistle blower, due diligence, anti-corruption, anti-money-laundering and international sanctions aimed to deter, detect and protect companies from crimes (focused on FCPA and UK Bribery Act). Mr. Dyer holds an MBA form Université de Genève (Switzerland), specialized in International Management, and a BA in Accounting from the Universidad del Pacífico (Perú). He is a Certified Anti-Money Laundering Specialist (CAMS) by the Association of Certified Anti-Money Laundering Specialists (USA), a Certified Corporate Compliance & Ethics Professional (CCEP) by the Society of Corporate Compliance and Ethics (USA), and an International Faculty of the International Training Compliance and International Compliance Association – ICT/ICA – (United Kingdom). Mr. Dyer speaks English, French and Spanish fluently.
Manueal Fernández Pollan . Mr. Fernández joined the Group in December 2015 as chief executive officer of Adexus in Chile. He currently leads the Corporate Management of Services of GyM, is the President of Adexus and a director of CAM. Mr. Fernández holds a Bachelor’s degree in Industrial Engineering from the Polytechnic University of Madrid, an MBA from CEPADE in Madrid and a Master’s in Strategic Planning and Finance from IDE in Madrid. He has worked for 10 years at Emerson Network Power, the last three years as Vice President of Sales and Regional Operations of Latin America. Before that he was chief executive officer for the Andean Countries (Colombia, Ecuador, Venezuela and Peru). Previously he worked in the Telefónica group, occupying different positions in Spain and Latin America, the last two years in Peru as chief executive officer of Telefónica Servicios Compartidos and Vice President of Resources of Telefónica del Perú.
Julia Sobrevilla Perea . Ms. Sobrevilla joined Graña y Montero in April 2018 as Corporate Affairs Officer. She joins Graña y Montero most recently from Coca-Cola Perú, where she was Public Affairs Director from 2012 to 2018. Before joining Coca-Cola Ms. Sobrevilla was Institutional Relations Manager at Grupo ACP, a Peruvian group dedicated to microfinance in Latin America. Prior to that, from 2002 to 2010 she was Country Representative for Population Services International, a Washington, DC-based not for profit, serving in Rwanda, Mexico and Mozambique. Previously she held several positions in MTV Networks and Nickelodeon Latin America from 1994 to 2001, based in Miami, Florida. She holds a Bachelors in Linguistics and Literature from the Pontificia Universidad Católica del Perú and completed Masters Courses in Communication at Stanford University. She sits on the board of SERNANP (Servicio Nacional de Areas Naturales Protegidas), Kunan and Premio Protagonistas del Cambio UPC.
Executive Commission
The Executive Commission is currently comprised by our Chief Executive Officer, the Business Segment Executive Officer for each of the four segments, our Chief Financial Officer, our Chief Investment Officer, our Chief Legal and Corporate Affairs Officer, our Chief Human Resources Officer, our Chief Audit Executive, our Chief Risk and Compliance Officer, and our Corporate Business Development Officer. The Executive Commission evaluates, at the management level, among other matters, our strategic plan, annual budget and annual investment plan.
Business Segments Executive Commission
The Business Segments Executive Commissions are comprised by the Business Segment Executive Officer and the CEOs of the companies in each of the relevant business segments. Each Business Segment Executive Commission evaluates the applicable business segment’s annual budget, finances and operations as well as a summary of the information discussed in the Executive Commission.
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Kinship
None.
Compensation of Directors and Executive Officers
Director compensation must be approved by a majority of shareholders at our annual shareholders’ meeting.
In 2017, total compensation paid to our former board of directors amounted to S/.2.8 million including compensation paid to directors that serve on our subsidiaries’ board of directors. In 2017, total compensation paid to our executive officers amounted to S/.15.4 million. See “Item 4.B Information on the Company—Business Overview—Regulatory Matters—Labor Regulations” for additional information on profit sharing regulatory requirements.
Neither we nor any of our subsidiaries have entered into any agreement that provides for any benefit or compensation to any director or senior executive upon expiration of his or her term or termination of employment. Under Peruvian law, unless we dismiss someone for justified cause, we are required to pay the dismissed employee (but not directors) 1.5x annual salary for every year with the company for a period not to exceed 12 years. We are not required to make such payments in the event of voluntary termination. Although we have no ongoing obligation to do so, in the past we have provided, and in the future we may provide, such benefits to our executive officers upon their retirement. We have not set aside or reserved any amounts to provide for pension, retirement or other similar benefits.
Executive Compensation Plan
We establish and pay executive compensation in compliance with applicable labor and tax regulations and corporate governance standards and in accordance with market conditions.
We establish pay scales taking into consideration executives’ responsibilities, including the degree of complexity of those responsibilities, power of decision-making and scope of supervision entrusted.
The fixed salary component of compensation is established for each position based on a pay scale. Fixed salary includes family allowance and cost of living payments, if applicable. We evaluate executives at least once a year to develop action plans in furtherance of continuously improving management performance.
The variable component of compensation is paid to executives and other employees for meeting specific goals, and is related both to his or her performance and our financial results. Variable compensation is typically paid as an annual bonus.
In addition, labor regulation establishes a mandatory profit sharing provision of 5% of our total annual taxable income, to be distributed among all employees, calculated based on a formula established by law that considers the days worked in the year and remuneration.
Our executives also receive additional benefits, typically non-pecuniary. The benefits granted include: (i) a vehicle owned and maintained by the company, with the purpose of facilitating transportation of executives in the performance of their functions; (ii) a fuel allowance to offset transportation costs in the performance of their functions; and (iii) an insurance policy, including work accident and high risk coverage.
In addition, we have established a plan for certain executives effective March 2013 that awards cash bonuses for the exclusive use of purchasing shares of our company or of our subsidiaries. The executive must agree to hold the shares for a specific period. If the executive is no longer employed with the company during such period, we are entitled to repurchase the shares at the original purchase price. This benefit is awarded at the discretion and subject to the approval of the Human Resource Management Committee of our board of directors.
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Board Committees
We have four board committees comprised of members of our board of directors.
Audit and Process Committee
Our Audit and Process Committee is comprised of four directors, all of which are independent in accordance with the SEC rules applicable to foreign private issuers. The current members of our Audit and Process Committee are Mr. Pedro Pablo Errazuriz Domínguez, Mr. Manuel del Rio, Mr. José Antonio Rosas and Mr. Alfonso de Orbegoso. These directors have extensive business and economic experience in Peru. Mr. Manuel del Rio and Mr. José Antonio Rosas each qualify as an “audit committee financial expert” in accordance with SEC rules. Our Audit and Process Committee oversees our corporate accounting and financial reporting process. The Audit and Process Committee is responsible for:
| • | reviewing our financial statements; |
| • | evaluating our internal controls and procedures, and identifying deficiencies; |
| • | recommending to our annual shareholders’ meeting the appointment of our external auditors, determining their compensation, retention and oversight, and resolving any disagreements that may arise between management and our external auditors; |
| • | evaluating the company’s compliance with the Board of Director’s internal regulation, as well as with general principles of corporate governance; |
| • | informing our board of directors regarding any issues that arise with respect to the quality or integrity of our financial statements, our compliance with legal or regulatory requirements, the performance and independence of the external auditors, or the performance of the internal audit function; |
| • | establishing procedures for the reception, retention and treatment of complaints regarding accounting, internal controls or other auditing matters, including the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; |
| • | independently engaging its own counsel and any other advisers it deems necessary to fulfill its functions; and |
| • | establishing policies and procedures to pre-approve audit and permissible non-audit services. |
Our board of directors has adopted a written charter for our Audit and Process Committee, which is available on our website at www.granaymontero.com.pe.
Human Resource Management Committee
Our Human Resource Management Committee is comprised of three directors, all of which are independent in accordance with Peruvian and NYSE independence standards. The current members of the committee are Mr. Rafael Venegas, Mr. Pedro Errázuriz and Mr. Alfonso de Orbegoso. The Human Resource Management Committee is responsible for:
| • | reporting to our board of directors on the appointment and dismissal of senior executives; |
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| • | reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those goals and objectives, and determining and approving CEO compensation; |
| • | establishing compensation arrangements for senior executives in accordance with the financial results of the company; proposing measures to ensure transparency in the remuneration of directors and senior executives; |
| • | evaluating our human resources policies; |
| • | reporting to our board of directors on matters regarding related party transactions that could result in a conflict of interest; establishing our social responsibility policies; and |
| • | appointing third-party independent compensation consultants, and establishing the compensation of and overseeing the third-party independent compensation consultants; |
As a foreign private issuer, we are not required to maintain a compensation committee that complies with all of the U.S. laws and regulations and NYSE requirements applicable to U.S. issuers.
Investment Committee
Our Investment Committee is comprised of five directors, with independent members under Peruvian and NYSE independence standards, currently comprising the majority of the committee. The current members of the committee are Mr. José Antonio Rosas, Mr. Manuel del Río, Mr. Alfonso Garcia-Miro, Mr. Augusto Baertl and Mr. Pedro Pablo Errazuriz. The Investment Committee is responsible for:
| • | establishing our investment policies; |
| • | approving our annual investment plan; and |
| • | analyzing the projects that would require an investment greater than US$5 million. |
Risk, Compliance and Sustainability Committee
Our Risk, Compliance and Sustainability Committee is comprised of five directors, with independent members under Peruvian and NYSE independence standards, currently comprising the majority of the committee. The current members of the committee are Mr. Alfonso de Orbegoso Baraybar (chairman of the committee), Mr. Pedro Errázuriz, Mr. Augusto Baertl and Mr. Manuel del Río. The Risk, Compliance and Sustainability Committee is responsible for:
| • | approving the structure, and evaluating the performance of the organization, in matters of risks and compliance; |
| • | approving the policies and limits of exposure to risk, monitoring the risk profile of the company, and supervising the development of the risks and compliance area; |
| • | ensuring compliance with the company’s policies, in particular with the anti-corruption policy and the sustainability policy, as well as with applicable laws. This committee can also propose policies, directives and/or complementary procedures that contribute to strengthening the responsible management of the company; and |
| • | supervising and reporting to our board of directors on social responsibility practices and management. |
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Operating Board Committees
We also have two operating board committees that meet monthly and are comprised of members of our board of directors, including at least one independent member under Peruvian and NYSE independence standards per committee.
Engineering and Construction Committee
Our Engineering and Construction Committee supervises the operations of our E&C segment, and is comprised of six directors. The current members of the committee are Mr. Augusto Baertl, Mr. Rafael Venegas, Mr. Roberto Abusada, Mr. Alfonso de Orbegoso, Mr. Pedro Errázuriz and Mr. Alfonso García-Miro.
Infrastructure Committee
Our Infrastructure Committee supervises the operations of our Infrastructure segment and is comprised of five directors. The current members of the committee are Mr. Augusto Baertl, Mr. Rafael Venegas, Mr. José Antonio Rosas, Mr. Alfonso García Miró and Mr. Manuel del Río.
We have developed an extensive and talented team, including more than 2,996 engineers, which gives us the capability and scale to undertake large and complex projects. We also have access to a network of approximately 150,000 manual laborers throughout Peru that can supplement our workforce when required by our projects. Moreover, we have the flexibility to engage our own workers on projects outside Peru, avoiding the need to seek new employees in other countries.
As of December 31, 2017, we had a total of 31,520 full-time employees, including approximately 13,629 manual laborers, a number that fluctuates depending on our project backlog. At such date, we also worked with 3,775 employees of subcontractors. Occasionally, we employ subcontractors for particular aspects of our projects, such as carpenters, specialists in elevator installation and specialists in glassworks. We are not dependent upon any particular subcontractor or group of subcontractors. As of December 31, 2017, 42% of our employees worked outside Peru. The following table sets forth a breakdown of our employees by category as of December 31, 2017.
| Salaried Employees | E&C | Infrastructure | Real Estate |
Technical
Services |
Corporate | TOTAL | ||||||||||||||||||
|
Engineers |
1,691 | 408 | 27 | 835 | 35 | 2,996 | ||||||||||||||||||
|
Other Professionals |
729 | 301 | 33 | 357 | 113 | 1,533 | ||||||||||||||||||
|
Technical specialists |
1,131 | 1,854 | 45 | 9,195 | 28 | 12,253 | ||||||||||||||||||
|
Manual Laborers(1) |
13,629 | — | — | — | — | 13,629 | ||||||||||||||||||
|
Joint operation employees(2) |
1,085 | 24 | — | — | — | 1,109 | ||||||||||||||||||
|
Subtotal |
18,265 | 2,587 | 105 | 10,387 | 176 | 31,520 | ||||||||||||||||||
|
Subcontracted employees |
3,152 | 174 | — | 449 | — | 3,775 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total |
21,417 | 2,761 | 105 | 10,836 | 176 | 35,295 | ||||||||||||||||||
| (1) | The number of manual laborers, who form part of our network of approximately 150,000 manual laborers, varies in relation to the number and size of projects we have in process at any particular time. |
| (2) | Includes engineers, professionals, technical specialists and manual laborers employed by our joint operations. |
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The following chart sets forth the changes of our total employees from December 31, 2014 to December 31, 2017.
Total Employees
Our talent development system has allowed us to develop a team of professionals with the ability to design and implement sophisticated projects. Our talent management process broadly focuses on attracting, developing and training employees.
We have implemented programs to attract young and qualified candidates. Our “Cantera” Program offers various types of internships and training opportunities to engineering students and recent graduates, rewarding the most successful candidates with the opportunity to work as full-time, permanent employees. Our focus is not only to attract talented people but also to retain them.
Through our Graña y Montero Academy, we offer continuing education opportunities through a wide selection of courses and training programs targeted at each level. We believe the knowledge that our employees gain through these programs is reflected in the way they work and relate to our clients, adding value in every step. During 2017, we invested more than US$0.26 million in continuing education, reaching approximately 59,899 training hours for our employees.
We place significant emphasis on instilling our core corporate values of quality, professionalism, reliability and efficiency on our employees, and on promoting safety, environmental sustainability and social responsibility throughout the entire organization. Our Code of Conduct and Charter of Ethics regulate the conduct of our employees while promoting the foregoing values. In addition, our employees participate in ethics seminars on a periodic basis.
Substantially all of our manual laborers and some of our other employees are members of labor unions. Our practice is generally to extend the benefits we offer our unionized employees to non-unionized employees. We consider our current relationship with unions to be positive.
In our E&C segment, collective bargaining agreements are negotiated at two levels: (i) on an annual basis between the National Federation of Civil Construction and the Peruvian Chamber of Construction, without our direct involvement; and (ii) on a per project basis directly between the unions and our project committees, in accordance with such annual agreement. In addition, some of our personnel in our gas processing plant belongs to the labor union Unicode Workers Union GMP S.A. We currently have collective bargaining agreements with some of our gas processing plant workers. In the case of the operation and maintenance of our electricity infrastructure business, some of our personnel in CAM Perú are subject to a collective bargaining agreement. These collective bargaining agreements are negotiated on an annual basis.
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Safety
We safeguard the health and safety of our employees and of all the persons present 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 2017, our company reached a total of 94.1 million hours worked. During this period, we reported an accident incidence rate of 0.46 accidents for every 200,000 hours worked, remaining at a level similar to 2016.
Our occupational health and safety management system in our subsidiaries GyM, GMI, Morelco, VyV-DSD, GMP, Concar, CAM (Chile, Perú, Colombia) and Adexus (February 2017) are certified by OHSAS 18001. We believe a safe job site contributes to our reputation and ability to gain new business while enhancing employee morale and reducing costs and exposure to liability.
Under our framework, we have provided over 100,000 hours of training in risk prevention for managers and directors, more than 1,000,000 hours of training for employees and nearly 200,000 hours of training for subcontractors. Additionally, to improve the leadership and commitment of our chain of command, these training sessions were complemented with periodic manager’s visits to projects, the establishment of annual safety goals based on the type of activity, the generation of opportunities to share lessons learned, and the monitoring of safety panels by our board of directors.
As of May 31, 2018, persons who are currently members of our board of directors and our executive officers held as a group 34,534,193 of our common shares. This amount represented 5.23% of our outstanding share capital as of such date.
Our directors and executive officers hold, in the aggregate, less than 1% of our outstanding share capital, with the exception of Carlos Montero, who owns 33,785,285 common shares, representing 5.12% of our outstanding share capital, through Bethel Enterprises.
Our other directors and executive officers who in the aggregate hold less than 1% interest in our company are: Mr. Pedro Pablo Errázuriz, Mr. Roberto Abusada, Mr. Luis Francisco Díaz Olivero, Mr. Antonio Rodríguez, Ms. Mónica Miloslavich and Mr. Antonio Cueto.
Our directors and executive officers do not have different voting rights.
We have established a plan for certain executives effective since March 2013 that awards cash bonuses for the exclusive use of purchasing shares of our company or of our subsidiaries. The executive must agree to hold the shares for a specific period. If the executive is no longer employed with the company during such period, we are entitled to repurchase the shares at the original purchase price. This benefit is awarded at the discretion and subject to the approval of the Human Resource Management Committee of our board of directors.
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
As of May 31, 2018, our issued and outstanding share capital was comprised of 660,053,790 common shares. The following table sets forth the beneficial ownership of our common shares as of May 31, 2018, based on information provided to us by CAVALI S.A. ICLV, the Peruvian clearing house (“CAVALI”) and JPMorgan Chase Bank NA, as depositary for the holders of ADS, except as set forth below.
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|
Shareholder |
Number of shares | Percentage owned | ||||||
|
GH Holding Group (1) |
117,538,203 | 17.81 | % | |||||
|
AFP PRIMA S.A. (Grupo Crédito) |
74,011,175 | 11.21 | % | |||||
|
AFP INTEGRA S.A. (Sura Group) |
72,223,691 | 10.94 | % | |||||
|
Aberdeen Asset Management PLC (2) |
43,298,200 | 6.56 | % | |||||
|
Fratelli Investment Limited (3) |
34,098,379 | 5.166 | % | |||||
|
Bethel Enterprises Inc. (4) |
33,785,285 | 5.12 | % | |||||
|
JPMorgan Chase Bank NA, as depositary for the holders of ADS (5) |
87,757,289 | 13.30 | % | |||||
|
Other Shareholders (6) |
197,341,568 | 29.90 | % | |||||
|
|
|
|
|
|||||
|
Total |
660,053,790 | 100 | % | |||||
| (1) | Mr. José Graña Miró Quesada, our former chairman, beneficially owns GH Holding Group. |
| (2) | Based on filings on Schedule 13F filed with the SEC on March 31, 2018. |
| (3) | Based on a Form 13G filed with the SEC on June 8, 2018. |
| (4) | Mr. Carlos Montero, through Bethel Enterprises Inc., indirectly owns 33,785,285 common shares, representing 5.12% of our outstanding share capital. |
| (5) | Excluding AFP PRIMA S.A., AFP INTEGRA S.A., Aberdeen Asset Management PLC, and Fratelli Investment Limited’s beneficial ownership of our common shares as of December 31, 2017. |
| (6) | Among other shareholders, the following directors and executive officers hold directly or indirectly common shares of our outstanding share capital: Mr. Roberto Abusada, a member of our board of directors, Mr. Pedro Pablo Errazuriz, a member of our board of directors, Mr. Luis Francisco Díaz Olivero, Chief Executive Officer, Ms. Mónica Miloslavich, our Chief Financial Officer, Mr. Antonio Rodríguez, Chief Investment Officer, and Mr. Antonio Cueto, Chief Operations Officer, hold in aggregate less than 1% of our outstanding share capital. |
As of December 31, 2017, 28 record holders of our common shares were located in the United States (including JPMorgan Chase Bank NA, as depositary for the holders of ADS), according to CAVALI.
Certain of our directors and executive officers directly or indirectly own shares of our subsidiaries: Mr. Renato Rojas, Chief Executive Officer of GyM, owns 108,854 common shares of GyM, representing 0.04% of its outstanding capital share; Mr. Rolando Ponce, Chief Executive Officer of Viva GyM owns 1,111,690 shares of Viva GyM, representing 0.46% of its outstanding capital share; and Eduardo Villa Corta, chief executive officer of GMI, owns 108,854 shares of GyM, representing 0.0421% of its outstanding capital share.
The following table sets forth the changes in beneficial ownership of our common shares from December 31, 2015, to December 31, 2017, based on information provided to us by CAVALI and JPMorgan Chase Bank NA, as depositary for the holders of ADS).
| As of December 31, 2015 | As of December 31, 2016 | As of December 31, 2017 | ||||||||||||||||||||||
| Shareholders | No. of Shares |
Percentage
Owned |
No. of Shares |
Percentage
Owned |
No. of Shares |
Percentage
Owned |
||||||||||||||||||
|
GH Holding Group (1) |
117,538,203 | 17.81 | 117,538,203 | 17.81 | 117,538,203 | 17.81 | ||||||||||||||||||
|
AFP PRIMA S.A. |
5,265,238 | 0.80 | 4,387,824 | 0.66 | 74,011,175 | 11.21 | ||||||||||||||||||
|
IN-CARTADM (AFP Integra-Sura Group) |
39,656,375 | 6.01 | 38,384,976 | 5.82 | 72,223,691 | 10.94 | ||||||||||||||||||
|
PR-CARTADM (Profuturo AFP-Grupo Scotiabank) |
36,968,166 | 5.60 | 36,968,166 | 5.60 | 23,136,533 | 3.51 | ||||||||||||||||||
|
Aberdeen Asset Management PLC (2) |
37,323,615 | 5.70 | 35,501,465 | 5.38 | 49,730,025 | 7.53 | ||||||||||||||||||
|
Bethel Enterprises Inc. (3) |
33,785,285 | 5.12 | 33,785,285 | 5.12 | 33,785,285 | 5.12 | ||||||||||||||||||
|
JPMorgan Chase Bank NA, as depositary for the holders of ADS (4) |
213,716,525 | 32.38 | 229,683,570 | 34.80 | 96,482,855 | 14.62 | ||||||||||||||||||
| (1) | Mr. José Graña Miró Quesada, our former chairman, beneficially owns GH Holding Group. |
| (2) | Based on filings on Schedule 13F filed with the SEC on December 31, 2017. |
| (3) | Mr. Carlos Montero indirectly owns 33,785,285 common shares, representing 5.12% of our outstanding share capital, through Bethel Enterprises Inc. |
| (4) | Excluding Aberdeen Asset Management PLC´s beneficial ownership of our common shares as of December 31, 2015 and December 31, 2016. As of December 31, 2017, excludes shares of Aberdeen Asset Management PLC, AFP PRIMA S.A. and AFP INTEGRA S.A. |
Our major shareholders do not have different voting rights.
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Peruvian Law Concerning Related Party Transactions
Peruvian law sets forth certain restrictions and limitations on transactions with certain related parties.
For instance, from a tax standpoint, the value of those transactions must be equal to the fair market value assessed under transfer pricing rules, i.e., the value agreed to by non-related parties under the same or similar circumstances. Similarly, companies with securities registered in the Peruvian Public Registry of Securities ( Registro Público del Mercado de Valores ), such as us, are required to comply with the following rules:
| • | The directors and managers of the company cannot, without the prior authorization of the board of directors, (i) receive in the form of a loan money or assets of the company; or (ii) use, for their own benefit or for the benefit of related parties, assets, services or credits of the company. |
| • | The execution of agreements that involve at least 5% of the assets of the company with persons or entities related to directors, managers or shareholders that own, directly or indirectly, 10% of the share capital, requires the prior authorization of the board of directors (with no participation of the director involved in the transaction, if any). |
| • | The execution of agreements with a party controlled by the company’s controlling shareholder requires the prior authorization of the board of directors and an evaluation of the terms of the transaction by an external independent company (audit companies or other to be determined by the Peruvian Securities Commission). |
The external independent company that reviews the transaction should not be related to the parties involved therein, nor to directors, managers or shareholders that own at least 10% of the share capital of the company.
As a general policy, we do not enter into transactions with directors and executive officers on terms more favorable than what we would offer third parties. Any related party transaction we have entered into in the past has been in the ordinary course of business and on an arm’s length basis.
Article 30 of the internal regulations of our board of directors establishes a review procedure for identifying, approving and accounting for related party transactions. Related party transactions are defined as any transaction entered into by and among our company and any shareholder that owns 1% or more of our company’s or of our subsidiaries’ outstanding shares, directors, senior executives and persons related to them. The Human Resource Management Committee is responsible for identifying, analyzing and approving each such transaction considering market conditions and potential benefits for us and the related party. For ordinary course transactions carried out under market conditions, a general authorization for the operations of the business line is sufficient. For more information, see “Item 6. Directors Senior Management and Employees—Management.”
Related Party Transactions
We enter into certain related party transactions in the ordinary course of our business. No such transactions in effect during 2017 were material to the company or, to our knowledge, to any such related party, nor were any such transactions unusual in their nature or condition. Related party transactions with the following parties were in effect in 2017:
| • | architectural services agreements entered into among Mr. Oscar Borasino, the brother in law of Mario Alvarado Pflucker, our former chief executive officer and director, as architect, and our subsidiary Viva GyM, as customer, in the project Parques del Mar for an aggregate amount of US$26.0 thousand; |
| • | architectural services agreements entered into among Mrs. Ruth Alvarado, the sister of Mario Alvarado Pflucker, our former chief executive officer and director, as architect, and our subsidiary Viva GyM, as customer, in the project Paul Harris, for an aggregate amount of US$46.5 thousand; |
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| • | advertising services agreements entered among Servicios Empresariales El Administrador E.I.R.L., a company related to the brother of Rolando Ponce Vergara, the chief executive officer of Viva GyM and our corporate real estate officer, as advertising intermediary, and our subsidiary Viva GyM, as customer, for an aggregate amount of US$13.0 thousand; |
| • | during 2016, our subsidiary CAM entered into a computer equipment lease agreement for a total amount of US$66.4 thousand with CSI, whose chief commercial officer, Alfredo Chavez, is the brother of Pedro Chavez, the chief executive officer of CAM; |
| • | our former subsidiary Stracon GyM executed several services agreements with one of its directors, Mr. Miguel Aramburu, for an aggregate amount of US$10.2 thousand; |
| • | our former subsidiary Stracon GyM entered into an operation management service agreement with Stracon S.A.C., a company owned by Stracon GyM’s shareholders, Mr. Stephen Dixon and Hayden Halsted, for an aggregate amount of US$1,650 thousand; |
| • | lease agreement for administrative offices entered into among Sistemas y Redes Cia, a shareholder of Adexus, as lessor, and our subsidiary Adexus, as lessee, for an aggregate amount of US$2,157.3 thousand; |
| • | lease agreement for use of vehicles used by our subsidiary Adexus, signed with Microrenta, a company owned by a shareholder of Adexus, for an aggregate amount of US$53.1 thousand; |
| • | advising services agreement entered into among our subsidiary Vial y Vives – DSD S.A. and Gabriel Vives, a former board member of Vial y Vives – DSD, for an aggregate amount of US$14.9 thousand; |
| • | our subsidiary Morelco entered into a service provision agreement for uniforms, shoes, helmets and goggles and other equipment for an aggregate amount of US$626.4 thousand with Agora, a company that is owned by the sister of a minority shareholder of Morelco; |
| • | our subsidiary Morelco entered into a service provision agreement for uniforms, shoes, helmets and goggles for an aggregate amount of US$109.3 thousand with Noralba Serna Henao, sister of Arturo Serna, the chief executive officer of Morelco; |
| • | our company and our subsidiaries Norvial, Terminales del Peru, Consorcio Terminales, Concar, GyM, Survial, GMI S.A. Ingenieros Consultores, and Viva GyM paid an aggregate amount of US$564.6 thousand to Editora El Comercio S.A., of which José Graña Miró Quesada, our former chairman, is a shareholder, for advertising, publishing and editing services; and |
| • | our company has an advisory contract with Mr. Augusto Baertl, Chairman of the Board, for an aggregate amount of US$129.4 thousand for the year 2017. |
C. Interests of Experts and Counsel
Not applicable.
A. C onsolidated Statements and Other Financial Information.
See Item 18 of this annual report on Form 20-F.
Legal and Administrative Proceedings
We may, from time to time, become subject to various legal and administrative proceedings that are incidental to the ordinary conduct of our business. We are currently not party to any material legal or administrative proceedings, other than as described below. As of December 31, 2017, we had recorded provisions amounting to S/.23.4 million in connection with legal and administrative proceedings. See note 23 to our audited annual consolidated financial statements included in this annual report.
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Two securities class action complaints have been filed against us and certain of our former directors and current and former executive officers in the Eastern District of New York during the first quarter of 2017. These complaints are consolidated into a single class action. The plaintiffs filed a consolidated amended compliant on May 29, 2018. We believe that we have meritorious defenses to the claims asserted, and we intend to defend ourselves vigorously in these matters.
The Lava Jato commission of the Peruvian congress, which was formed in November 2016 and tasked with investigating the alleged bribes of Brazilian companies to Peruvian public officials, has initiated congressional inquiries into the company and other construction companies in Peru. Certain of the company’s former board members and executive officers to have been required to give testimony at hearings before the commission, during which they have affirmed that the company was unaware of Odebrecht’s illicit activities.
Peruvian prosecutors have included José Graña Miró Quesada, the former Chairman of the company, in an investigation for the crime of collusion, and Hernando Graña Acuña, a shareholder, a former board member of the company and chairman of our subsidiary GyM for the crime of money laundering against the Peruvian government, each in connection with the IIRSA South project concession (tranches II and III), in which we participated. Gonzalo Ferraro Rey, the former Chief Infrastructure Officer of the company, has also been included in an investigation for the crime of money laundering in connection with the same project.
In connection with investigations relating to the IIRSA South project concession (tranches II and III), the Peruvian criminal prosecutor moved to charge the company and our construction subsidiary, GyM, as criminal defendants in connection with the projects. Separately, an Ad Hoc Public Prosecutor appointed by the Peruvian executive branch to investigate matters of corruption moved to directly include the company as a civilly-responsible third party. In response, the Peruvian First National Preparatory Investigation Court ( Primer Juzgado de Investigación Preparatoria Nacional ) notified us of its decision to formally include the company and GyM in its criminal investigation. We appealed the court’s decision and, on June 22, 2018, the First Court of Appeals of the Superior Court of Lima revoked the judicial order No. 05 dated February 28, 2018 that indicted the company and GyM, among other corporate defendants, in the criminal investigation on charges of collusion and other crimes, and rejected the petition, without prejudice, made by the prosecutor to incorporate both companies in the aforementioned process. Nevertheless, we cannot assure you that the criminal prosecutor will not appeal this decision, or file a new claim, against the company and GyM, or that our position will ultimately prevail. Furthermore, a decision from the Peruvian judiciary on whether our company will be included in the investigation proceedings as a civilly responsible third party remains pending, and we cannot assure you that our company will not be included or that our position would ultimately prevail.
The Ad Hoc Prosecutor has also moved to directly include our subsidiary, GyM S.A., as a civilly-responsible third party in the investigation relating to Tranches 1 and 2 of Line 1 of the Lima Metro. A decision from the Peruvian judiciary regarding these matters remains pending, and we cannot assure you that our subsidiary will not be included or that our position would ultimately prevail.
In July 2017, media reports alleged that certain construction companies in Peru, Brazil and Spain, including our company, colluded as a “construction club” to receive public contracts. As a result of these reports, INDECOPI initiated an investigation regarding the anti-competitive activities of construction companies in Peru, including our company. In July 2017, the Peruvian government conducted a search of our facilities related to these allegations. Separately, a former employee of GyM has been included in a criminal investigation for collusion and other alleged crimes, though neither the company nor GyM have been formally included in these criminal investigations. In January 2018 criminal prosecutors conducted a search of our facilities regarding the “construction club” investigation. We have provided the information requested by the Peruvian criminal prosecutors. A former employee of GyM has been included in the investigation for collusion and other alleged crimes. To date, there is no formal investigation of the company.
A conviction of corruption or resolutions with government authorities may lead to criminal and civil fines as well as penalties, sanctions, injunctions against future conduct, profit disgorgement, disqualifications from directly and indirectly engaging in certain types of business, the loss of business licenses or permits or other restrictions. Moreover, our involvement in corruption investigations, and any findings of wrongdoing in such investigations, could further damage our reputation and have a material adverse impact on our ability to compete for business. Such investigations may also adversely affect our ability to pursue strategic projects, and could potentially result in the termination or modification of certain existing contracts or relationships. Also, such investigations may affect the company’s ability to secure financing in the future.
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Dividends and Dividend Policy
Dividend Policy
Our current dividend policy, adopted on March 29, 2016, is to distribute between 30% and 40% of the net profit from the preceding year, as long as we hold such net profit on a consolidated basis, subject to contractual restrictions on our indebtedness. Holders of our common shares are entitled to receive dividends on a pro rata basis in accordance with their respective number of shares held. Our dividend policy can be modified by a favorable vote of a majority of our shareholders and any changes become effective 30 days after approval. Dividends will not be distributed in advance.
Article 23 of our by-laws establishes that dividends distribution must be approved by our shareholders during the annual shareholders’ meeting. The recommendation of our board of directors is required for the distribution of interim dividends, which must be subsequently ratified at a shareholders’ meeting.
Under Peruvian law, companies may distribute up to 100% of their profit (after payment of income tax) subject to a 10% legal reserve until the legal reserve equals 20% of the total value of their capital stock. According to Article 40 of the Peruvian Corporate Law, in order to distribute dividends, profits must be determined in accordance with the individual financial statements of the company.
Payment of Dividends
Dividends are paid to holders of our common shares as of a record date determined by us. In order to allow for the settlement of securities, under the rules of the Peruvian Securities Commission, investors who purchase shares of a publicly-held company three business days prior to a dividend payment date do not have the right to receive such dividend payment. Dividends on issued and outstanding common shares are distributed pro rata.
We may not make any dividend payments until all outstanding amounts under our repayment obligations of the GSP performance guarantee have been repaid in full. In addition, we may not be able to make any dividend payments until all outstanding amounts under our syndicated loan and our corporate guarantee of the GSP bridge loan have been repaid or discharged, as the case may be, in full. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
In addition, the indentures of the Senior Secured Notes issued by GyM Ferrovías and the Corporate Bonds issued by Norvial, contain, respectively, certain customary covenants, including restrictions on our ability to pay dividends if we are in default under the agreement, and our medium term loan with Credit Suisse imposes, certain limitations in an event of default, on our ability to distribute cash dividends. See “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”
Holders of common shares are not entitled to interest on accrued dividends. In addition, under Article 232 of the Peruvian Corporate Law, the right to collect accrued dividends declared by a publicly-held company expires ten years from the original dividend payment date.
Previous Dividend Payments
The following table sets forth the amounts of cash dividends declared and paid since 2015 for our common shares.
| Dividends Paid | Per Share | |||||||
| (in S/.) | ||||||||
|
2015 |
104,910,523 | 0.158942384 | ||||||
|
2016 |
30,854,000 | 0.046700000 | ||||||
|
2017 |
— | — | ||||||
|
2018 |
— | — | ||||||
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Except as disclosed in our audited annual consolidated financial statements and in this annual report, we have not experienced any significant changes since the date of our audited annual consolidated financial statements included in this annual report.
| ITEM 9. | THE OFFER AND LISTING |
Market Price of Our Common Shares and ADSs
Our ADSs
On July 29, 2013, we completed our initial equity offering in the United States of 19,534,884 ADSs, representing 97,674,420 common shares. Our ADSs are listed on the New York Stock Exchange under the symbol “GRAM.” On March 31, 2018, the closing price on the New York Stock Exchange was US$3.04 per ADS.
As the company disclosed on a Form 6-K furnished on May 17, 2018, the New York Stock Exchange suspended trading of our ADSs and commenced proceedings to delist the company due to the company’s delay in filing this annual report. The company has appealed the decision. Our ADSs have been available for trading on the over-the-counter (OTC) market in the United States since May 21, 2018.
The following table sets forth, for the periods indicated below, the high and low market prices for our ADSs in U.S. dollars, as reported by the New York Stock Exchange and, from May 21, 2018, the over-the-counter (OTC) market.
| High | Low | |||||||
| Full year: | in US$ | |||||||
|
2013 (since July 29) |
22.07 | 18.52 | ||||||
|
2014 |
21.97 | 11.70 | ||||||
|
2015 |
12.68 | 2.88 | ||||||
|
2016 |
8.79 | 2.20 | ||||||
|
2017 |
6.88 | 2.17 | ||||||
|
Quarters: |
||||||||
|
2016 |
||||||||
|
First Quarter |
4.20 | 2.20 | ||||||
|
Second Quarter |
7.64 | 3.93 | ||||||
|
Third Quarter |
8.79 | 7.10 | ||||||
|
Fourth Quarter |
8.67 | 6.35 | ||||||
|
2017 |
||||||||
|
First Quarter |
6.88 | 2.17 | ||||||
|
Second Quarter |
4.50 | 2.91 | ||||||
|
Third Quarter |
4.81 | 2.99 | ||||||
|
Fourth Quarter |
5.12 | 2.58 | ||||||
|
2018 |
||||||||
|
First Quarter |
3.16 | 2.29 | ||||||
| High | Low | |||||||
| Last Six Months: | in US$ | |||||||
|
2018 |
||||||||
|
January |
3.16 | 2.73 | ||||||
|
February |
3.11 | 2.45 | ||||||
|
March |
3.04 | 2.29 | ||||||
|
April |
3.70 | 2.95 | ||||||
|
May |
3.54 | 2.25 | ||||||
|
June (through June 26, 2018) |
3.20 | 3.03 | ||||||
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Our Common Shares
Our common shares are registered in the Public Registry of Securities held with the Peruvian Securities Commission and are listed on the Lima Stock Exchange under the symbols “GRAMONC1”. On May 31, 2018, the closing price on the Lima Stock Exchange was S/.2.04 per common share. As of December 31, 2017, 28 record holders of our common shares were located in the United States, according to CAVALI.
The following table sets forth, for the periods indicated below, the high and low closing prices of our common shares as reported by the Lima Stock Exchange.
| High | Low | |||||||
| (in S/.) | ||||||||
|
2013 |
12.79 | 9.76 | ||||||
|
2014 |
12.30 | 6.90 | ||||||
|
2015 |
7.30 | 1.94 | ||||||
|
2016 |
5.90 | 1.60 | ||||||
|
2017 |
4.63 | 1.47 | ||||||
The following table sets forth, for the periods indicated below, the high and low market prices, as well as the average daily trading volume for such periods, of our common shares as reported by the Lima Stock Exchange.
| High | Low |
Avergae
Daily Trading Volume |
||||||||||
| (in millions of US$) | ||||||||||||
|
Full year: |
||||||||||||
|
2015 |
7.30 | 1.94 | 150,100 | |||||||||
|
2016 |
5.90 | 1.60 | 307,874 | |||||||||
|
2017 |
4.63 | 1.47 | 467,517 | |||||||||
|
Quarters: |
||||||||||||
|
2015 |
||||||||||||
|
First quarter |
7.30 | 4.80 | 156,468 | |||||||||
|
Second quarter |
5.45 | 4.55 | 110,936 | |||||||||
|
Third quarter |
4.60 | 2.38 | 153,138 | |||||||||
|
Fourth quarter |
2.68 | 1.94 | 181,680 | |||||||||
|
2016 |
||||||||||||
|
First quarter |
3.00 | 1.60 | 282,537 | |||||||||
|
Second quarter |
5.00 | 2.70 | 353,154 | |||||||||
|
Third quarter |
5.90 | 4.64 | 359,053 | |||||||||
|
Fourth quarter |
5.84 | 4.35 | 231,603 | |||||||||
|
2017 |
||||||||||||
|
First quarter |
4.63 | 1.47 | 586,273 | |||||||||
|
Second quarter |
2.90 | 1.88 | 630,419 | |||||||||
|
Third quarter |
3.10 | 1.98 | 212,057 | |||||||||
|
Fourth quarter |
3.39 | 1.70 | 442,321 | |||||||||
|
2018 |
||||||||||||
|
First quarter |
2.00 | 1.50 | 286,157 | |||||||||
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The following table sets forth for each of the most recent six months the high and low closing prices of our common shares as reported by the Lima Stock Exchange.
| High | Low | |||||||
| (in S/.) | ||||||||
|
2017 |
||||||||
|
December |
1.99 | 1.70 | ||||||
|
2018 |
||||||||
|
January |
2.00 | 1.81 | ||||||
|
February |
2.00 | 1.63 | ||||||
|
March |
1.91 | 1.50 | ||||||
|
April |
2.42 | 1.90 | ||||||
|
May |
2.35 | 1.90 | ||||||
|
June (through June 26, 2018) |
2.13 | 2.05 | ||||||
Not applicable.
Our common shares are traded on the Lima Stock Exchange, and our ADSs were traded on the New York Stock Exchange throughout 2017. On May 17, 2018, the New York Stock Exchange suspended the trading of our ADSs and commenced proceedings to delist the company. The company appealed the decision. Since May 21, 2018, our ADSs have been available for trading on the over-the-counter (OTC) market in the United States.
Trading in the Peruvian Securities Market
Lima Stock Exchange
As of the day of this annual report, there were 284 companies listed on the Lima Stock Exchange. Established in 1970, the Lima Stock Exchange is Peru’s only securities exchange. On November 19, 2003, the members of the Lima Stock Exchange approved to convert its corporate status to a publicly held corporation. As of the day of this annual report, Lima Stock Exchange had a share capital of S/.182,092,340, divided into 173,659,481 class “A” shares and 8,432,859 class “B” shares of par value S/.1.00 each. Class “A” shares are entitled to one vote per share while class “B” shares do not have voting rights.
Trading on the Lima Stock Exchange is primarily done on an electronic trading system that became operational in August 1995. From the second Sunday of March through the first Sunday of November of each year, trading hours are Monday through Friday (except holidays) as follows: 8:20 a.m.-8:30 a.m. (pre-market ordering); 8:30 a.m.-2:52 p.m. (trading); 2:52 p.m.-3:00 p.m. (after-market sales); and 3:02 p.m.-3:10 p.m. (after-market trading). At all other times, trading hours are from Monday to Friday (except holidays) as follows: 9:00 a.m.-9:30 a.m. (pre-market ordering); 9:30 a.m.-3:55 p.m. (trading); 3:55 p.m.-4:00 p.m. (after-market sales); and 4:00 p.m.-4:10 p.m. (after-market trading).
Substantially all of the transactions on the Lima Stock Exchange are traded on the electronic system. Transactions during the electronic sessions are executed through brokerage firms and stock brokers on behalf of their clients. Brokers submit orders in the order in which they are received. The orders must specify the type of security as well as the amount and price of the proposed sale or purchase. In order to control price volatility, the Lima Stock Exchange imposes a 15-minute suspension on trading when the price of a security varies on a single day by more than 15% for Peruvian companies and 30% for non-Peruvian companies.
Certain information regarding trading on the Lima Stock Exchange is set forth in the table below:
| 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||
|
Market capitalization (in millions of soles)(1) |
337,226 | 360,960 | 309,412 | 416,787 | 526,841 | |||||||||||||||
|
Volume (in millions of soles) |
16,124 | 17,301 | 12,001 | 15,342 | 29,022 | |||||||||||||||
|
Average daily trading volume (in millions of soles) |
64 | 69 | 48 | 61 | 116 | |||||||||||||||
| (1) | End-of-period figures for trading on the Lima Stock Exchange. |
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The stock market capitalization of companies listed on the Lima Stock Exchange was US$162.4 billion at the end of 2017, compared to US$120.7 billion, US$120.8 billion, US$90.7 billion and US$124.0 at the end of 2013, 2014, 2015 and 2016 respectively.
Total market volume in 2017 was US$8.9 billion, reflecting a 95.9% increase compared with 2016. Equity market volume, which represented 70.4% of total market volume, ended the year at US$6.3 billion, 136.1% more than the previous year. The repo market, which represented 7.8% of total market volume, reported volume of US$698.1 million in 2017, reflecting an increase of 40.1%.
The total number of operations in the market in 2017 increased by 20.5%, closing the year at 158,661 operations. The number of operations in the equity market in 2017 increased by 20.9% amounting to 147,779 operations.
In 2013, the S&P/BVL Peru General Index ( Índice S&P/BVL Peru General ) registered a decrease of 23.6% to 15,754 points, while in 2014, it reached 14,794 points, decreasing 6.1% compared to 2013. In 2015, it reached 9,849 points, decreasing 33.4% compared to 2014. In 2016, it reached 15,567 points, increasing 58.1% compared to 2015. In 2017, it reached 19,974 points, increasing 28.3% compared to 2016.
Regulation of the Peruvian Securities Market
The regulatory framework for the Peruvian securities market is established in the Securities Market Law approved by Legislative Decree No. 861, whose unified sole text was enacted by Supreme Decree No. 093-2002-EF, as amended ( Ley del Mercado de Valores ), and the resolutions issued from time to time by the Peruvian Securities Commission. The purpose of the Securities Market Law is to promote the ordered development and transparency of the Peruvian securities markets, adequate protection for investors and the principles under which the Peruvian securities market is intended to operate. The Securities Market Law contains the general rules for: (i) primary and secondary public offerings of securities; (ii) public offering of securities for acquisitions and sales; (iii) local and international offerings, including simultaneous offerings; (iv) the Public Registry of Securities ( Registro Público del Mercado de Valores ); (v) reporting obligations of material information ( hechos de importancia ) by the issuers of securities recorded in the Public Registry of Securities and by the entities that are subject to the regulation and supervision of the Peruvian Securities Commission; (vi) the enforcement of insider trading; (vii) privileged information and confidentiality regulations and prohibitions against price manipulation; (viii) the broker-dealers; (ix) the Lima Stock Exchange; (x) CAVALI (the settlement and registry entity for transactions executed on the Lima Stock Exchange); (xi) other entities that are required to be registered at the Peruvian securities market Public Registry of Securities; (xii) capital market instruments and operations, including securitizations; and (xiii) mutual funds and investments funds publicly placed and their respective management companies.
The Peruvian securities market is regulated and supervised by the Peruvian Securities Commission ( Superintendencia de Mercado de Valores ), a governmental entity reporting to the Peruvian Ministry of Economy and Finance, with functional, administrative, economic, technical and budgetary autonomy. The Peruvian Securities Commission is governed by the Superintendent, designated by the Peruvian Ministry of Economy and Finance, and by a five member board of directors convened by the Superintendent (who acts as Chairman of the board). The other four members are appointed by the government under applicable legislation. The Peruvian Securities Commission issues from time to time resolutions which provide specific regulations or may impose sanctions in cases of violations of the Securities Market Law or the resolutions issued by the Peruvian Securities Commission.
The Peruvian Securities Commission, in order to achieve the Securities Market Law´s purposes, has broad regulatory and supervisory powers, including (i) issuing general mandatory rules; (ii) supervision and oversight of compliance with applicable legislation (including the power to order inspections and require the submission of information and documentation by entities that are under its jurisdiction and summon and interrogate any person that may contribute to its investigations); (iii) imposing sanctions; (iv) managing the Peruvian securities market public registry; (v) verifying that public offerings meet filing requirements and that the securities subject to such offerings are duly recorded at the Peruvian securities market public registry of securities; (vi) authorizing the incorporation and functioning of entities under its scope of supervision; and (vii) monitoring the content and accuracy of the financial and other information that is filed with the Peruvian Securities Commission. The Peruvian Securities Commission is responsible for the enactment, interpretation and enforcement of rules and regulations issued under the Securities Market Law.
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Disclosure Obligations
Issuers of securities registered with the Peruvian Securities Commission are required to disclose material information relating to the issuer. Pursuant to the Securities Market Law and relevant regulations enacted thereunder, all material information in connection with the issuer of registered securities (such as our common shares), its activities or securities issued or secured by such issuer which may influence the liquidity or price of such securities must be disclosed. Accordingly, issuers must file with the Peruvian Securities Commission mainly two types of information: (i) financial information, including unaudited interim financial statements on a quarterly basis (which are not required to be subject to limited review by external auditors), and audited annual consolidated financial statements on an annual basis, and (ii) material information relating to the issuer and its activities that may significantly affect the price, offering or trading of the issued securities, and in general, all the information that may be relevant for investors to be able to make investment decisions.
In order to comply with the foregoing disclosure obligations, issuers must disclose information to the Peruvian Securities Commission and, if the securities are listed, with the Lima Stock Exchange as soon as practicable but not later than the day on which the event took place or the issuer became aware of such information.
Not applicable.
Not applicable.
Not applicable.
| ITEM 10. | ADDITIONAL INFORMATION |
Not applicable.
B. Memorandum and Articles of Association
Set forth below is certain information relating to our share capital, including brief summaries of certain material provisions of our bylaws, Peruvian Corporate Law and certain other laws and regulations of Peru, all as in effect as of the date hereof.
General
We are a publicly-held corporation under Peruvian Corporate Law and registered with the Public Registry of Corporations in Lima. We are listed on the Lima Stock Exchange and the New York Stock Exchange.
Our by-laws provide that our principal corporate purposes are to engage in any and all activities related to the construction and real estate businesses; to provide services related to the mining and hydrocarbons industries; to participate in all stages of development of public services and other infrastructure concessions; and to provide management and corporate services to related and third parties. In addition, our company can realize investments and corporate transactions, including the acquisition, holding and transfer of securities of Peruvian and foreign companies.
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Shareholders’ Liability
Under Peruvian Corporate Law, holders of our common shares cannot vote on matters with respect to which they have a conflict of interest.
Under Article 133 of the Peruvian Corporate Law, a shareholder must abstain from voting when faced with a conflict of interest. A resolution approved in disregard of this provision may be challenged under Article 139 of the Peruvian Corporate Law and the shareholders that participated in the determination in breach of this provision, if their vote was key in attaining the required majority, may be held jointly liable.
Redemption and Rights of Withdrawal
Under Article 200 of the Peruvian Corporate Law, holders of our common shares have redemption rights if: (i) we change our corporate purpose; (ii) a change occurs in the place of organization to a foreign country; or (iii) any transformation, merger or significant spin-off occurs with respect to our company.
Preemptive and Accretion Rights
If we increase our share capital, holders of our common shares have the right to subscribe to new common shares on a pro rata basis. Holders of common shares have preemptive rights in order to maintain their share interest in our share capital, unless the capital increase (i) results from a conversion of debt to common shares, (ii) is approved by shareholders representing at least 40% of the subscribed voting shares provided that the capital increase does not favor, directly or indirectly, certain shareholders to the detriment of others, or (iii) results from a corporate reorganization.
Shareholders who are in default of any payments relating to subscribed but unpaid shares may not exercise their preemptive rights.
Voting Rights and Dividends
Holders of common shares are entitled to one vote per share, with the exception of the election of the board of directors, where each holder is entitled to one vote per share per nominee. Each holder’s votes may be cast for a single nominee or distributed among the nominees at the holder’s discretion. To that effect, each of our common shares gives the holder the right to as many votes as there are directors to be elected. Shareholders may pool votes in favor of one person or distribute them among various persons. Those candidates for the board who receive the most votes are elected directors. Holders of common shares may attend and vote at shareholders’ meetings either in person or through a proxy.
Holders of common shares have the right to participate in the distribution of dividends and shareholder equity resulting from liquidation. Our by-laws do not establish a maximum time limit for the payment of the dividends. However, according to Article 232 of the Peruvian Corporate Law, the right to collect past-due dividends in the case of companies that are publicly held companies, such as ours, expires ten years after the date on which the dividend payment was due.
Our share capital may be increased by a decision of holders of common shares at a shareholders’ meeting. Capital reductions may be voluntary or mandatory and must be approved by holders of common shares at a shareholders’ meeting. Capital reductions are mandatory when accumulated losses exceed 50% of the capital and to the extent such accumulated losses are not offset by accumulated earnings and capital increases within the following fiscal year. Capital increases and reductions must be communicated to the Peruvian Securities Commission, the Lima Stock Exchange and SUNAT. Voluntary capital reductions must also be published in the official gazette El Peruano and in a widely circulated newspaper in the city in which we are located.
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Liquidation Rights
If we are liquidated, our shareholders have the right to receive net assets resulting from the liquidation, after we comply with our obligation to pay all our creditors and after discounting any existing dividend liabilities. For this reason, we cannot assure that we will be able to reimburse 100% of the book value of the common shares in case of bankruptcy or liquidation.
Ordinary and Extraordinary Meetings
Pursuant to Peruvian Corporate Law and our by-laws, the annual shareholders’ meeting must be held during the three-month period after the end of each fiscal year. Additional shareholders’ meetings may be held during the year. Because we are a publicly-held corporation, we are subject to the special control of the Peruvian Securities Commission, as provided in Article 253 of the Peruvian Corporate Law. If we do not hold the annual shareholders’ meeting during the three-month period after the end of each fiscal year or any other shareholders’ meeting required by our by-laws, a public notary or a competent judge shall call for such a meeting at the request of at least one shareholder of the common shares. Such meeting will take place within a reasonable period of time.
Pursuant to the Peruvian Corporate Law, other shareholders’ meetings are convened by the board of directors when deemed convenient by the company or when it is requested by notarized letter by the holders of at least 5% of our common shares which voting rights are not suspended according to Peruvian Law. Pursuant to section 255 of the Peruvian Corporate Law, if the board expressly or implicitly refuses to convene the shareholders’ meeting, a notary public or a competent judge will call for such meeting at the request of holders of at least 5% of our common shares. If a notary public or competent judge calls for a shareholders’ meeting, the place, date and hour of the meeting, the agenda, the person who will preside the meeting and the notary public who will certify the resolutions of the meeting shall be indicated in the meeting notice. If the meeting called is other than the annual shareholders’ meeting or a shareholders’ meeting required by the Peruvian Corporate Law or the by-laws, the agenda will contain those matters requested by the shareholders who requested the meeting.
Notices of Meetings
Since we are a publicly-held corporation, notice of shareholders’ meetings must be given by publication of a notice. The publication shall occur at least 25 days prior to any shareholders’ meeting in the Peruvian Official Gazette, El Peruano, and in a widely circulated newspaper in the city in which we are located.
Quorum and Voting Requirements
According to Article 33 of our by-laws and Article 257 of the Peruvian Corporate Law, shareholders’ meetings called for the purpose of considering a capital increase or decrease, the issuance of obligations, a change in the by-laws, the sale in a single act of assets with an accounting value that exceeds 50% of our share capital, a merger, division, reorganization, transformation or dissolution, are subject to a first, second and third quorum call, with each of the second and third quorum call to occur upon the failure of the preceding one. A quorum for the first call requires the presence of shareholders holding 50% of our total common shares. For the second call, the presence of shareholders holding at least 25% of our total common shares is adequate, while for the third call there is no quorum requirement. These decisions require the approval of the majority of the common shares represented at the shareholders’ meeting. Shareholders’ meetings convened to consider all other matters are subject to a first and second quorum call, with the second quorum call to occur upon the failure of the first quorum.
In accordance with Peruvian Corporate Law, only those holders of common shares whose names are registered in the company’s stock ledger not less than 10 days in advance of a meeting will be entitled to attend the shareholders’ meeting and to exercise their rights.
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Limitations on the Rights of Non-Residents or Foreign Shareholders
There are no limitations under our by-laws or Peruvian Corporate Law on the rights of non-residents or foreign shareholders to own securities or exercise voting rights with respect to our securities.
Disclosure of Shareholdings and Tender Offer Regulations
Disclosure of Shareholdings
There are no provisions in our by-laws governing the ownership threshold above which share ownership must be disclosed.
However, according to Article 10 of CONASEV Resolution Nº 090-2005-EF-94.10, as amended, we must inform the Peruvian Securities Commission of the members of our economic group, comprised by our subsidiaries, and a list of our holders of common shares owning more than a 5% share interest, as well as any change to such information.
Tender Offer Regulations
Peruvian securities regulations include mandatory takeover rules applicable to the acquisition of control of a publicly held company.
Subject to certain conditions, such regulations generally establish the obligation to launch a tender offer when a person or group of persons acquires a significant interest in a publicly held company. According to the provisions set forth in CONASEV Resolution No. 009-2006-EF-94.10, a person acquires a significant interest in a listed company when such person (i) holds or has the power to exercise directly or indirectly 25%, 50% or 60% of the voting rights in a listed company, or (ii) has the power to appoint or remove the majority of the board members or to amend its by-laws.
A tender offer may be launched prior or following an acquisition of the significant interest. The tender offer may be launched after the “significant interest” is acquired if it is acquired (i) by means of an indirect transaction, defined as a relevant acquisition or interest increase through the acquisition of securities issued by a company that in turn holds share capital of the target company; (ii) as a consequence of a public sale offer, or (iii) in no more than four transactions within a three-year period.
This mandatory procedure has the effect of alerting other shareholders and the market that an individual or financial group has acquired a significant percentage of a company’s voting shares, and gives other shareholders the opportunity to sell their shares at the price offered by the purchaser. The purchaser is required to launch a tender offer unless: (i) shareholders representing 100% of the voting rights consent in writing, (ii) voting shares are acquired by a depositary in order to subsequently issue ADSs, or (iii) voting shares are acquired pursuant to the exercise of preemptive rights.
Changes in Capital
Our by-laws do not establish special conditions to increase or reduce our share capital beyond what is required under Peruvian Corporate Law.
Anti-Takeover Provisions
Our by-laws do not contain any provision that would have the effect of delaying, deferring or preventing a change of control.
Board of Directors
For additional information regarding our board of directors, see “Item 6. Directors, Senior Management and Employees—Directors and Senior Management.”
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Form and Transfer
Common shares may be either physical share certificates in registered form or book-entry securities in the CAVALI S.A. ICLV book-entry settlement system also in registered form. Furthermore, in the case of shares represented in book entries, the issuance of new shares which result from share splits or similar corporate events must also be represented in said form.
Furthermore, the Peruvian Corporate Law forbids publicly-held corporations, such as us, from including in their by-laws stipulations limiting the transfer of their shares or restraining their trading in other ways. According to Article 18 of our by-laws, we cannot recognize a shareholders’ agreement that contemplates limitations, restrictions or preferential rights on the transfer of shares, even if such an agreement is recorded in our stock ledger ( matrícula de acciones ) or in CAVALI. As of the date of this annual report, no shareholders’ agreement is recorded in our stock ledger.
Arbitration
Our by-laws include an arbitration clause applicable to disputes arising from the interpretation of our bylaws or Peruvian Corporate Law and their complementary provisions, among our company, our management and our shareholders. Any such arbitration will be subject to the regulations of the Arbitration Center of the Lima Chamber of Commerce. The material terms of the arbitration clause are as follows:
| • | any dispute, controversy or claim arising out of the performance and the interpretation of the by-laws and any action or remedy set forth in the Peruvian Corporate Law (Ley General de Sociedades) among us, our current or former shareholders and/or our current or former management shall be settled by arbitration; |
| • | any dispute, controversy or claim between us and a third party shall be also settled by arbitration, if agreed upon by all parties either expressly or tacitly; |
| • | arbitrations shall be conducted before a panel of three arbitrators; |
| • | arbitrators shall consider only the applicable law for their award (arbitration in law and not arbitration in equity); |
| • | each party to a dispute shall appoint an arbitrator within 10 business days from receiving the notice of arbitration. The two selected arbitrators shall appoint the third arbitrator. If one of the parties fails to appoint its arbitrator within 10 business days, the Center of Arbitration of the Lima Chamber of Commerce shall appoint the arbitrator; |
| • | the rules of the Center of Arbitration of the Lima Chamber of Commerce shall apply to the arbitration; and |
| • | the arbitration clause is not applicable to the cases that must be submitted to the jurisdiction of the courts or of the Superintendencia del Mercado de Valores, such as when arbitration would present hardship to minority shareholders or when Peruvian law otherwise requires it. |
The arbitration clause does not apply to claims based on violations of U.S. securities laws.
Syndicated Loan
In December 2015 we entered into a medium term loan credit agreement for up to US$200 million (S/.672 million) with Credit Suisse AG, Cayman Islands Branch, and Credit Suisse Securities (USA) LLC. As a result of the termination of the GSP gas pipeline concession, in June 2017, we entered into an amendment to the credit agreement. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” This agreement and the amendments thereto have been filed as Exhibit 10.01 to this annual report.
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Term Loan
As a result of the termination of the GSP gas pipeline concession, our proportional guarantee of the GSP bridge loan became due. On June 27, 2017 we entered into a new US$78.7 million (S/.264.8 million) term loan with Natixis, BBVA, SMBC and MUFJ, the proceeds of which were used to prepay GSP bridge loan in full. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” This agreement and an amendment thereto has been filed as Exhibit 10.02 to this annual report.
Financial Stability Framework Agreement
On July 31, 2017, we, and certain of our subsidiaries, GyM, CAM Peru S.A., Vial y Vives—DSD and Concesionaria Vía Expresa Sur S.A., entered into a Financial Stability Framework Agreement with the following financial entities: Scotiabank Peru S.A.A., Banco Internacional del Perú S.A.A., BBVA Banco Continental, Banco de Crédito del Perú, Citibank del Perú S.A. and Citibank N.A. In April 2018, we repaid US$73.9 million of the facility with the proceeds of the sale of Stracon. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” This agreement has been filed as Exhibit 10.03 to this annual report.
GSP Concession and Subordination Arrangements
In November 2015 we acquired a 20% interest in GSP, an entity which, on July 22, 2014, signed a concession agreement with the government of Peru to build, operate and maintain the natural gas pipeline transportation system to satisfy the demand of certain cities in the southern region of Peru.
On January 24, 2017, the government of Peru terminated the contract, due to the impossibility of obtaining financial closing. In accordance with the concession contract, the Peruvian government is required to carry out an auction process to sell GSP’s assets and obtain a new concessionaire within one year of the contract termination, with the funds raised in the sale to be used to pay the existing concessionaire for its investment in the project. Although the concession contract provides that payment must be made within one year of termination, the Peruvian Ministry of Energy and Mines has not made payment or, to our knowledge, initiated the payment process. A summary of these provisions of the concession contract have been filed as Exhibit 10.04 to this annual report.
In 2016, in connection with efforts to restructure or sell Odebrecht’s participation in GSP, due to the corruption scandal surrounding Odebrecht, Odebrecht contractually agreed to subordinate its claims under the concession to the other project partners, Enagás and ourselves. As a result, we and Enagas may be entitled to repayment of our percentage payment under the concession contract prior to Odebrecht. However, on January 3, 2018, Odebrecht commenced arbitration proceedings against us, our subsidiary GyM and Enagás, seeking to invalidate the contractual subordination. These contractual arrangements have been filed as Exhibit 10.05 to this annual report.
For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”
Since August 1990, there have been no exchange controls in Peru and all foreign exchange transactions are based on free market exchange rates. Prior to August 1990, the Peruvian foreign market consisted of several alternative exchange rates. Additionally, during the 1990s, the Peruvian currency experienced a significant number of large devaluations, and Peru has consequently adopted, and operated under, various exchange rate control practices and exchange rate policies, ranging from strict control over exchange rates to market determination of rates. Current Peruvian regulations on foreign investment allow the foreign holders of equity shares of Peruvian companies to receive and repatriate 100 percent of the cash dividends distributed by such companies. Such investors
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are allowed to purchase foreign exchange at free market currency rates through any member of the Peruvian banking system and transfer such foreign currency rates through any member of the Peruvian banking system and transfer such foreign currency outside Peru without restriction.
Peruvian Tax Considerations
The following is a general summary of material Peruvian tax matters under Peruvian law, as in effect on the date of this annual report, and describes the principal tax consequences of ownership of ADSs and common shares by non-resident individuals or entities (“Non-Peruvian Holders”). Legislative, judicial or administrative changes or interpretations may, however, be forthcoming. Any such changes or interpretations could affect the tax consequences to holders of ADSs and common shares and could alter or modify the conclusions set forth herein. This summary is not intended to be a comprehensive description of all of the tax considerations that may be relevant to a decision to make an investment in the ADSs or common shares. In addition, it does not describe any tax consequences arising under the laws of any taxing jurisdiction other than Peru or applicable to an individual or entity resident of Peru or to a person with a permanent establishment in Peru.
For purposes of Peruvian taxation:
| • | individuals are residents of Peru, if they are Peruvian nationals who have established their place of residence in Peru or if they are foreign nationals with a permanence of more than 183 days in Peru in any 12-month period (in the latter case, the condition of Peruvian resident can only be acquired as of the 1st of January of the year following the fulfillment of residence conditions); and |
| • | legal entities are residents of Peru if they are established or incorporated in Peru. |
Cash Dividends and Other Distributions
Cash dividends paid to Non-Peruvian Holders with respect to common shares and amounts distributed with respect to ADSs have been subject to Peruvian withholding income tax at a rate of 5% since 2017. As a general rule, the distribution of additional common shares representing profits, the distribution of shares which differ from the distribution of earnings or profits, as well as the distribution of preemptive rights with respect to common shares, which are carried out as part of a pro rata distribution to all shareholders, will not be subject to Peruvian income tax or withholding taxes.
Capital Gains
Pursuant to Article 6 of the Peruvian income tax law, individuals and domiciled entities in Peru are subject to Peruvian income tax on their worldwide income while non-domiciled entities are subject to Peruvian income tax only on their Peruvian source income.
Peruvian income tax law provides that income derived from the disposal of securities issued by Peruvian entities is considered Peruvian source income and is therefore subject to income tax. Under current Peruvian income tax law, capital gains resulting from the disposal of American Depositary Receipts (ADRs) that represent shares issued by Peruvian entities are considered Peruvian source income and therefore are subject to Peruvian income tax. Peruvian income tax law also provides that the taxable income resulting from the disposal of securities is equal to the difference between the sale price of the securities (which may not be less than their fair market value) and their tax basis.
Notwithstanding the foregoing, capital gains resulting from the disposal of ADSs or beneficial interest in ADSs that represent shares issued by a Peruvian entity are not considered Peruvian source income, and therefore are not subject to Peruvian income tax.
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In the event ADSs are exchanged into common shares and such common shares are disposed of, capital gains resulting therefrom will be subject to an income tax rate of either 5% or 30%, depending on where the transaction takes place. If the transaction is consummated in Peru, any capital gain will be subject to an income tax rate of 5%; and if the transaction is performed outside of Peru, any capital gain will be subject to a 30% income tax rate.
Peruvian income tax law regulations have stated with respect to the transfer of common shares, that transactions are deemed to be consummated in Peru if the common shares are transferred through the Lima Stock Exchange. From 2016 through December 31 of 2019, pursuant to the Law 30341, capital gains resulting from a transfer of: (i) Common shares and investment shares, (ii) ADRs and Global Depositary Receipts (GDRs), (iii) Exchange Trade Funds (ETF) units that have underlying shares and/or securities representing debt, (iv) representative securities of debt, (v) Certificates of participation in mutual funds for investment in securities, (vi) Certificates of participation in investment Funds in Rent of Real Property (FIRBI) and certificates of participation in Trustee of Securitization for Investment in Rent of Real Estate (FIBRA), and (vii) Negotiable invoices, in each case, through the Lima Stock Exchange will be exempt from income tax, provided, however, that the following conditions are met:
(a) The transfer must be performed through a centralized trading mechanism supervised by the Securities Market Superintendence;
(b) In any 12-month period, neither the seller or any person related to him must dispose of more than 10% of the total number of common shares issued by the company through one or more simultaneous or successive operations; and
(c) The shares must have a “market presence”, meaning that transactions in respect of those shares for a value exceeding four Tax Units (currently, S/.16,600) shall have occurred in at least 27 business days out of any 180 business day period including the date of the transaction.
Any gain resulting from the conversion of ADSs into common shares or common shares into ADSs will not be subject to taxation in Peru.
Likewise, it is important to notice that if after applying the exemption, the issuer delisted the securities from the Registry of the Lima Stock Exchange, in whole or in part, in an act or progressively, within the next 12 months after the disposal is made, the exemption that is applied to the securities unlisted is lost.
Any Non-Peruvian Holder entities who acquires common shares will have the following tax basis: (i) for common shares purchased by the transferor, the acquisition price paid for the shares; (ii) for common shares received by the transferor as a result of a share capital increase because of a capitalization of net profits, the par value of such common shares; (iii) for other common shares received free of any payment, tax basis will be: (x) zero or the cost borne by the transferor, in the case of individuals and (y) the fair market value at the time of the acquisition, in the case of entities; and (iv) for common shares of the same type acquired at different opportunities and at different values, the tax basis will be the weighted average cost. In cases where common shares are sold by Non-Peruvian Holders outside the Lima Stock Exchange, the tax basis must be certified by the Peruvian tax administration prior to the time payment is made to the transferor; otherwise it would not be possible to deduct the tax basis and the 30% Peruvian income tax would apply to the total sale price. Under Peruvian income tax law, tax basis certification is granted by the Peruvian tax authorities within 30 business days after the filing of the corresponding application. If the Peruvian tax authorities do not respond within the abovementioned period, the tax basis calculation will be deemed automatically approved.
In any transaction relating to Peruvian securities through the Lima Stock Exchange, CAVALI will act as withholding agent of the Peruvian income tax. If the purchaser is a resident in Peru and the sale is not performed through the Lima Stock Exchange, the purchaser will act as withholding agent. In other cases, the transferor shall be obliged to self-assess the tax and pay it to the Peruvian tax authorities within the first 12 business days of the month following the transfer.
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Other Considerations
No Peruvian estate or gift taxes are imposed on the gratuitous transfer of ADSs or common shares. No stamp, transfer or similar tax applies to any transfer of ADSs or common shares, except for commissions payable by seller and buyer to the Lima Stock Exchange (0.021% of value sold), fees payable to the Peruvian Securities Commission (0.0135% of value sold), brokers’ fees (about 0.05% to 0.50% of value sold) and value added tax (at the rate of 18%) on commissions and fees. Any investor who sells its common shares on the Lima Stock Exchange will incur these fees and taxes upon purchase and sale of the common shares.
United States Federal Income Tax Considerations
The following summary describes certain United States federal income tax consequences to a United States Holder (as defined below) of the purchase, ownership and disposition of our common shares and ADSs as of the date of this annual report. Except where noted, this summary deals only with common shares and ADSs held as capital assets (generally, property held for investment). As used herein, the term “United States Holder” means a beneficial owner of common shares or ADSs that is for United States federal income tax purposes:
| • | an individual citizen or resident of the United States; |
| • | a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| • | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| • | a trust if it (i) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust, or (ii) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. |
This summary does not represent a detailed description of the United States federal income tax consequences applicable to you in light of your particular circumstances and does not address the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
| • | a dealer in securities or currencies; |
| • | a financial institution; |
| • | a regulated investment company; |
| • | a real estate investment trust; |
| • | an insurance company; |
| • | a tax-exempt organization; |
| • | a person holding our common shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle; |
| • | a trader in securities that has elected the mark-to-market method of accounting for your securities; |
| • | a person liable for alternative minimum tax; |
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| • | a person who owns or is deemed to own 10% or more of our voting stock; |
| • | a partnership or other pass-through entity for United States federal income tax purposes; or |
| • | a person whose “functional currency” is not the U.S. dollar. |
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. There is currently no income tax treaty between the United States and Peru that would provide for United States federal income tax consequences different than the consequences under the foregoing authorities. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
If a partnership (or other entity or arrangement treated as a partnership for United States federal income tax purposes) holds our common shares or ADSs, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common shares or ADSs, you should consult your tax advisors.
This summary does not address the effects of the Medicare tax on net investment income or other United States income tax consequences such as United States federal estate or gift tax consequences, and does not address the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our common shares or ADSs, you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by such ADSs. Accordingly, deposits or withdrawals of common shares for ADSs will not be subject to United States federal income tax.
Taxation of Dividends
The gross amount of distributions, other than certain pro rata distributions of common shares, on the ADSs or common shares (including amounts withheld to reflect Peruvian withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles.
To the extent that the amount of any distribution (including amounts withheld to reflect Peruvian withholding taxes) exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or common shares, and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend. Such dividends (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of the common shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.
With respect to non-corporate United States Holders, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A non-United States corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on common shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our ADSs, which are listed on the New York Stock Exchange, will be
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considered readily tradable on an established securities market in the United States. Based on existing guidance, it is not entirely clear whether our common shares will be considered readily tradable on an established securities market in the United States because only the ADSs, not the underlying common shares, are listed on a securities market in the United States. We believe that dividends we pay on our common shares that are represented by ADSs, but not our common shares that are not so represented, will meet such conditions required for the reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. Non-corporate United States Holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particular circumstances.
The amount of any dividend paid in soles will equal the U.S. dollar value of the soles received, calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively received by you, in the case of the common shares, or by the depositary, in the case of ADSs, regardless of whether the soles are converted into U.S. dollars at that time. If the soles received as a dividend are converted into U.S. dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the soles received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a tax basis in the soles equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the soles will be treated as United States source ordinary income or loss.
Subject to certain conditions and limitations, Peruvian withholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or common shares will be treated as foreign source income and will generally constitute passive category income. However, in certain circumstances, if you have held the ADSs or common shares for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any Peruvian withholding taxes imposed on dividends paid on the ADSs or common shares. If you do not elect to claim a United States foreign tax credit, you may instead claim a deduction for Peruvian income tax withheld, but only for a taxable year in which you elect to do so with respect to all foreign income taxes paid or accrued in such taxable year. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of ADSs or common shares in an amount equal to the difference between the amount realized for the ADSs or common shares and your tax basis in the ADSs or common shares, in each case as determined in U.S. dollars. Such gain or loss will generally be capital gain or loss. Capital gains of non-corporate United States Holders derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
If a Peruvian income tax is withheld on the sale or other disposition of our ADSs or common shares, your amount realized will include the gross amount of the proceeds of that sale or other disposition before deduction of the Peruvian income tax. See “—Peruvian Tax Considerations—Capital Gains” for a description of when a sale or other disposition of our ADSs or common shares may be subject to taxation by Peru. Any gain or loss recognized by you will generally be treated as United States source gain or loss for foreign tax credit purposes. Consequently, in the case of gain from the disposition of ADSs or common shares that is subject to Peruvian income tax, you may not be able to benefit from the foreign tax credit for that Peruvian income tax (i.e., because the gain from the disposition would be United States source), unless you can apply the credit (subject to applicable limitations) against United States federal income tax payable on other income from foreign sources. Alternatively, you may take a deduction for the Peruvian income tax if you do not take a credit for any foreign taxes paid or accrued during the taxable year. You are urged to consult your tax advisors regarding the tax consequences if Peruvian income tax is imposed on a disposition of ADSs or common shares, including the availability of the foreign tax credit under your particular circumstances.
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Passive Foreign Investment Company
We do not believe that we are, for United States federal income tax purposes, a passive foreign investment company (a “PFIC”), and we expect to operate in such a manner so as not to become a PFIC. If, however, we are or become a PFIC, you could be subject to additional United States federal income taxes on gain recognized with respect to the ADSs or common shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us (as discussed above under “—Taxation of Dividends”) if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our ADSs or common shares and the proceeds from the sale, exchange or redemption of our ADSs or common shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. Backup withholding may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service in a timely manner.
The above description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership or disposition of our ADSs or common shares. You should consult your own tax advisors concerning the overall tax consequences to you, including the consequences under laws other than United States federal income tax laws, of an investment in our ADSs or common shares.
F. Divi dends and Paying Agents
Not applicable.
Not applicable.
We are subject to the informational requirements of the U.S. Securities Exchange Act of 1934, or the Exchange Act. Accordingly, we are required to submit reports and other information to the SEC, including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information submitted to the SEC at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. Copies of the materials may be obtained from the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at http://www.sec.gov, from which you can electronically access these materials.
As a foreign private issuer, we are required to file with the SEC annual reports on Form 20-F, but we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act. For example, we are not required to prepare and issue quarterly reports. However, we have furnished, and intend to continue to furnish, our shareholders with quarterly reports containing unaudited financial data for the first three quarters of each fiscal year. In addition, as a foreign issuer, we are not subject to the proxy rules under Section 14 of the Exchange Act and our officers and directors are subject to Section 16 of the Exchange Act relating to insider short-swing profit disclosure and recovery regime.
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We send the depositary a copy of all notices that we give relating to meetings of our shareholders or to distributions to shareholders or the offering of rights and a copy of any other report or communication that we make generally available to our shareholders. The depositary makes all these notices, reports and communications that it receives from us available for inspection by registered holders of ADSs at its office. The depositary mails copies of those notices, reports and communications to you if we ask the depositary to do so and furnish sufficient copies of materials for that purpose.
We file financial statements and other periodic reports with the Peruvian Securities Commission in Peru. Issuers of securities registered with the Peruvian Securities Commission are required to disclose material information relating to the issuer. Pursuant to the Securities Market Law and relevant regulations enacted thereunder, all material information in connection with the issuer of registered securities, its activities or securities issued or secured by such issuer which may influence the liquidity or price of such securities must be disclosed. Accordingly, issuers must file with the Peruvian Securities Commission mainly two types of information: (a) financial information, including unaudited interim financial statements on a quarterly basis (which are not required to be subject to limited review), and audited annual consolidated financial statements on an annual basis, and (b) material information relating to the issuer and its activities that may significantly affect the price, offering or negotiation of the issued securities, and in general, all the information that may be relevant for investors to be able to make investment decisions.
See the notes 2.2 and 6 to our adutied annual consolidated financial statements included in this annual report for a description of our subsidiaries.
| ITEM 11. | QUANTI TATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to a number of market risks arising from our normal business activities, including the possibility that changes in currency exchange rates or interest rates will adversely affect future cash flows and profit or the value of our financial assets and liabilities. From time to time, we enter into derivative transactions to hedge against foreign currencies and interest rate fluctuations. For further information regarding our market risk, see note 4 to our audited annual consolidated financial statements included in this annual report.
Exchange Rate Risk
We are exposed to market risk associated with changes in foreign currency exchange rates. Our revenues and costs, and our assets and liabilities, are denominated in soles, U.S. dollars, Chilean pesos and, to a lesser extent, other currencies. In 2017, we estimate that 39.3%, 43.8% and 16.9% of our revenues were denominated in soles, U.S. dollars and other currencies (principally Chilean pesos), respectively, while 63.9%, 18.3% and 17.8% of our cost of sales during the year were denominated in soles, U.S. dollars and other currencies. In addition, as of December 31, 2017, 52.2%, 38.6% and 9.2% of our total debt was denominated in soles, U.S. dollars and other currencies, respectively. If, at December 31, 2017, the sol had strengthened/weakened by 2% against the U.S. dollar, with all other variables remaining constant, or pre-tax profit for the year would have increased/decreased by S/.0.1 million. This sensitivity analysis does not take into account our payable to Chubb Insurance Company relating to our reimbursement obligations under the GSP performance guarantee.
Interest Rate Risk
We may from time to time incur variable interest rate indebtedness, and accordingly our financial expenses are affected by changes in interest rates. Based upon our indebtedness at December 31, 2017, and taking into account our interest rate derivative instruments, a change in interest rates of five percent (or 500 basis points) would impact our net profit by S/.82.5 million annually. This sensitivity analysis does not take into account our payable to Chubb Insurance Company relating to our reimbursement obligations under the GSP performance guarantee.
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Commodity Price Risk
We are exposed to market risk associated with changes in commodity prices, primarily for oil, steel and cement, which in aggregate represented a majority of our total input cost in 2017. We do not have long-term contracts for the supply of these key inputs. Based upon our consumption of these inputs during 2017, a 10% increase/decrease in the prices of each of oil, steel and cement would have increased/decreased our costs of sales by S/.51.6 million, S/.13.9 million and S/.1.5 million, respectively. However, based on our production of oil during 2017, a 10% increase/decrease in the price of oil would have increased/decreased our revenues by S/.58.1 million.
| ITE M 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
Not applicable.
Not applicable.
D. Ameri can Depositary Shares
Fees and Expenses
The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of common shares, issuances in respect of common share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason, US$5.00 or less for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a common share distribution, rights and/or other distribution prior to such deposit to pay such charge.
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing common shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:
| • | a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs; |
| • | a fee of US$0.05 or less per ADS for any cash distribution made pursuant to the deposit agreement; |
| • | a fee of US$0.05 or less per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision); |
| • |
a fee for the reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of the depositary’s agents (including, without limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law |
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or regulation relating to foreign investment) in connection with the servicing of the common shares or other deposited securities, the sale of securities, the delivery of deposited securities or otherwise in connection with the depositary’s or the custodian’s compliance with applicable law, rule or regulation (which charge shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions); |
| • | a fee for the distribution or sale of securities pursuant to paragraph 10 of the deposit agreement, such fee being in an amount equal to the US$0.05 per ADS issuance fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were common shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto; |
| • | stock transfer or other taxes and other governmental charges; |
| • | cable and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of common shares; |
| • | transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities; and |
| • | expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars. |
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and exchange application and listing fees. The amounts of reimbursements available to us are not based upon the amounts of fees the depositary collects from investors. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing common shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting on their behalf. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary will generally set off the amounts owing from distributions made to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the depositary may refuse to provide any further services to holders that have not paid those fees and expenses owing until such fees and expenses have been paid. At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary.
During 2017, the depositary reimbursed us for expenses in an aggregate amount of US$89,950.1 (S/.291,887.9).
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