Form 20-F

20-F 1 d655899d20f.htm FORM 20-F Form 20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

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

For the fiscal year ended December 31, 2018

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

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

Date of event requiring this shell company report

For the transition period from to

Commission file number 001-35991

GRAÑA Y MONTERO S.A.A.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Republic of Peru

(Jurisdiction of incorporation or organization)

Av. Paseo de la República 4667

Surquillo

Lima 34, Peru

(Address of principal executive offices)

Daniel Urbina Pérez, Chief Legal Officer

Tel. 011-51-1-213-6565

relacion.inversionistas@gym.com.pe

Av. Paseo de la República 4667

Surquillo

Lima 34, Peru

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

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

Title of each class

Name of each exchange on which registered

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

American Depositary Shares, each representing five

Common Shares

New York Stock Exchange*

New York Stock Exchange

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

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

None

Securities for which there is a reporting obligation

pursuant to Section 15(d) of the Act:

None

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


At December 31, 2018		729,434,192 shares of common stock

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

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

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

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

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

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


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

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

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

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

U.S. GAAP ☐

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☒

Other ☐

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

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

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

TABLE OF CONTENTS


		Page
PART I.			1
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		6
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		6
ITEM 3.	KEY INFORMATION		6
A.	Selected Financial Data		6
B.	Capitalization and Indebtedness		14
C.	Reasons for the Offer and Use of Proceeds		14
D.	Risk Factors		14
ITEM 4.	INFORMATION ON THE COMPANY		36
A.	History and Development of the Company		36
B.	Business Overview		37
C.	Organizational Structure		87
D.	Property, Plant and Equipment		89
ITEM 4A.	UNRESOLVED STAFF COMMENTS		89
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		89
A.	Operating Results		90
B.	Liquidity and Capital Resources		116
C.	Research and Development, Patents and Licenses, Etc.		121
D.	Trend Information		121
E.	Off-Balance Sheet Arrangements		125
F.	Tabular Disclosure of Contractual Obligations		125
G.	Safe Harbor		126
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		126
A.	Directors and Senior Management		126
B.	Compensation		132
C.	Board Practices		133
D.	Employees		135
E.	Share Ownership		137
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		137
A.	Major Shareholders		137
B.	Related Party Transactions		138
C.	Interests of Experts and Counsel		139
ITEM 8.	FINANCIAL INFORMATION		139
A.	Consolidated Statements and Other Financial Information		139
B.	Significant Changes		141
ITEM 9.	THE OFFER AND LISTING		141
A.	Offer and Listing Details		141
B.	Plan of Distribution		142
C.	Markets		142
D.	Selling Shareholders		144
E.	Dilution		144
F.	Expenses of the Issue		144
ITEM 10.	ADDITIONAL INFORMATION		144
A.	Share Capital		144
B.	Memorandum and Articles of Association		144
C.	Material Contracts		147
D.	Exchange Controls		148
E.	Taxation		148
F.	Dividends and Paying Agents		153
G.	Statement by Experts		153
H.	Documents on Display		153
I.	Subsidiary Information		154
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		154
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		155
A.	Debt Securities		155
B.	Warrants and Rights		155


C.	Other Securities	155
D.	American Depositary Shares	155
PART II.		157
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	157
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	158
ITEM 15.	CONTROLS AND PROCEDURES	158
A.	Disclosure Controls and Procedures	158
B.	Management’s Annual Report on Internal Control Over Financial Reporting	158
C.	Attestation Report of the Registered Public Accounting Firm	160
D.	Changes in Internal Control Over Financial Reporting	160
ITEM 16.	[RESERVED]	161
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	161
ITEM 16B.	CODE OF BUSINESS CONDUCT AND ETHICS	161
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	162
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	163
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	163
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	163
ITEM 16G.	CORPORATE GOVERNANCE	164
ITEM 16H.	MINE SAFETY DISCLOSURE	165
ITEM 17.	FINANCIAL STATEMENTS	165
ITEM 18.	FINANCIAL STATEMENTS	165
ITEM 19.	EXHIBITS	165

PART I.

INTRODUCTION

Certain Definitions

All references to “we”, “us”, “our”, “our company”, “the group” and “Graña y Montero” in this annual report are to Graña y Montero S.A.A., a publicly-held corporation (sociedad anónima abierta) organized under the laws of Peru. In this annual report, we refer to our principal subsidiaries, joint operations, joint ventures and associated companies as follows: (i) in our Engineering and Construction (E&C) segment: GyM S.A. as “GyM”; Vial y Vives—DSD S.A. as “Vial y Vives—DSD”; GMI S.A. as “GMI”; Morelco S.A.S. as “Morelco”; (ii) in our Infrastructure segment: Norvial S.A. as “Norvial”; Survial S.A. as “Survial”; Concesión Canchaque S.A. as “Canchaque”; GyM Ferrovías S.A. as “GyM Ferrovías”; Concesionaria La Chira S.A. as “La Chira”; GMP S.A. as “GMP”; and (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.” 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 gas pipeline concession of Gasoducto Sur Peruano S.A. (“GSP”) 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, or “CCDS”). Both GSP and CCDS are in the process of being liquidated. Additionally, we have recently sold certain assets and businesses, including: on April 24, 2017, the sale of our interest in Compañía Operadora de Gas del Amazonas (“COGA”); on June 6, 2017, the sale of our interest in GMD S.A. (“GMD”); on April 11, 2018, the sale of our interest in Stracon GyM S.A. (“Stracon GyM”); and, on December 4, 2018, the sale of our interest in CAM Chile S.A. (“CAM”) and CAM Servicios del Perú S.A. (“CAM Servicios”). In addition, we are in the process of marketing for sale our subsidiary Adexus S.A. (“Adexus”). 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.

Presentation of Financial Information

Our consolidated financial statements included in this annual report have been prepared in soles and in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). Our annual consolidated financial statements as of December 31, 2017 and 2018 and for the years ended December 31, 2016, 2017 and 2018 have been audited by Moore Stephens in accordance with the standards of the Public Company Accounting Oversight Board (United States).

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

We manage our business in three segments: Engineering and Construction (E&C); Infrastructure; and Real Estate. Prior to December 31, 2017, in addition to the foregoing segments, we had a Technical Services segment. However, we transferred Concar from this segment to our Infrastructure segment beginning on April 1, 2017; on June 6, 2017, we sold our interest in our former technical services subsidiary, GMD; and we are in the process of marketing for sale Adexus, our other technical services subsidiary. The historical segment financial information included in this annual report has been adjusted accordingly. For information on our results of operations by business segment, see note 7 to our audited annual consolidated financial statements included in this annual report.

As a result of the sale of GMD on June 6, 2017, we present GMD as a discontinued operation in our audited annual consolidated financial statements for the years ended December 31, 2017 and 2018. We have reclassified our consolidated financial statements for the year ended December 31, 2016, and selected financial information for the years ended December 31, 2014 and 2015, included in this annual report, to show GMD as a discontinued operation. In addition, (i) on December 4, 2018, we sold our interests in each of CAM and CAM Servicios, (ii) on April 11, 2018, we sold our interest in Stracon GyM, and (iii) we are in the process of marketing for sale our subsidiary Adexus. As a result, we present CAM, CAM Servicios and Stracon GyM as discontinued operations, and Adexus as an investment held for sale, in our audited annual consolidated financial statements for the year ended December 31, 2018. We have reclassified our consolidated financial statements for the years ended December 31, 2016 and 2017, and the selected financial information for the years ended December 31, 2014 and 2015, included in this annual report to show CAM, CAM Servicios and Stracon GyM as discontinued operations and Adexus as an investment held for sale. We have also revised prior backlog data included in this annual report to exclude the presentation of entities that are presented as discontinued operations.

We requested that the staff of the U.S. Securities and Exchange Commission (the “SEC”) grant relief from the financial statement filing requirements of Rule 3-09 of Regulation S-X (“Rule 3-09”) pursuant to Section 2430 of the Division of Corporation Finance Financial Reporting Manual, with respect to our investment in GSP. The SEC has not granted our company’s waiver request and, as a result, our company is required to file with the SEC separate financial statements for GSP for 2015, 2016 and 2017, with 2016 being audited. However, it is currently impracticable for our company to comply with this requirement, because the audit opinion that was issued with respect to GSP’s 2016 financial statements included a disclaimer, our company’s loss of significant influence over GSP, and GSP’s limited management as the entity is in insolvency proceedings. We believe that GSP’s financial statements would not provide additional material information to investors. However, we cannot assure you that that the SEC will not take actions against our company relating to our non-compliance, among other matters, in the event of a capital raise, our company may be temporarily unable to have a registration statement for a public offering of securities in the United States declared effective by the SEC. For more information, see “Item 3.D. Key Information—Risk Factors—Risks Related to our Company—we are not fully compliant with our reporting requirements under the Exchange Act because of our inability to provide audited financial statements for GSP in accordance with Rule 3-09 . For more information on GSP, see notes 5(e), 5(f) and 16 to our audited annual consolidated financial statements included in this annual report.

Non-IFRS Data

In this annual report, we present EBITDA, a non-GAAP financial measure. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable IFRS measure. We present EBITDA because we believe it provides readers with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons on a consistent basis. 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/.3.379 to US$1.00, which was the exchange rate reported for December 31, 2018 by the Peruvian Superintendency of Banks, Insurance and Private Pension Fund Administrators (Superintendencia de Banca, Seguros y AFPs, or “SBS”). We present our backlog in U.S. dollars. For contracts denominated in soles or other local currencies, amounts have been converted into U.S. dollars based on the exchange rate published by the SBS on December 31 of the corresponding year. When we present our ratios of backlog and revenues in this annual report, we similarly convert our revenues, which are reported in soles, into U.S. dollars based on the exchange rate reported for December 31 of the corresponding year. For conversions of macroeconomic indicators (particularly in “Item 5.D. Operating and Financial Review and Prospects—Trend Information” in this annual report), average annual exchange rates for the currencies of each of the countries addressed are used. The Federal Reserve Bank of New York does not report a noon buying rate for soles. The U.S. dollar equivalent information presented in this annual report is provided solely for convenience of the reader and should not be construed as implying that the soles or other currency amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate.

Rounding

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

Backlog

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

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

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—Risks 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 and real estate services industries in Peru and elsewhere in Latin America. We have made these estimates on the basis of our management’s knowledge and statistics and other information, which we believe to be the most recently available as of the date of this annual report, from government agencies, industry professional organizations, industry publications and other sources. While we believe these estimates to be accurate as of the date of this annual report, we have not independently verified the data from third-party sources and our internal data has not been verified by any independent source. We paid Great Place to Work ^® Institute, a human resources consulting, research and training firm, for our employees to participate in their market survey referenced in this annual report (Copyright ^© 2018 Great Place to Work ^® Institute, Inc. All rights reserved.). In this annual report we present gross domestic product (“GDP”) both on a nominal and real basis. Real GDP is nominal GDP adjusted to exclude the effect of inflation. Unless otherwise indicated, references to GDP are to real GDP.

Measurements and Other Data

In this annual report, we use the following measurements:

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

“cf” means one cubic foot;

•

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

•

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

•

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

•

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

In this annual report, we use the term accident 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;

•

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;

•

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

•

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 our company and certain of our former directors and our former and current executive officers;

•

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;

•

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.

ITEM 3.

KEY INFORMATION

A.	Selected Financial Data

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

The following selected financial data as of December 31, 2017 and 2018 and for the years ended December 31, 2016, 2017 and 2018 have been derived from our audited annual consolidated financial statements included in this annual report. The following selected financial data as of December 31, 2014, 2015 and 2016 and for the years ended December 31, 2014 and 2015 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, 2016, 2017 and 2018 have been audited by Moore Stephens in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our consolidated financial statements for the year ended December 31, 2017 included in this annual report have been restated. In our consolidated financial statements included in our annual report on Form 20-F for the year ended December 31, 2017, we inadvertently presented the gain on the sale of GMD under “Gain from the sale of investments” in error and, accordingly, we have restated our 2017 income statement and the related notes to reflect GMD as a discontinued operation. For more information, see note 2.31 to our audited annual consolidated financial statements included in this annual report.


	For the year ended December 31,
	2014			2015			2016⁽¹⁾			2017 Restated			2018			2018
				(in millions of S/.)												(in millions of US$)⁽²⁾
Income Statement Data:
Revenues		4,861.0			5,542.3			4,137.3			4,014.0			3,899.5			1,154.0
Cost of sales		(4,212.5	)		(5,210.6	)		(3,821.2	)		(3,511.6	)		(3,225.0	)		(954.4	)

Gross profit		648.5			331.7			316.1			502.5			674.5			199.6
Administrative expenses		(298.4	)		(291.3	)		(278.3	)		(322.5	)		(278.4	)		(82.4	)
Other income and expenses, net⁽³⁾		5.2			18.3			(21.9	)		(33.3	)		(61.2	)		(18.1	)
Profit (losses) from sale of investments		2.1			—			46.3			34.5			—			—
Other (expenses) income, net		(0.1	)		0.3			(0.5	)		0.5			—			—

Operating profit		357.3			58.4			61.8			181.7			334.7			99.1
Financial (expense) income, net⁽³⁾		(58.3	)		(97.7	)		(179.8	)		(137.0	)		(197.1	)		(58.3	)
Share of the profit and loss obtained from associates and joint ventures under the equity method of accounting		52.9			24.4			(590.1	)		0.5			(3.7	)		(1.1	)
Profit before income tax		351.9			(14.9	)		(708.1	)		45.1			133.9			39.6
Income tax		(104.3	)		(78.7	)		152.2			(46.3	)		(113.3	)		(33.5	)
Profit from continuing operations		247.6			(93.5	)		(556.0	)		(1.2	)		20.6			6.1
Profit from discontinued operations		113.7			149.1			104.4			210.4			36.8			10.9

Net profit		361.2			55.6			(451.6	)		209.2			57.4			17.0

Net profit (loss) attributable to controlling interest⁽⁴⁾		299.7			7.1			(509.7	)		148.7			(83.2	)		(24.6	)
Net profit (loss) attributable to non-controlling interest⁽⁴⁾		61.5			48.5			58.1			60.5			140.6			41.6

(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), 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.

(2)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

(3)	Reflects exchange losses due to the depreciation of the sol against the U.S. dollar and our U.S. dollar denominated liabilities. For more information, see note 28 to our audited annual consolidated financial statements included in this annual report.

(4)

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


	As of December 31,
	2014		2015		2016⁽¹⁾		2017		2018		2018
Balance Sheet Data:			(in millions of S/.)								(in millions of US$)⁽²⁾
Total current assets		4,635.7		5,200.4		4,328.7		3,891.9		2,985.5		883.5
Cash and cash equivalents		818.4		554.0		607.0		626.2		801.1		237.1
Accounts receivables		1,768.6		2,143.3		1,862.5		2,381.9		1,631.2		482.7
Outstanding work in progress		1,152.8		1,278.2		680.9		61.8		28.5		8.4
Inventories⁽³⁾		833.6		1,159.2		1,104.3		770.7		514.0		152.1
Total non-current assets		3,094.2		3,699.6		4,718.0		4,775.7		4,197.1		1,242.1
Long-term accounts receivables⁽⁴⁾		624.5		687.8		1,754.4		2,180.8		2,133.5		631.4
Investments in associates and joint ventures		229.6		637.0		389.8		268.7		257.8		76.3
Property, plant and equipment		1,148.7		1,111.8		1,113.6		865.7		470.6		139.3
Intangible assets⁽⁵⁾		780.8		878.3		960.3		940.1		847.1		250.7
Total current liabilities		3,796.1		4,092.3		4,537.0		3,549.2		2,665.8		788.9
Short-term borrowings		1,425.5		1,265.1		2,007.1		1,093.4		865.6		256.2
Accounts payable^{(6) (7)}		2,151.4		2,779.6		2,453.1		2,356.7		1,768.1		523.3
Total non-current liabilities		753.8		1,725.8		2,019.9		2,529.4		2,048.9		606.3
Long-term borrowings		624.8		1,310.3		1,341.0		1,544.2		1,274.1		377.1
Capital stock		660.1		660.1		660.1		660.1		729.4		215.9
Shareholders’ equity		2,691.7		2,558.8		1,980.4		2,123.3		2,088.4		618.0
Non-controlling interest		488.7		523.1		509.3		465.7		401.6		118.8

(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/.3.379 to US$1.00 as of December 31, 2018.

(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/.684.3 million, S/.607.1 million, S/.810.8 million, S/.726.3 million and S/.496.5 million in advance payments made by our clients as of December 31, 2014, 2015, 2016, 2017 and 2018, respectively, in connection with our E&C segment and the operation and maintenance of infrastructure assets contracts. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—General—Engineering and Construction” and note 22 to our audited annual consolidated financial statements included in this annual report.

(7)

Includes our 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, which was fully repaid as of December 31, 2018. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and “—Liquidity and Capital Resources—Indebtedness.”


	As of and for the year ended December 31,
	2014			2015			2016⁽¹⁾			2017 Restated			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Other Data:
EBITDA⁽³⁾ (in millions of S/. or US$)		783.9			538.4			(240.5	)		572.3			557.3			164.9
Gross margin		13.3	%		6.0	%		7.6	%		12.5	%		17.3	%		17.3	%
EBITDA margin⁽⁴⁾		16.13	%		9.7	%		(5.8	)%		14.3	%		14.3	%		14.3	%
Outstanding shares (thousands)		660,054			660,054			660,054			660,054			729,434			215,873
Profit per share (in S/.or US$)		0.55			0.08			(0.68	)		0.31			0.08			0.02
Profit attributable to controlling interest per share (in S/.or US$)		0.45			0.01			(0.77	)		0.23			(0.13	)		(0.04	)
Dividend per share (in S/.or US$)⁽⁵⁾		0.16			0.05			—			—			—			—
Net debt⁽⁶⁾/ EBITDA ratio		1.1	x		3.5	x		(11.4	)x		3.5	x		2.4	x		2.4	x
Backlog (in millions of US$) (Unaudited)⁽⁷⁾		3,765.4			3,918.4			3,011.6			2,388.4			1,257.2			1,257.2
Backlog/revenues ratio (Unaudited)⁽⁷⁾		1.6	x		1.9	x		1.8	x		1.3	x		1.1	x		1.1	x

(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 consolidated financial statements included in this annual report.

(2)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

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

(4)	Reflects EBITDA as a percentage of revenues.

(5)	Payment of dividends for the year’s profit.

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

(7)

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

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

1. Engineering & Construction


	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Income Statement Data:
Revenues		3,718.0			4,352.7			2,936.8			2,331.9			1,960.9			580.3
Cost of sales		(3,354.1	)		(4,244.4	)		(2,876.6	)		(2,155.4	)		(1,898.8	)		(561.9	)

Gross profit		363.8			108.3			60.2			176.5			62.1			18.4
Administrative expenses		(219.7	)		(243.6	)		(212.0	)		(188.2	)		(136.1	)		(40.3	)
Other income and (expenses), net		(12.5	)		6.4			(14.2	)		(46.5	)		(13.5	)		(4.0	)
Other (losses) gains, net		—			(0.2	)		—			—			—			—

Operating profit		131.7			(129.2	)		(166.1	)		(58.1	)		(87.5	)		(25.9	)
Financial (expense) income, net		(44.8	)		(96.8	)		(50.8	)		(38.2	)		(67.7	)		(20.0	)
Share of the profit or loss in associates under the equity method of accounting		48.2			15.0			16.5			31.0			11.4			3.4

Profit (loss) before income tax		131.1			(210.9	)		(200.4	)		(65.3	)		(143.9	)		(42.6	)


	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Income tax		(24.4	)		(15.2	)		19.7			0.9			14.4			4.3
Profit from discontinued operations		82.9			104.2			87.2			76.8			44.1			13.1

Net profit (loss)		193.6			(121.8	)		(93.4	)		12.4			(85.4	)		(25.3	)
Net profit attributable to controlling interest		164.1			(131.2	)		(87.2	)		12.1			(86.9	)		(25.7	)
Net profit (loss) attributable to non-controlling interest		29.5			9.3			(5.7	)		0.3			1.5			0.43

	As of December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Balance Sheet Data:
Total current assets		2,676.6			3,157.1			1,910.9			1,949.0			1,408.0			416.7
Cash and cash equivalents		285.4			172.1			93.5			184.4			177.5			52.5
Accounts receivables		1,092.9			1,526.4			1,060.5			1,640.0			1,173.9			347.4
Outstanding work in progress		1,145.4			1,260.5			648.9			55.8			25.0			7.4
Other current assets		152.9			198.1			108.0			68.9			31.7			9.4
Total non-current assets		1,250.0			1,118.4			1,328.0			1,382.3			993.2			293.9
Long-term accounts receivables		6.2			0.5			214.4			392.5			346.1			102.4
Property, plant and equipment		651.2			606.2			592.2			509.7			205.7			60.9
Other non-current assets		592.6			511.7			521.4			480.1			441.4			130.6
Total current liabilities		2,500.2			2,846.3			2,101.5			2,189.6			1,585.2			469.1
Short-term borrowings		629.6			653.0			582.3			592.0			232.4			68.8
Accounts payable⁽²⁾		1,701.9			2,174.0			1,482.1			1,561.6			1,346.4			398.5
Total non-current liabilities		445.2			629.2			471.8			546.3			413.0			122.2
Long-term borrowings		144.1			376.0			246.3			127.8			9.3			2.8
Other long-term liabilities		301.1			253.3			225.5			418.6			403.7			119.5
Shareholders’ equity		817.8			639.2			551.7			487.9			331.2			98.0
Non-controlling interest		163.4			160.8			113.9			107.5			71.8			21.2

2. Infrastructure

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Income Statement Data:
Revenues		1,613.5			1,353.1			1,174.8			1,447.9			1,883.3			557.3
Cost of sales		(1,351.6	)		(1,107.2	)		(963.4	)		(1,187.8	)		(1,532.6	)		453.6
Gross profit		261.9			245.9			211.4			260.2			350.6			103.8
Administrative expenses		(102.8	)		(67.0	)		(66.1	)		(63.9	)		(68.8	)		(20.4	)
Other income and (expenses), net		(1.9	)		2.0			1.3			5.8			1.4			0.4
Other (losses) gains, net		(0.1	)		(0.1	)		(0.5	)		0.4			—			—
Operating profit		157.1			180.8			146.1			202.5			283.0			83.8
Financial (expense) income, net		(35.2	)		(22.9	)		(9.6	)		(19.5	)		(20.1	)		(5.9	)
Share of the profit or loss in associates under the equity method of accounting		—			0.9			1.6			1.6			1.6			0.5
Profit before income tax		121.9			158.9			138.1			184.5			264.6			78.3
Income tax		(55.8	)		(46.5	)		(39.9	)		(55.2	)		(80.5	)		(23.9	)
Net profit		66.1			112.4			98.3			129.3			184.0			54.5
Net profit attributable to controlling interest		59.5			93.0			74.4			103.8			152.3			45.1
Net profit (loss) attributable to non-controlling interest		6.5			19.4			23.8			25.5			31.8			9.4



	As of December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Balance Sheet Data:
Total current assets		614.1			639.3			806.5			923.3			969.1			286.8
Cash and cash equivalents		173.4			240.3			303.9			331.1			401.2			118.7
Accounts receivables		378.8			331.9			409.2			535.0			509.2			150.7
Outstanding work in progress		16.4			17.7			32.1			—			—			—
Other current assets		45.6			49.5			61.3			57.2			58.7			17.4
Total non-current assets		1,297.9			1,514.4			1,801.6			2,098.4			2,111.3			624.8
Long-term accounts receivables⁽³⁾		602.3			670.7			930.2			1,164.0			1,214.2			359.3
Property, plant and equipment		236.3			225.4			200.2			190.4			187.7			55.6
Other non-current assets		412.8			536.1			623.5			743.9			709.5			210.0
Total current liabilities		1,180.4			458.4			407.2			580.2			737.2			218.2
Short-term borrowings		588.8			197.2			85.1			86.2			290.6			86.0
Accounts payable		568.3			241.3			261.5			486.2			426.9			126.3
Total non-current liabilities		154.5			1,010.3			1,444.7			1,585.9			1,368.3			405.0
Long-term borrowings		103.3			842.5			1,004.6			1,014.4			985.6			291.7
Other long-term liabilities		51.1			167.8			440.1			571.4			382.7			113.3
Shareholders’ equity		497.1			586.2			643.3			729.5			828.3			245.1
Non-controlling interest		80.0			98.8			112.9			126.1			146.6			43.4

3. Real Estate

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Income Statement Data:
Revenues		224.6			215.8			411.5			647.5			630.1			186.5
Cost of sales		(162.1	)		(164.0	)		(275.0	)		(500.2	)		(342.2	)		(101.3	)

Gross profit		62.4			51.8			136.5			147.4			288.0			85.2
Administrative expenses		(21.1	)		(20.5	)		(28.4	)		(21.2	)		(50.7	)		(15.0	)
Other income and (expenses), net		(0.8	)		1.8			0.8			(3.7	)		(2.0	)		(0.6	)
Other (losses) gains, net		—			—			—			49.0			—			—
Profit from the sale of investments		—			—			—			—			—			—

Operating profit		40.5			33.0			108.9			171.5			235.3			69.6
Financial (expense) income, net		(14.7	)		(10.9	)		(11.6	)		(18.3	)		(8.3	)		(2.5	)
Share of the profit or loss in associates under the equity method of accounting		12.2			14.9			6.8			0.5			—			—

Profit before income tax		38.0			37.0			104.2			153.6			226.9			67.2
Income tax		(11.5	)		(7.6	)		(27.1	)		(35.9	)		(69.2	)		(20.5	)

Net profit		26.5			29.3			77.2			117.7			157.8			46.7
Net profit attributable to controlling interest⁽⁴⁾		9.5			12.4			22.1			48.6			28.9			8.6
Net profit (loss) attributable to non-controlling interest⁽⁴⁾		17.0			17.0			55.1			69.1			128.9			38.1


	As of December 31,
	2014		2015		2016		2017		2018		2018
	(in millions of S/.)										(in millions of US$)⁽¹⁾
Balance Sheet Data:
Total current assets		760.8		1,109.3		1,117.1		884.6		721.0		213.4
Cash and cash equivalents		54.3		74.5		58.9		85.2		93.3		27.6
Accounts receivables		75.6		114.4		111.2		155.3		179.3		53.1
Outstanding work in progress		631.0		920.4		—		—		—		—
Other current assets⁽⁵⁾		117.4		91.7		947.0		644.1		448.4		132.7
Total non-current assets		9.7		14.7		113.6		78.5		98.5		29.2
Long-term accounts receivables⁽³⁾		7.3		11.3		17.9		9.8		36.3		10.7
Property, plant and equipment		36.2		34.7		13.0		11.6		9.2		2.7
Other non-current assets		64.1		30.9		82.7		57.0		53.0		15.7
Total current liabilities		266.6		555.1		515.8		352.1		310.1		91.8
Short-term borrowings		144.3		224.4		206.5		162.0		133.1		39.4
Accounts payable		120.1		330.7		291.2		144.8		172.5		51.1
Total non-current liabilities		138.9		159.6		104.2		44.1		37.2		11.0
Long-term borrowings		16.4		27.6		16.5		12.0		10.7		3.2
Other long-term liabilities		122.5		132.0		87.6		32.1		26.5		7.8
Shareholders’ equity		157.3		158.6		234.4		217.3		193.5		57.3
Non-controlling interest		315.4		327.6		376.3		349.6		278.7		82.5

(1)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

(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 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 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.

Non-GAAP Financial Measure and Reconciliation

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,
	2014			2015			2016			2017 Restated			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Net profit (loss)		361.2			55.6			(451.6	)		209.2			57.4			17.0
Financial expense		381.8			518.6			942.5			473.9			630.1			186.5
Financial income		(323.6	)		(420.9	)		(762.7	)		(336.8	)		(433.0	)		(128.2	)
Income tax		104.6			78.7			(152.2	)		46.3			113.3			33.5
Depreciation and amortization		260.0			306.4			183.4			179.7			189.5			56.1

EBITDA		783.9			538.4			(240.5	)		572.3			557.3			164.9

(1)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

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


	For the year ended December 31,
	2014			2015			2016			2017 Restated			2018			2018
	(in millions of S/.)															(in millions of US$)⁽¹⁾
Engineering and construction		407.0			158.3			19.3			120.0			19.2			5.69
Infrastructure		257.2			272.2			237.8			300.9			411.5			121.8
Real estate		56.5			52.8			121.4			177.3			241.0			71.3
Parent company operations		258.2			(34.1	)		(1,025.2	)		125.9			(27.8	)		8.2
Intercompany eliminations		(245.4	)		16.2			406.2			(151.8	)		(86.6	)		(25.6	)

EBITDA		783.9			538.4			(240.5	)		572.3			557.3			164.9

(1) Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

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

1. Engineering & Construction

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit (loss)		193.6			(121.8	)		(93.5	)		12.4			(85.4	)		(25.3	)
Financial expense		201.2			375.8			555.8			212.3			284.7			84.3
Financial income		(156.4	)		(279.0	)		(505.0	)		(174.1	)		(217.0	)		(64.2	)
Income tax		24.4			15.2			(19.7	)		(0.9	)		(14.4	)		(4.3	)
Depreciation and amortization		144.2			168.1			81.6			70.3			51.3			15.2

EBITDA		407.0			158.3			19.3			120.0			19.2			5.7

2. Infrastructure

2.1 Full Segment

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit		92.6			112.4			98.3			129.3			184.0			54.5
Financial expense		101.6			78.2			101.7			62.6			143.1			42.4
Financial income		(71.2	)		(55.3	)		(92.0	)		(43.1	)		(123.1	)		(36.4	)
Income tax		56.6			46.5			39.9			55.2			80.5			23.8
Depreciation and amortization		77.6			90.5			90.0			96.9			126.8			37.5

EBITDA		257.2			272.3			237.8			300.9			411.5			121.8



2.2(a) All Toll Roads

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit		43.0			53.5			44.9			55.0			29.2			8.6
Financial expense		19.0			10.8			14.9			7.7			28.6			8.5
Financial income		(9.5	)		(14.8	)		(9.6	)		(3.5	)		(7.2	)		(2.1	)
Income tax		16.2			18.8			15.5			20.9			8.8			2.6
Depreciation and amortization		11.4			10.9			11.1			11.0			42.9			12.7

EBITDA		80.1			79.2			76.8			91.1			102.3			30.3

2.2(b) Norvial

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit		31.1			40.9			47.3			49.4			17.2			5.1
Financial expense		9.7			4.1			4.9			3.4			25.0			7.4
Financial income		(0.4	)		(0.4	)		(1.6	)		(0.9	)		(1.0	)		(0.3	)
Income tax		10.9			13.6			16.3			18.7			3.9			1.1
Depreciation and amortization		11.0			10.8			10.9			10.8			42.7			12.6

EBITDA		62.3			68.9			77.7			81.4			87.8			26.0

2.3 Mass Transit

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit (loss)		12.1			18.8			23.9			19.5			87.1			25.8
Financial expense		39.8			7.9			20.5			18.4			72.5			21.4
Financial income		(35.3	)		(4.9	)		(25.8	)		(14.0	)		(87.0	)		(25.8	)
Income tax		10.8			8.1			10.9			9.5			38.0			11.3
Depreciation and amortization		0.9			0.1			0.1			0.1			0.2			0.1

EBITDA		28.3			30.0			29.6			33.5			110.8			32.8

2.4 Energy

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit		62.7			20.2			12.0			38.1			65.0			19.2
Financial expense		30.6			50.3			61.7			34.8			37.9			11.2
Financial income		(19.2	)		(30.5	)		(52.0	)		(23.3	)		(26.9	)		(7.9	)
Income tax		29.8			7.7			5.3			13.2			26.3			7.8
Depreciation and amortization		58.1			74.2			72.5			79.4			76.6			22.7

EBITDA		162.0			121.8			99.5			142.1			178.9			52.9

2.5 Concar


	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit (loss)		(26.5	)		18.5			14.0			16.9			2.4			0.7
Financial expense		12.0			9.1			4.5			1.7			4.2			1.2
Financial income		(7.2	)		(5.0	)		(4.6	)		(2.3	)		(1.4	)		(0.4	)
Income tax		(0.8	)		11.4			6.7			11.4			6.9			2.0
Depreciation and amortization		7.1			5.3			6.4			6.4			7.1			2.1

EBITDA		(15.3	)		39.3			27.0			34.1			19.2			5.7

3. Real Estate

	For the year ended December 31,
	2014			2015			2016			2017			2018			2018
	(in millions of S/.)															(in millions of US$)⁽²⁾
Net profit		26.5			29.3			77.2			117.7			157.8			46.7
Financial expense		30.4			47.7			65.1			36.0			25.2			7.5
Financial income		(15.6	)		(36.8	)		(53.5	)		(17.7	)		(16.9	)		(5.0	)
Income tax		11.5			7.6			27.1			35.9			69.2			20.5
Depreciation and amortization		3.8			4.9			5.6			5.3			5.7			1.7

EBITDA		56.5			52.8			121.4			177.3			241.0			71.3

(1)

For the effects on our results of operations for 2016 resulting from the termination of the GSP gas pipeline concession, see “Item. S.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/.3.379 to US$1.00 as of December 31, 2018.

(3)	Our E&C segment EBITDA includes S/.48.2 million, S/.15.0 million,S/.16.5 million, S/.31.0 million and S/.11.4 in 2014, 2015, 2016, 2017 and 2018, respectively, which represents GyM’s 39.0% equity interest in Viva GyM’s net profit.

B.	Capitalization and Indebtedness

Not applicable.

C.	Reasons for the Offer and Use of Proceeds

Not applicable.

D.	Risk Factors

Risks Related to Recent Developments

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 senior management have been the subject of congressional and criminal investigations relating to corruption allegations. These investigations are ongoing.

(sometimes in apparent contradiction with prior statements) that certain of our former directors and senior management were aware that Odebrecht had made corrupt payments to government officials in connection with certain projects in which we participated. We have undertaken an internal investigation and we continue to review and assess the past practices of our company, to determine whether there has been any wrongdoing on the part of our former or current directors, officers and employees.

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 operations.

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 our company and other construction companies in Peru, which have included certain of our company’s former directors and senior management.

Peruvian prosecutors have included José Graña Miró Quesada, a shareholder and the former Chairman of our company, in an investigation for the crime of collusion, and Hernando Graña Acuña, a shareholder, a former board member of our company and 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 our 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 our company and our construction subsidiary, GyM, as criminal defendants in connection with the project. In response, the Peruvian First National Preparatory Investigation Court (Primer Juzgado de Investigación Preparatoria Nacional) notified us of its decision to formally include our company and GyM in its criminal investigation. We appealed the court’s decision and, in June 2018, the First Court of Appeals of the Superior Court of Lima revoked the judicial order that indicted our company and GyM, among other corporate defendants, in the criminal investigation on charges of collusion and other crimes and rejected the petition, without prejudice, made by the prosecutor to incorporate both companies in the aforementioned process. Nevertheless, we cannot assure you that the criminal prosecutor will not file a new motion to charge our company and/or GyM or that our position will ultimately prevail if such motion is filed.

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

Recent news reports have indicated that Odebrecht has executed a settlement and cooperation agreement with the Peruvian government regarding several infrastructure projects in the country, including certain projects in which we have participated. According to news reports, under the agreement Odebrecht has agreed to pay compensation to the Peruvian government over the course of several years and to cooperate with, and provide evidence to, prosecutors in connection with ongoing investigations by this Peruvian government. According to news reports, former senior officers of Odebrecht’s affiliate in Peru have indicated to Peruvian prospectors (sometimes in apparent contradiction with prior statements) that certain of our former directors and senior management were aware that Odebrecht had made corrupt payments to government officials in connection with certain projects in which we participated. We have undertaken an internal investigation and we continue to review and assess the past practices of our company, to determine whether there has been any wrongdoing on the part of our former or current directors, officers and employees. In addition, a former secretary of the IIRSA South project recently asserted that a former executive of our company was present at a meeting in 2011 in which the need to reimburse illicit payments previously made by Odebrecht was mentioned. We continue to review and assess the past practices of our company to determine whether there has been any wrongdoing on the part of our former or current officers and employees.

We cannot assure you that other of our former or current directors and senior management will not be included in the foregoing proceedings as well, or that our company will not be included in other investigations or proceedings as criminal defendants or civilly-responsible third parties.

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 or admissions of wrongdoing in such investigations, could further damage our reputation and have a material adverse impact on our ability to compete for business. 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.

In May 2018, Peruvian Supreme Decree No. 096-2018-EF set forth guidelines to determine the value of assets to be put in trust to guarantee eventual compensation to the Peruvian government that is required for companies that have been partners of companies that have been, or whose officers or representatives have been, convicted of, or have admitted to, corruption, money-laundering or similar crimes, which includes our company and our subsidiary GyM. Following discussions with the Peruvian government during the fourth quarter of 2018, we established a trust in favor of the Peruvian government, which we funded in the amount of S/.79.1 million (US$23.4 million) by assigning shares of our subsidiary GMI to such trust. We cannot assure you that the Peruvian government will not claim the assets set forth in this trust or require that our company place additional assets in trust, nor can we assure you that these assets will fully satisfy any eventual obligations we may have to the Peruvian government. Management has estimated that the value of the contingency for the matters described above should not exceed US$45.8 million (S/.148.4 million).

We continue to evaluate alternatives to resolving ongoing investigations against our company and our subsidiary GyM. However, we cannot assure you that these investigations will be resolved in a manner that is favorable to our company.

INDECOPI and Peruvian prosecutors have initiated investigations in response to news reports 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, in December 2018, GyM was formally included as a civilly-responsible third party, along with eleven other construction companies in the criminal investigation conducted by a Peruvian public prosecutor based on facts similar to those under investigation by INDECOPI. In addition, a former employee of GyM has been included in a criminal investigation for collusion and other alleged crimes.

We cannot assure you that any of our company’s 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.

We continue to review and assess the past practices of our company to determine whether there has been any wrongdoing on the part of our former or current directors, officers and employees in relation to this matter. In addition, we continue to evaluate alternatives to resolve the ongoing investigation against our company. However, we cannot assure you that this investigation will be resolved in a manner that is favorable to our company.

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

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

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

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

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

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

Although the concession contract provides that payment must be made within one year of termination, the Peruvian Ministry of Energy and Mines has not made payment or, to our knowledge, initiated the payment process or the auction process for a new concessionaire. As a result, we expect to assert our rights against the Peruvian government by filing arbitration proceedings in May 2019, after the six-month period mandated by the concession contract for the parties to discuss the matter. This will place us in an adversarial position with the Peruvian government. We cannot assure you that this or any other claims that we pursue in connection with the termination of the gas pipeline concession will ultimately prevail in a timely manner, or at all.

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. In January 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.

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 continued to record S/.218.3 million in connection with our investment in GSP as of December 31, 2016, 2017 and 2018. 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 one of our debt instruments for which we have obtained waivers, and historically we have been in default on other of our debt instruments, and we cannot assure you that we will be able to obtain additional waivers in the event of the existing default or future defaults

We are currently in default under one of our debt instruments and we cannot assure you that we will be able to obtain a waiver. In addition, in the past we were in default under certain of our debt instruments and procured waivers from our creditors under such instruments. We cannot assure you that we will not breach the covenants under these or other of our debt instruments in the future and, in such event, that we would be able to obtain the required waivers from our creditors. Failure to successfully obtain waivers could force us to precipitate the sale of assets, including on unfavorable terms, to repay these debt instruments. Moreover, if we are not able to renegotiate the terms of 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, in order to raise funds to make payments in respect of debt related to the termination of the GSP gas pipeline concession. In accordance with this plan, we have undertaken several divestitures. However, we cannot assure you that we will be able to continue to sell assets on favorable terms or at all. If we are not able to sell assets on a timely basis, our ability to address our liquidity needs 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.

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

A securities class action civil lawsuit has been filed against our 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.

be unavailable for a certain period of time, which may make it harder to effect such sales.

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 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.

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. 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.

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

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

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

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

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

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

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

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

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

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

Our business requires significant purchases of energy, raw materials and components, including, among others, large quantities of fuel, cement and steel, as well as purchases or leases of equipment. Certain inputs used in our operations are susceptible to significant fluctuations in prices, over which we may have little control. The prices of some of these inputs are affected to a significant extent by the prices of commodities, such as oil and iron. Global oil prices increased in 2016 and 2017 and they decreased in 2018, and we cannot assure you that oil prices will not increase in the future (although increased oil prices would benefit revenues in our Energy line of business). Substantial increases in the prices of such commodities generally result in increases in our suppliers’ operating costs and, consequently, lead to increases in the prices they charge for their products. Moreover, we do not have long-term contracts for the supply of our key inputs, and, as 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 for delayed payments, additional costs that exceed the contract price or for amounts not included in the original contract price, including change orders. These types of claims can occur due to matters such as owner-caused delays or changes from the initial project scope, and, occasionally, they can be the subject of lengthy proceedings. When these types of events occur and unresolved claims are pending, we may invest significant working capital in projects to cover cost overruns pending the resolution of the relevant claims. Moreover, we have recently encountered difficulties collecting on claims, even following successful arbitration awards, particularly against the government. A failure to promptly recover on these types of claims and change orders could have a material adverse effect on our financial performance.

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

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

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

Although we have a thorough partner selection process, consortia and other strategic alliances that we enter into as part of our business, including arrangements where operating control may be shared with unaffiliated third parties, may involve risks not otherwise present when we operate independently, including: sharing approval rights over major decisions; responsibility for our partners’ unpaid obligations or liabilities; ensuring ethical and compliance behavior; and inconsistencies in our and our partners’ economic or business interests or goals. Any disputes between us and our partners may result in delays, litigation or operational impasses. We may also incur liabilities as a result of action taken by our partners. In addition, if we participate in consortia or other strategic alliances where we are not the controlling party, we may have limited control over operational, financial and other management decisions and actions and the success of the consortium or other strategic alliance will depend largely on the performance of our partners. These risks could adversely affect our ability to transact the business 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 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.

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

We or one of our subsidiaries would face debarment from participating in government bidding processes for one to three years if, including potentially as a result of the ongoing investigations against our company and GyM, we or they were found to have violated certain provisions of the Peruvian State Contracting Law (Ley de Contrataciones del Estado). We and our subsidiaries are required to comply with a large number of contractual obligations with the government in our business, and we cannot assure you that we will be in full compliance at all times. Moreover, the imposition of a debarment on a subsidiary could affect the ability of our company or our other subsidiaries (not just the subsidiary that was debarred), to participate in government bids under the Peruvian State Contracting Law. Approximately 11.6% of our 2018 revenues came from public-sector contracts in Peru. As of December 31, 2018, 6.5% of our backlog is comprised of contracts with the public sector. As a result, if we are debarred from participating in government bidding processes, our business and financial performance would be materially and affected.

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

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

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

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

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

Growing concerns about climate change could result in the imposition of additional or more stringent environmental requirements or regulations. For example, there are ongoing international efforts to address greenhouse emissions, such as the Kyoto Protocol or the more recent Paris Agreement, which are in various stages of negotiation and implementation. If more stringent environmental regulation is adopted in the countries where we operate, we may be obliged to incur higher expenditures than anticipated, adversely affecting our financial performance. In addition, future remediation requirements in the event that we are found responsible for environmental damage may be substantial and could impact our financial condition. Moreover, more stringent environmental regulation could increase the costs of projects for our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the demand for our services. Accordingly, new environmental regulation could have a material adverse effect on our business and financial performance.

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

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

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

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

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

In accordance with IFRS, we measure and recognize a large portion of our revenues under the percentage-of-completion accounting methodology. 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.

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

Our future success depends in part on our ability to select and purchase high quality mechanical instruments and equipment at attractive prices. While we have historically been able to do so, such instruments and equipment may become subject to higher import taxes than currently apply. We cannot assure you that there will not be further increases in import taxes, changes in laws related to imports or the imposition of quotas by countries from which we import mechanical instruments and equipment, any of which could have a material adverse effect on our business. Furthermore, our ability to pay our instrument or equipment suppliers could be affected by our failure to obtain, on a timely basis, authorization from the Ministry of Justice pursuant to Law 30,737 to make such payments. Such restrictions may limit our ability to purchase necessary instruments and equipment.

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

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

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 30,737 in our ability to transfer funds abroad. Section II of Law 30,737, promulgated in March 2018, imposes certain restrictions on companies, such as our company, that have been partners of groups that have been, or whose officers or representatives have been, convicted of, or have admitted to, corruption, money-laundering or similar crimes. Among other things, the law requires that these companies submit money transfers abroad to the Peruvian Ministry of Justice for pre-approval, and we cannot assure you that any such approvals will be granted in a timely manner or at all.

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

We may not be able to make successful acquisitions

Part of our long-term strategy has been to evaluate strategic acquisition opportunities to expand our operations and geographic footprint, especially in Chile and Colombia. We may not be able to identify appropriate acquisition opportunities, or, if we do, we may overpay for these acquisitions or may not otherwise be able to negotiate terms and conditions that are acceptable to us. We may also face difficulties obtaining financing to pay for acquisitions. Law 30,737 currently requires that payments we make abroad be submitted to the Peruvian Ministry of Justice for pre-approval, and we cannot assure you that any such approvals will be granted in a timely manner or at all. In addition, we may not be able to obtain regulatory approvals, including antitrust approvals, required to consummate acquisitions. Furthermore, even if we are able to successfully consummate an acquisition, we may encounter challenges in integrating the acquired business effectively and profitably into our operations. The integration of an acquisition involves a number of factors that may affect our operations, including diversion of management’s attention, difficulties in retaining personnel and entry into unfamiliar

markets. Acquired businesses may not achieve the levels of productivity anticipated or otherwise perform as expected. Acquisitions may bring us into businesses we have not previously conducted and expose us to additional business risks that are different from those we have traditionally experienced, including new geographic, market, operating and financial risks. Moreover, acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies. Even if such liabilities are assumed by the sellers, we may have difficulties enforcing our rights, contractual or otherwise. We cannot assure you that future acquisitions will meet our strategic objectives.

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.

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 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 our markets slowed significantly during 2016, 2017 and 2018 as a result of market conditions. In the case of Peru, public and private investment slowed significantly during 2016 and 2017, as a result of corruption investigations and political uncertainty. In 2018, Peru experienced a growth rate of 5.20% in private and public investment, but we cannot assure you that such growth will continue in subsequent years.

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 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 fluctuated significantly in recent years, with the average Brent crude prices declining from US$99.02 per barrel in 2014 to US$54.20 per barrel in 2017. In 2018, average Brent crude prices increased to US$70.99 per barrel, but during the first quarter of 2019, decreased to US$63.23 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.

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.

Our contract with Petroperú S.A. (“Petroperú”) for fuel storage at the South terminal is currently scheduled to expire in August 2019. Moreover, 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, with respect to which we recently received a letter from the Municipality of Lima in which the Municipality communicated its desire to cease discussions to relaunch the project.

Additional Risks Related to our Real Estate Business

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

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

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, 2017 and 2018, approximately 95%, 88% and 92%, 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.

Risks Related to Peru

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

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

Moreover, investigations against former or current government officials relating to bribery payments made by Odebrecht have, and may continue to, result in political uncertainty in Peru. 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.

Criminal investigations have been initiated against former presidents Alejandro Toledo, Ollanta Humala, Alan García and Pedro Pablo Kuczynski. On April 17, 2019, former President Alan García committed suicide as prosecutors were preparing to detain him over matters relating to criminal investigations.

Several corruption scandals regarding authorities at municipal, regional and national 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 2018, 32.5% and 55.6% of our revenues were denominated in soles and U.S. dollars, respectively, whereas 63.0% and 23.1% of our costs of sales were denominated in soles and U.S. dollars, respectively. In 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.

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 3.2% in 2014, 4.4% in 2015, 3.2% in 2016, 1.4% in 2017 and 4.8% in 2018, 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, or other criminal activity, including drug trafficking, will not occur, or if there is such a resurgence, it will not disrupt the economy of Peru and our business.

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 Related to Chile, Colombia and other Latin American Countries

We face risks related to our operations outside of Peru

Latin American economic, political and social conditions may adversely affect our business. Our financial performance may be significantly affected not only by general economic, political and social conditions in Peru but also in other markets where we operate or intend to operate, including Chile and Colombia. During 2016, 2017 and 2018, approximately 26.5%, 28.0% and 14.2%, 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.

Risks Related to our ADSs

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

Based on the assessment of our internal control over financial reporting as of December 31, 2018, as required by Section 404 of the U.S. Sarbanes Oxley Act of 2002 (“SOX”), management has concluded that, as of

such date, our internal control over financial reporting was not effective at the reasonable assurance level due to control deficiencies that constituted material weaknesses. These material weaknesses consisted of:

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deficiencies in the operational effectiveness of controls over SOX compliance, including those related to determining the subsidiaries to be included in the scope of SOX testing, the review and formal approval of risk and control matrices, the updating and approval of narratives and flowcharts, as well as the monitoring of detected control failures and the implementation of our internal control system over financing reporting;

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deficiency in formally having an established and documented process for enterprise and fraud risk management, including the implementation of a risk management system that includes a methodology, a process of identification, evaluation and quantification of the risks, a continuous improvement plan and a monitoring and reporting process;

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deficiencies in the design and operational effectiveness of controls over segregation of duties to help ensure that personnel with potential conflicts were not involved in non-compatible activities;

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deficiencies in the design and operational effectiveness of the controls established in the accounting closing process with respect to the: (1) preparation and review of the annual and interim consolidated financial statements, (2) review, approval and supporting documentation of certain accounting entries, (3) segregation of duties between preparation and approval of accounting entries, (4) access control to spreadsheets used for manual accounting records in compliance with IFRS disclosures, (5) disclosure of discontinued operations, and (6) complete, accurate and timely provision of information to the accounting department; and

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deficiencies in the design and operational effectiveness of controls established in the revenue recognition process with respect to the criteria for, and the documentation supporting, the recognition of revenue and the determination of related provisions, including construction contract revenues and contingent revenues.

Certain of these material weaknesses resulted in adjustments to the accounting for revenue and accounts receivable. 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, 2018, 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.

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

As of the date of this annual report, our former chairman and members of his family beneficially own 13.48% 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.

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.

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

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

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 85 years ago by, and named after, engineers Alejandro Graña Garland, Carlos Montero Bernales and Carlos Graña Elizalde. We began primarily as a construction company.

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

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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.

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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.

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

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

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

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In 2011, we 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 December 2018, our company sold its position in CAM to GDF Suez Energie Services Chile Holding SpA and ENGIE Services Perú S.A.

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In 2012, we began operating the Lima Metro.

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

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

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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.

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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.

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

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

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

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

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

B.	Business Overview

Overview

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 2,100 engineers and a skilled work force that share our core corporate values of quality, professionalism, reliability and efficiency. As a company listed on the Lima Stock Exchange since 1997 and the NYSE since 2013, we also 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.

The tables below show our backlog, revenues and EBITDA from 2014 to 2018.

LOGO

During 2018, we generated revenues of S/.3,899.5 million (US$1,154 million), EBITDA of S/.557.3 million (US$164.9 million), and net profit of S/.57.4 million (US$17 million) including net loss attributable to controlling interest of S/.83.2 million (US$24.6 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 2018, and one of the largest publicly-traded engineering and construction company in Latin America as measured by market capitalization as of December 31, 2018. Peru is undergoing a period of development, with over 4.4% average annual real GDP growth between 2009 and 2018 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 example is Norvial, a toll road concession operated within our Infrastructure segment. In addition to managing the concession, we used our E&C segment to design and construct the expansion of the highway and, once constructed, we are now using our Infrastructure segment to operate and maintain the highway. In addition to increasing our levels of consolidated activity, many of these lines of business enable us to achieve more stable cash flows through medium and long-term client service contracts and concessions, which counter in part the cyclicality of the engineering and construction business.

Significant backlog

Our backlog amounted to US$1,257.2 million as of December 31, 2018. We believe that our backlog, which as of December 31, 2018 represented approximately 1.09x of our related 2018 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 64.9% of our backlog as of December 31, 2018 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). In October 2012, we acquired Vial y Vives, an engineering and construction company specializing in the Chilean mining sector which complements our leading E&C practice in the mining sector. In August 2013, we acquired a controlling interest in DSD Construcciones y Montajes, a Chilean engineering and construction company whose main focus is electromechanical works and assemblies in construction projects related to oil refineries, pulp and paper, power plants and mining plants. In December 2014, we acquired a controlling interest in Morelco, an engineering and construction company specialized in the Colombian oil and gas and other energy sectors. We believe that our proven ability to create new businesses, develop businesses organically and acquire and successfully integrate new businesses into our platform is a key competitive advantage to expand our operations in Latin America.

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

Our senior management team has an average tenure within our company of approximately 10 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 2,100 engineers. We also have access to a network of approximately 132,000 manual laborers throughout Peru that can supplement our workforce when required by our construction pipeline. Thanks to our extensive and talented team, we have the capability and scale to undertake large and complex projects in Peru and elsewhere.

We have developed a strong corporate culture based on principles of high quality, professionalism, reliability and efficiency, as well as compliance. 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 2018, we had an accident incidence rate of 0.32, calculated over 200,000 hours worked.

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 one of the most well-known engineering and construction groups in Peru, undertaking a broad range of activities relating to: engineering; civil construction; electromechanic construction and building construction. We provide E&C services for a diverse range of end-markets, focusing on the mining, power, oil and gas, transportation, real estate and other infrastructure sectors. The following chart sets forth our 2018 revenues by end-market.

2018 E&C Revenues by End-Market

LOGO

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

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

Although we primarily undertake engineering and construction projects in Peru, our clients often ask us to undertake the engineering and construction of large and complex projects in other countries, such as Mexico, the Dominican Republic, Bolivia, Panama and Chile. As a result, we have developed extensive experience executing projects throughout Latin America. To further capitalize on our capabilities and expertise, we have expanded our activities into other key markets, such as Chile and Colombia, which have been benefitting from high levels of investment and are aligned with our areas of strategic focus. In 2018, approximately US$160.5 million (S/.542.1 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 (S/.63.19 billion) between 2018 and 2021, according to the Peruvian Ministry of Energy and Mines and the Ministry of Economy and Finance—we have significant expertise with respect to specialized engineering and construction services for the mining sector. As a result, we believe we are one of the leading mining construction companies in Latin America and we leverage this expertise both within our principal markets as well as to selectively undertake complex projects across the region.

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


	As of and for the year ended December 31,
	2016⁽¹⁾			2017			2018			2018
	(in millions of S/., except as indicated)									(in millions of US$)⁽²⁾
Revenues		2,936.8			2,331.9			1,960.9			580.3
Net profit		(93.4	)		12.4			(85.4	)		(25.3	)
Net profit (loss) attributable to controlling		(87.7	)		12.1			(86.9	)		(25.7	)
EBITDA		19.3			120.0			19.2			5.7
EBITDA margin		0.7	%		5.1	%		1.0	%		1.0	%
Backlog (in millions of US$)⁽³⁾		1,157.6			772.5			782.6			782.6
Backlog/revenues ratio⁽³⁾		1.3	x		1.1	x		1.3	x		1.3	x

(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 5.1(e), 19(i),19(ii) and 16 to our audited annual financial statements included in this annual report.

(2)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

(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.

Principal Engineering and Construction Activities

The following chart sets forth our 2018 revenues by E&C activity.

2018 E&C Revenues by Activities

LOGO

Civil Construction

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

Electromechanic Construction

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

Engineering Services

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

Building Construction

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

Other Services

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

Major Projects

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

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

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

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

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

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

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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;

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

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

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

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

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

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in 2000, the Marriott Hotel in Lima;

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

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in 2004, the Ralco hydroelectric power plant in Chile;

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

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in 2005, the San Cristobal concentrator plant in Bolivia;

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

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

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

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

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in 2010, the Bayóvar plant for Vale;

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

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

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

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

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

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

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

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

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

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

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in 2014, construction of a concentrator plant for the Toromocho copper mine, developed by Chinalco Mining;

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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;

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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;

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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;

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

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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;

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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;

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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;

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in 2016, construction of an Open Plaza shopping center in the city of Huancayo, province of Junin;

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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;

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

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in 2017, electromechanical assembly of certain infrastructure in connection with the Cuajone mine improvement project in Peru;

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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;

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

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

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

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

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

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

•

assembly of equipment and installation of pipelines, electricity and instrumentation for the wet area of Toquepala mine’s unit expansion, which is scheduled to be completed in May 2019;

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execution of civil works in the Quellaveco mine for AngloAmerican, which is scheduled to be completed in July 2019;

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execution of complementary works for the auxiliary units of the Talara refinery for Cobra Perú (three contracts), which is scheduled to be completed during the second half of 2020;

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expansion works in the Aceros Arequipa plant for Aceros Arequipa Corporation, which is scheduled to be completed in August 2019; and

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

Clients

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

Project Selection and Bidding

We win new engineering and construction contracts through private and public bidding processes or direct negotiation, from a variety of sources, including potential client requests, proposals from existing or former clients, opportunities sought by our commercial team and from requests by the Peruvian government. Approximately 82.5% of our 2018 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 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.

Contracts

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

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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.

Competition

We generally compete with some of the largest contractors in Peru and the other countries where we operate. Because the E&C sector is highly competitive, the markets served by our business generally require substantial resources and highly-skilled and experienced technical personnel. The principal competitors of our E&C segment include local companies such as Besalco S.A., Cosapi S.A., San Martín Contratistas Generales, ICCGSA, JJC Contratistas Generales S.A., and international companies such as Techint S.A.C., SSK Montajes e Instalaciones S.A.C., Skanska del Perú S.A., Mota-Engil Peru S.A., Salfacorp S.A., OHL, Acciona, Astaldi, Grupo FCC, Ismocol, Termotecnica, Masa, Thiess, 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,
	2016			2017			2018			2018
	(in millions of S/., except as indicated)									(in millions of US$)⁽¹⁾
Revenues		1,174.8			1,447.9			1,883.3			557.3
Net profit		98.3			129.3			184.0			54.5
Net profit attributable to controlling		74.4			103.8			152.3			45.1
EBITDA		237.8			300.9			411.5			121.8
EBITDA margin		20.2	%		20.8	%		21.8	%		21.8	%
Backlog (in millions of US$)⁽²⁾		519.0			544.8			520.8			520.8
Backlog/revenues ratio⁽²⁾		1.5	x		1.2	x		0.9	x		0.9	x

(1)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

(2)

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

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

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

The following table shows selected information about our current concessions and long-term contracts as of December 31, 2018.


Project	Year Granted		Initiated Operations		Expiration		Characteristics		% Owned by Us			Status
Toll Roads:
Norvial⁽¹⁾		2003		2003		2028		183 km		67.0	%		Operating
Survial		2007		2008		2032		750 km		99.9	%		Operating
Canchaque		2006		2010		2025		78 km		99.9	%		Operating
Mass Transit:
Lima Metro		2011		2012		2041		33.1 km		75.0	%		Operating


Project	Year Granted		Initiated Operations		Expiration		Characteristics	% Owned by Us			Status
Water Treatment:
La Chira		2010		June 2016		2037	Avg. treatment capacity of 6.3 m3/sec (expected)		50.0	%		Operating
Energy:
Oil Production⁽²⁾ Block I		1995		1995		2021	Avg. daily production of 727 bbl (2018)		100.0	%		Operating
Block V		1993		1993		2023	Avg. daily production of 107 bbl (2018)		100.0	%		Operating
Block III		2015		2015		2045	Avg. daily production of 712 bbl (2018)		100.0	%		Operating
Block IV		2015		2015		2045	Avg. daily production of 1,898 bbl (2018)		100.0	%		Operating
Gas Processing⁽³⁾		2006		2006		N/A	Avg. daily processing capacity of 44 MMcf (2018)		100.0	%		Operating
North and Central Fuel Terminals		2014		2014		2034	Aggregate storage capacity of 2.2 MMbbl		50.0	%		Operating
South Fuel Terminals		1997		1998		August 2019	Aggregate storage capacity of 1.4 MMbbl		50.0	%		Operating

(1)

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

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

(3)	We own a gas processing plant and have a long-term delivery and gas processing contract with Enel Generación Piura S.A.

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

On November 11, 2013, we entered into a memorandum of understanding with Canada Pension Plan Investment Board (“CPPIB”), to create an alliance regarding a partnership to invest in infrastructure projects in Latin America, mainly Peru, Chile and Colombia. This alliance 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.

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.”

Principal Infrastructure Lines of Business

Toll Roads

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

LOGO

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


	For the year ended December 31,
	2016			2017			2018			2018
	(in millions of S/.)									(in millions of US$)⁽¹⁾
Revenues		264.4			263.8			280.8			83.1
EBITDA		76.8			91.1			102.3			31.5
EBITDA margin		29.0	%		34.5	%		36.4	%		36.4	%

(1)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

The charts below set forth the breakdown of our revenues and EBITDA from our toll road concessions for 2018.

LOGO

Norvial

Under our Norvial concession, we operate and maintain part of the only major highway that connects Lima to the northwest of Peru. This 183-km road, known as Red Vial 5, runs from the cities of Ancón to Pativilca and has three toll stations. The concession was awarded to Norvial in 2003 for a 25-year term. In June 2018, the company transferred economic rights over 48.8% of the share capital of Norvial to Inversiones en Autopistas S.A. by transferring its Class B shares. Our company continues to possess 67% of voting rights of Norvial and an economic interest of 18.2% of Norvial’s share capital. JJC Contratistas Generales S.A. owns the remaining 33.0%.

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 October 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 2016, 2017 and 2018.


	For the year ended December 31,
	2016		2017		2018
Average daily traffic by vehicle equivalents⁽¹⁾		24.140		24.965		26.095
Average toll fee charged for vehicle equivalents (in S/.)		14.3		14.76		15.22

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

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


	For the year ended December 31,
	2016			2017			2018			2018
	(in millions of S/.)									(in millions of US$)⁽¹⁾
Revenues		216.3			149.5			163.1			48.3
Net profit		47.3			49.4			17.2			5.1
EBITDA		77.7			81.4			87.8			26.0
EBITDA margin		35.9	%		54.5	%		53.8	%		53.8	%

(1)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

Survial

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

LOGO

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

Our revenue from this concession consists of an annual fee paid to Survial by the Peruvian Ministry of Transport and Communications in consideration for the operation and maintenance of the road, which fee can vary depending on the amount of maintenance required due to road damages. In 2016, 2017 and 2018 the fee amounted to US$8.1 million (S/.27.2 million), US$28.4 million (S/.92.2 million) and US$8.4 million (S/.28.3 million), respectively. Our revenue in this concession does not depend on traffic volume.

Additional revenues of the concession are generated from the execution of additional works, work we perform as a result of catastrophic events and emergency maintenance. These revenues are billed when approval is received from the grantor and/or the regulator of the work in progress. In 2016, 2017 and 2018, the additional revenues amounted to US$0.6 million (S/.2.2 million), US$0.04 million (S/.0.1 million) and US$15.8 million (S/.53.6 million), respectively.

Canchaque

Under our Canchaque concession, we operate and maintain a 78 km road from the towns of Buenos Aires to Canchaque, in Peru. The road has one toll station. The concession was awarded to Canchaque in 2006 for a 15- year term. We own 99.9% 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 2016, 2017 and 2018, the fee amounted to US$2.5 million (S/.8.4 million), US$5.1 million (S/.16.5 million) and US$7.7 million (S/.26.1 million), respectively. Our revenue in this concession does not depend on traffic volume.

The significant variation in 2018 was due to an additional disbursement by the Ministry of Transport and Communications of US$5.4 million for maintenance.

Additional revenues of the concession are generated from the execution of additional works, work we perform as a result of catastrophic events and emergency maintenance. These revenues are billed when approval is received from the grantor and/or the regulator of the work in progress. In 2016, 2017 and 2018, the additional revenues amounted to US$0.09 million (S/.0.30 million), US$0.32 million (S/.1.0 million) and US$1.7 million (S/.6.0 million), respectively.

Additional Toll Road Projects

We continuously evaluate infrastructure projects and strategically present public-private partnership proposals and participate in bidding processes for road concessions. In 2012 we were awarded, and in 2013 we signed the contract for, a 40-year concession for the 4.6 km Vía Expresa Sur, one of the main roads in Lima, which crosses the city from north to south. The road 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 until June 2019. The concessionaire continues to act as custodian of certain assets of which it had taken possession and continues to maintain certain performance guaranties in connection with the concession. The government and the concessionaire have agreed to meet and coordinate aspects of the project, with the goal of resuming operations. However, with respect to the concession for Via Expresa Sur, we recently received a letter from the Municipality of Lima in which the Municipality communicated its desire to cease discussions to relaunch the project. We cannot assure you that this concession contract will be resumed.

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. Our 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 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 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.

LOGO

As of December 31, 2018, GyM Ferrovías had spent a total of S/.8.3 million (US$2.5 million) in capital expenditures in connection with the Lima Metro.

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

As of April 8, 2019, we operated 44 trains (including four backup trains), which we expect to enable us to travel 4,811,779.65 kilometers per year. The average frequency of the trains is 3 to 6 minutes, depending on the schedule and the fee per kilometer traveled is, for our original 24 trains, S/.81.43, and for our 20 newer trains, S/.53.19.

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 2018.

LOGO

Water Treatment

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

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

Energy

We currently operate three energy businesses within our Infrastructure segment: Exploration and Production; Natural Gas; and Transport and Distribution. We operate and extract oil from four onshore fields (Block I, Block III, Block IV and Block V) located in the provinces of Talara and Paita in northern Peru. We have two long-term hydrocarbon extraction service contracts with Perupetro, the Peruvian entity responsible for the administration and supervision of all exploration and production contracts in Peru, under which we operate two oil producing fields, Blocks I and V. In addition, we have two long-term license contracts with Perupetro, a state-owned oil and gas company, for two other blocks, Block III and IV, which started operations in April 2015; oil production from these blocks is sold to Petroperú. During 2018, the oil production of our four blocks was approximately 3,654 bbl per day. We also own and operate a natural gas processing plant located in northern Peru, which processes and fractions natural gas liquids and delivers dry gas to a gas-fired power generation company under a long-term processing and fractionation agreement. In addition, we are a 50% partner in two consortiums named Consorcio Terminales (CT) and Terminales del Peru (TP) both of which have contract with Petroperú, 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 dispatched 53,656 tonnes of sodium hydrosulfide for international mining companies in 2018.

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


	For the year ended December 31,
	2016			2017			2018			2018
	(in millions of S/.)									(in millions of US$)⁽¹⁾
Revenues		382.2			436.9			560.5			165.9
Net Profit		12.0			38.1			65.0			19.2
EBITDA		99.5			142.1			178.9			52.9
EBITDA margin		26.0	%		32.5	%		31.9	%		31.9	%

(1)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

The pie charts below set forth the breakdown of our revenues and EBITDA from our Energy line of business for 2018.

LOGO

Oil and Gas Production

We operate and extract oil from four mature fields (Blocks I, III, IV and V) located in the provinces of Talara and Paita in northern Peru. Two of these fields, Blocks I and V, are operated under long-term service contracts under which we provide hydrocarbon extraction services to Perupetro. Hydrocarbons extracted from these two blocks belong to Perupetro, which in turn pays us, once a month, a variable fee per barrel of extracted hydrocarbons. This extraction fee is based on a basket of international crude prices and the level of production. The other two fields, Blocks III and IV, are operated under long-term license contracts with Perupetro. The hydrocarbons extracted are owned by our subsidiary GMP, which in turn pays royalties, on a fortnightly basis, to Perupetro, based on

the average prices of three international crude oil prices: Fortis, Suez Blend and Oman Blend crudes. Our activities are focused on proved reserves development and production and are conducted in mature oil fields, which have been producing oil for over 100 years in the case of Block I, 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 2018 was 720 barrels of crude oil. We operate 212 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 2018 was 756 barrels of crude oil. We operate 166 wells using various oil extraction systems and operate a network of production batteries and pipelines to collect, measure and deliver oil in a fiscalization point close to the Talara refinery, which purchases the oil according to a contract based on an average price of three international crude oil prices: Fortis Blend, Suez Blend and Oman crudes, as adjusted by certain factors. The field is located between the provinces of Talara and Paita, department of Piura, in northern Peru, approximately 21 miles from the Talara refinery.

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 2018 was 2,069 barrels of crude oil. We operate 284 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 2018 in this field was 109 barrels of crude oil. We operate 41 wells in this field using various oil extraction systems. The Block V field is located in the province of Los Órganos, department of Piura, Peru, close to the border with Ecuador. Block V has been producing oil since the 1950s.

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

LOGO

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

During 2016, 2017 and 2018, we received an average revenue (for all blocks) of US$38.55, US$49.19 and US$52.38, respectively, per barrel of extracted oil, which was equivalent to approximately 88.52%, 91.84% and 73.72%, 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 6,196 MMcf per day during 2018). In Block I, we provide natural gas to ENEL under a “take or pay” contract (an average of 5,332 MMcf per day during 2018), 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, 2018. 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		722		7,761		2,101
Proved developed non—producing		—		—		—
Proved undeveloped		—		—		—
Total proved reserves		722		7,761		2,101
Block III:
Proved developed producing		2,519		—		2,519
Proved developed non—producing		22		—		22
Proved undeveloped		11,795		—		11,795
Total proved reserves		14,337		—		14,337
Block IV:
Proved developed producing		6,365		12,008		8,499


	Crude Oil (Mbbl)		Natural Gas (MMcf)		Crude Oil Equivalents (MBoe)
Proved developed non—producing		70		71		82
Proved undeveloped		5,787		13,767		8,234
Total proved reserves		12,221		25,845		16,815
Block V:
Proved developed producing		213		—		213
Proved developed non—producing		—		—		—
Proved undeveloped		—		—		—
Total proved reserves		213		—		213
Total:
Proved developed producing		9,820		19,768		13,333
Proved developed non—producing		92		71		105
Proved undeveloped		17,582		13,767		20,029
Total proved reserves		27,494		33,606		33,467

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 2018, which, pursuant to our contractual agreements, resulted in average oil and gas prices of US$69.69 per barrel and US$3.73 MMcf, respectively, that for the purpose of reserve amount estimation were assumed to remain constant.

Proved undeveloped reserves in the fields as of December 31, 2018 were 20,029 MBoe, consisting of 17,582 MBbl of crude oil and 2,447 Mboe (13,767 MMcf) of natural gas. We estimate that during 2018 proved undeveloped reserves increased by 1,329 Mboe of crude oil, approximately 1,663 Mboe of proved undeveloped reserves of crude oil were converted into proved developed reserves, and an additional 817 Mboe of crude oil of probable and possible reserves were converted into proved developed reserves. Capital expenditures made during 2018, for both drilling activities and workovers, to convert undeveloped reserves to proved developed reserves amounted to approximately US$21.4 million (S/.72.3 million).

The principal changes in proved undeveloped reserves during 2018 were:

•

Crude oil reserves: proved undeveloped crude oil reserves decreased 250 Mbbl during 2018, as follows:

•

an increase of 1,189 MBbl due to a drilling campaign in Block IV and a decrease of 194 MBbl due to a revision of type curve in Block III; and

•

a decrease of 1,246 MBbl due to proved undeveloped reserves that were converted into proved developed reserves in Block IV.

•

Associated natural gas reserves increased 4,594 Mboe (25,845 MMcf) during 2018, as follows:

•

recategorized from resources to reserves due to the development of a project to transport gas from Block IV to our gas processing plant, which remains in progress: 12,078 MMcf as proved developed and 13,767 MMcf as proved undeveloped reserves.

For changes in proved developed and undeveloped reserves from December 31, 2017 to December 31, 2018, 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 22 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 25 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 11 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 26 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 34 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 29 years of experience developed at Petroperu, Perez Companc Peru and Argentina, Petrobras Venezuela and Peru, Grupo Synergy E&P Ecuador, and GMP.

Production, Revenues, Prices and Costs:

The following table sets forth information regarding our production, revenues, prices and production costs for 2016, 2017 and 2018.


	For the year ended December 31,
	2016		2017		2018
Production volumes⁽¹⁾:
Crude oil (Mbbl)
Block I		381.3		310.9		262.8
Block III		347.7		267.8		275.8
Block IV		232.7		530.9		755.9
Block V		46.9		3.2		39.9

Total (crude oil Mbbl)		1,008.60		1,145.8		1334.4
Natural gas (MMcf)
Block I		2,025.8		2,979.0		2,228.8
Block III				—		—
Block IV				—		—
Block V				—		—

Total (natural gas MMcf)		2,025.8		2,979.0		2,228.8
Crude oil equivalents (Mboe)		360.1		529.5		396.2

Total Company		1,368.7		1,675.3		1,730.6
Average sales prices⁽²⁾:
Crude oil (US$/bbl)		38.48		49.81		64.72
Natural Gas (US$/Mcf)		1.53		4.07		4.52
Crude oil equivalents (US$/boe)		30.62		41.95		55.64
Costs and expenses⁽²⁾:
Production expenses (US$/boe)		10.08		17.35		18.11
Royalties (US$/boe)		5.4		9.27		17.80
General and administrative expenses (US$/boe)		2.09		2.02		2.37
Depreciation, depletion, amortization and accretion expenses (US$/boe)		12.58		8.99		10.19

(1)	Hydrocarbons extracted from Blocks I and V belong to Perupetro, which in turns pays us a per barrel fee for extracted hydrocarbons. Hydrocarbons extracted from Blocks III and IV belong to GMP, which in turn pays Perupetro a royalty as per the extracted hydrocarbons.

(2)

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, 2018.


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

As of December 31, 2018, we had a total of 703 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 2016, 2017 and 2018 in Blocks I, III, IV and V.


	For the year ended December 31,
	2016		2017		2018
Development Wells
Productive		11		22		33
Dry		—		—		—

Total		11		22		33
Exploratory Wells
Productive		—		1		—
Dry		—		—		1

Total		—		1		1

During 2016, 2017 and 2018 we invested US$5.4 million (S/.18.1 million), US$16.5 million (S/.53.6 million) and US$20.2 (S/.68.4), respectively, in drilling activities. During 2018, we drilled a total of 33 wells in Block IV (all of them are productive wells) and one exploratory well in Block III (dry well).

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, 2018, we estimated that we will be required to close 62 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.

Our gas processing plant has the capacity to process up to 44 MMcf per day. We processed 33.19 MMcf per day during 2016, 30.57 MMcf per day during 2017 and 30.12 MMcf per day during 2018. Approximately 83% 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. Approximately 10% of the volume processed by our gas processing plant depends on the volumes of gas extracted by GMP in Block I and 7% on the gas provided by CNPC, 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; in July 2017 for an additional year until August 2018; and in July 2018 for an additional year until August 2019. The total amount of the additional investment required during the period from 2018-2019, which will be reimbursed, is approximately US$10 million (S/.33.7 million). In November 2018, Petroperú initiated a public bidding for the operation of the South Terminals, in which we expect to participate, that is expected to be awarded in June 2019.

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 2.5 MMbbl in the North and Central Terminals and of 1.6 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 2016, 2017 and 2018, Consorcio Terminales and Terminales del Perú generated revenues of US$74.1 million (S/.249.0 million), US$78.84 million (S/.255.8 million) and US$82.5 (S/.278.9 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.

The South Terminal operation agreement has been extended to August 1, 2019. With respect to the North Terminal operation agreement, the agreement with Consorcio Terminales expired on October 31, 2014, however, GMP and Oiltanking were granted a new operation agreement for the terminal, this time under the ‘Terminales del Perú’ Consortium, which provided for a 20 year extension that will end on November 1, 2034. Additionally, Terminales del Peru was granted with the operation agreement for the terminal del Centro-Callao, for 20 years commencing on September 2, 2014 until September 1, 2034. In executing their operations, both Consorcio Terminales and Terminales del Perú are committed to develop and follow a work program which must include an investment schedule. The work program performed included the installation of protection systems and loading systems, among others, and was secured by a performance bond.

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 2018, this terminal dispatched 23.9 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 dispatched 53,656 tonnes of sodium hydrosulfide for international mining companies in 2018. During 2016, 2017 and 2018 these activities generated revenues in the aggregate of approximately US$6.3 million (S/.21.2 million), US$6.6 million (S/.21.4 million) and US$6.6 million (S/.22.3 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 our company to capitalize on the Peruvian government’s initiatives to increase infrastructure development.

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 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 2,936.30 km of Peruvian roads and highways, including our own highway concessions, in addition to the Lima Metro.

Operation and Maintenance of Infrastructure Assets

Total 2,936.30 KM

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The table below sets forth selected financial information for our operation and maintenance of infrastructure assets activities.


	For the year ended December 31,
	2016			2017			2018			2018
	(in millions of S/.)									(in millions of US$)⁽¹⁾
Revenues		262.7			378.3			452.3			133.9
Net profit (loss)		14.0			16.9			2.4			0.7
EBITDA		27.0			34.1			19.2			5.7
EBITDA margin		10.3	%		9.0	%		4.2	%		4.2	%

(1)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

The below map illustrates the roads in Peru for which we currently provide operation and maintenance services.

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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.

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 2018, 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 1,178,970 m2 of affordable housing (approximately 18,565 units); approximately 390,696 m2 of housing (approximately 1,871 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 328,834 m2 of affordable housing (approximately 2531 units); approximately 27,304 m2 of housing (approximately 229 units). Our Real Estate segment also owns significant land parcels in Lima, comprising approximately 786 hectares as of December 31, 2018, 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,
	2016⁽¹⁾			2017⁽¹⁾			2018⁽¹⁾			2018⁽¹⁾
	(in millions of S/., except as indicated)									(in millions of US$)⁽²⁾
Revenues		411.5			647.5			630.1			186.5
Net profit		77.2			117.7			157.8			46.7
Net profit attributable to controlling		22.1			48.6			28.9			8.6
EBITDA		121.4			177.3			241.00			71.3
EBITDA margin		29.5	%		27.4	%		38.2	%		38.2	%
Backlog (in millions of US$)⁽³⁾		95.9			25.9			57.9			57.9
Backlog/revenues ratio⁽³⁾		0.8	x		0.1	x		0.3	x		0.3	x

(1)	In 2016, 2017 and 2018 we recognized S/.97 million (US$28.9 million), S/.163.1 million (US$50.3 million) and S/.38.4 million (US$11.5 million), respectively, in revenues from land sales.

(2)	Calculated based on an exchange rate of S/.3.379 to US$1.00 as of December 31, 2018.

(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.” See also “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Results of Operations—General—Real Estate.” 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.

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, 2018, 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/.58,800 and S/.310,800. In order for a unit to qualify for the Techo Propio new housing purchase program, its selling price must be less than S/.84,100 for a single family home or less than S/.105,000 for a multi-family dwelling.

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, 2018, we are developing four housing projects, one of which is in the construction stage, with the other three in the process of obtaining the required approvals and permits. 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.

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,
	2016		2017		2018
Number of Units Delivered⁽¹⁾:
Affordable Housing		855		1,353		1,232
Housing		79		65		44

Total		934		1,418		1,276
Number of Units Sold and Not Yet Delivered⁽¹⁾:
Affordable Housing		1,620		1,152		1,810
Housing		97		43		75

Total		1,717		1,195		1,885
Total m2 Delivered:
Affordable Housing		48,460		78,004		70,986
Housing		19,398		20,978		13,752

Total		67,858		98,982		84,738
Total m2 Sold and Not Yet Delivered:
Affordable Housing		55,404		66,878		107,075
Housing		21,825		12,538		15,440

Total		77,229		79,416		122,515
Value of Units Delivered (in millions of S/.):
Affordable Housing		138.0		170		137
Housing		163.0		221		133

Total		301.0		391		270

(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 16 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, 2018, we owned approximately 135,120 hectares, of which 83% is located in Lima and 17% 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 50.45% interest in Almonte, which owned approximately 291.28 hectares as of December 31, 2018 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 purchase agreement with PRINSUR for the sale of 420.9 hectares of land for an aggregate amount of US$92.7 million, US$74.1 million of which has been paid, with the remainder to be paid upon satisfaction of certain conditions precedent.

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 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.

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.

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.

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. We have revised prior backlog data included in this annual report to exclude the presentation of entities that are presented as discontinued operations.

Our consolidated backlog as of December 31, 2018 was US$1,257.2 million. We expect to recognize as revenues 52.7% of our backlog by December 31, 2019, 31.9% by December 31, 2020 and 15.4% thereafter. The following table sets forth our consolidated backlog from December 31, 2014 to December 31, 2018.

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(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 33.8% of our total backlog as of December 31, 2016.

Our backlog slightly increased in 2018, but may decline 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 42.5% of our E&C backlog and 33.8% of our total backlog as of December 31, 2016. During 2017 we also removed US$87.5 million from our backlog related to the Chavimochic project. During 2018, we removed from our presentation of backlog CAM, CAM Servicios and Stracon GyM, which we account for as discontinued operations, and Adexus, which we account for as an investment held for sale. 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 2016, 2017 and 2018 accounting for opening backlog for each year, annual contract bookings and adjustments, cancellations during the year and annual revenues recognized.


	2016			2017			2018
	(in millions of US$)
Opening backlog (end of prior year)		2,405.7			1,677.6			1,244.1
Contract bookings and adjustments during the year		1,225.1			719.9			881.3
Cancellations during the year		(855.0	)
Revenues recognized during the year		(1,098.2	)		(1,153.4	)		(868.2	)
Ending backlog (end of current year)		1,677.6			1,244.1			1,257.2

The chart below sets forth our consolidated backlog breakdown by end-market, geography and client sector as of December 31, 2018.

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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, 2018 was US$782.6 million. We expect to recognize as revenues 66.4% of such backlog by December 31, 2019 and 33.6% of such backlog thereafter. The following table sets forth of our E&C backlog from December 31, 2014 to December 31, 2018.

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The following pie charts set forth our E&C backlog breakdown by end-market, geography, client sector and contract type as of December 31, 2018.

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The table below sets forth our ending E&C backlog for 2016, 2017 and 2018 accounting for opening backlog for each year, annual contract bookings and adjustments, cancellations during the year and annual revenues recognized.


	2016			2017			2018
	(in millions of US$)
Opening backlog (end of prior year)		1,981.6			1,157.6			772.5
Contract bookings and adjustments during the year		890.1			357.7			582.6
Cancellations during the year⁽¹⁾		(855.0	)		—			—
Revenues recognized during the year		(859.0	)		(742.8	)		(572.5	)

Ending backlog (end of current year)		1,157.6			772.5			782.6

(1)

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.

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 2019, we will operate 44 trains including 20 new trains, which in the aggregate will travel 4.8 million kilometers for that year. Our backlog also assumes that for 2019, 2020 and 2021, we will operate 44 trains at full operation, which in the aggregate will travel 4.8 million 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.

Our Infrastructure backlog as of December 31, 2018 was US$520.8 million. We expect to recognize as revenues 34.1% of our backlog by December 31, 2019 and 65.9% of our backlog thereafter. The following chart sets forth the growth of our Infrastructure backlog from December 31, 2014 to December 31, 2018.

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The following pie chart sets forth our Infrastructure backlog breakdown by line of business as of December 31, 2018.

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The table below sets forth our ending Infrastructure backlog for 2016, 2017 and 2018, accounting for opening backlog for each year, annual contract bookings, cancellations during the year and adjustments and annual revenues recognized.


	2016			2017			2018
	(in millions of S/.)
Opening backlog (end of prior year)		385.2			519.0			544.8
Contract bookings and adjustments during the year		302.4			288.6			209.6
Cancellations during the year
Revenues recognized during the year		(168.7	)		(262.8	)		(233.6	)

Ending backlog (end of current year)		519.0			544.8			520.8

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, 2018 was US$57.9 million. We expect to recognize as revenues 90.6% of our backlog by December 31, 2019, and 9.4% thereafter.

The following pie chart sets forth our Real Estate backlog breakdown by type of real estate activities as of December 31, 2018.

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	2016			2017			2018
	(in millions of US$)
Opening backlog (end of prior year)		111.0			95.9			25.9
Contract bookings and adjustments during the year		107.3			129.6			125.7
Cancellations during the year		—			—			—
Revenues recognized during the year		(122.5	)		(199.5	)		(93.7	)

Ending backlog (end of current year)		95.9			25.9			57.9

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. 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.

Quality Assurance

In 2018, our operations were certified according to the following international standards:


		ISO 9001 (QUALITY)	ISO 14001 (ENVIRONMENTAL)	OHSAS 18001 (SECURITY AND SAFETY)	OTHER
Engineering and Construction	GMI	x	x	x
	GyM	x	x	x
	Morelco	x	x	x	x
	VyV - DSD	x	x	x
Infrastructure	GMP	x	x	x
	Ferrovias GyM	x
	Concar	x	x	x
	Viva GyM			x

Engineering and Construction:

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GMI: ISO 14001, ISO 9001 and OHSAS 18001.

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GyM: ISO 9001 in project management control processes; ISO 14001 and OHSAS 18001 in engineering, procurement and construction of electromechanical projects, civil works and buildings.

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Morelco: ISO 14001, ISO 9001 and OHSAS 18001; in addition, ASME ESTAMPES U/S NATIONAL BOARD ESTAMPER.

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Vial y Vives—DSD: ISO 14001, ISO 9001 and OHSAS 18001.

Infrastructure:

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GMP: ISO 14001, ISO 9001 and OHSAS 18001: certified for oil and gas production processes in lots III, IV, I and V; gas processing at the Pariñas plant; reception, storage and dispatch of hydrocarbons-derived products in nine terminals (Pisco, Mollendo, Ilo, Cusco, Juliaca, Eten, Salaverry, Chimbote and Supe).

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Ferrovias GyM: ISO 9001 for the operation and conservation of railway infrastructure and rolling stock of the Transport System - Line 1.

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Concar: ISO 9001, ISO 14001 and OHSAS 18001.

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Viva GyM: OHSAS 18001 for its main office and the Los Parques de Comas project.

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:

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Metro Culture: We conduct workshops that transform trains and train stations into centers of social and cultural education to promote respect and tolerance. In 2018, we carried out 54 artistic presentations and incorporated approximately 27,000 people in health campaigns.

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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 2018, approximately 4,000 road users participated in these workshops.

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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 2018, the program trained approximately 2,000 people.

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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.

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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 2018, we trained approximately 750 participants, 75% of whom joined the Group.

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Cantera Program: This program is designed to attract and train young talents in engineering. In 2018, we recruited 8 young people out of a total of 34 participants.

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 Supreme Decree No.° 082-2019-EF (Texto Unico Ordenado de Ley de Contrataciones del Estado) and its Regulations which, in turn, was approved by Supreme Decree No. 344-2018-EF, which entered into force on January 30th, 2019, governs services and construction agreements entered into with public entities. Article 29 of Supreme Decree No. 344-2018-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 53 of Supreme Decree No. 344-2018-EF as follows:

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public biddings (licitación pública), applicable to goods and works;

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public tenders (concurso público), applicable to services, including consulting services;

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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;

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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;

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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

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direct contracting (contratación directa), applicable to goods and services, in emergency situations arising from catastrophic events, involvement of national security, shortages, among other similar reasons.

As established in Article 70 of Supreme Decree No. 344-2018-EF, the selection processes include the following phases:

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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;

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in the case of the selection of individual consultants: notice; registration of participants; submission of bids; evaluation and qualification of bids; and

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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 9 of Supreme Decree No. 344-2018-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 35 of Supreme Decree No. 344-2018-EF establishes the types of contracts that may be entered into by public entities:

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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;

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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;

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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

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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.

Article 36 of Supreme Decree No. 344-2018-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:

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“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

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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.

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.

Pursuant to the 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, our 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.

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. 29,783) is intended to promote workplace accident prevention and applies to all business sectors. The principal safety rules applicable to construction projects include the following:

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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;

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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;

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companies shall hire an occupational physician and establish an area of occupational medicine;

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companies shall perform periodic audits to verify whether internal safety and health regulations are in accordance with law;

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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;

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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 employees were engaged in high-risk activities);

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companies must show a safety and health plan; an index of frequency; and our company’s performance in safety and health in order to be awarded public and private projects;

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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

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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.

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 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 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.

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 2018-2019 agreement, dated September 11, 2018, 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 2018-2019 agreement, the parties have, among other things, agreed on an increase in the daily wage of such employees.

Supreme Decree No. 009-97-SA, Law No. 26,790 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. 28,611 (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

Supreme Decree No. 015-2012-VIVIENDA (modified by the Supreme Decree No.° 019-2014-VIVIENDA and Supreme Decree No. 0082016-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.

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 modified by Supreme Decree No.° 023-2018-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:

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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

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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.

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:

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.

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.

The management of Public Private Partnership contracts by the three levels of government (central, regional and local) is regulated.

For projects in regulated sectors, the monitoring of Public Private Partnership contracts is subject to the provisions of the Law No. 27,332, 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.

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. 27,785, Organic Law of the National Control System and the General Comptroller of Peru.

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.

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.

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. 27,446 (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.

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 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 foregoing, 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.

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 and modified by Supreme Decree No. 023-2018-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/126 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

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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.

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.

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.

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. 27,972) 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 (modified by the Supreme Decree No.° 019-2014-VIVIENDA and Supreme Decree No. 0082016-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:

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undertaking an environmental impact assessment; and

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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.

Upon completion of the real estate development and construction stages, as the case may be, the following requirements must be met:

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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

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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. 27,157, 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. 26,912, 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.° 082-2019-EF (Texto Unico Ordenado de Ley de Contrataciones del Estado) and its Regulations, approved by Supreme Decree No. 344-2018, 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.

Intellectual Property

Certain operations of GMI are protected by Peruvian Copyright Law, approved by Legislative Decree No. 822, specifically the engineering drawings 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.

C. Organizational Structure

The following organizational chart sets forth our principal operating subsidiaries within our three business segments.

LOGO

(1)

(2)	36.10% of the share capital in Viva GyM is held by our subsidiary GyM.

The following charts set forth the principal activities of each of our three business segments:

LOGO

The following is a brief description of our principal operating subsidiaries:

•

Engineering and Construction:

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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.

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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.

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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.

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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.

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Infrastructure:

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Toll Roads:

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

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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.

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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.

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Mass Transit:

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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.

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Water Treatment:

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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.

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Energy:

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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.

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Real Estate:

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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.

D. Property, Plant and Equipment

Approximately 82.2% of our assets are located in Peru, with the remaining balance located in Chile and Colombia. At December 31, 2018, the net book value of the company was US$139.3 million (S/.470.6 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.

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.

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.”

A. Operating Results

Overview

We are the largest engineering and construction company in Peru as measured by revenues during 2018, and one of the largest publicly traded engineering and construction companies in Latin America as measured by market capitalization as of December 31, 2018, with strong complementary businesses in infrastructure and real estate services. With 85 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 have expanded 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 senior management.

Additionally, on January 24, 2017, the Peruvian government terminated the gas pipeline concession held by GSP, a 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 Concesionaria Chavimochic S.A.C. (“Chavimochic”). Our stakes in these projects ranged from 17% to 33%. During 2018, none of these projects (including Chavimochic) were currently ongoing. During the period from January 1, 2005 to December 31, 2018, 84% 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 4% 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, 2018, our investment in this project amounted to US$6.1 million (S/.20.5 million) and our portion of the performance guarantee amounted to US$9.5 million (S/.32.1 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 CCDS.

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. Since that time, the Peruvian government has not indicated an intention to commence the auction process. 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 substantially asset is the claim for government payment described above, as contemplated under the concession contract in the event of termination.

On December 21, 2018, we formally initiated the procedure for direct negotiations with the Peruvian state regarding the termination payment used by the government to GSP. This decision was taken considering that GSP had not taken any legal action to demand the payment despite efforts by G&M at the general shareholders meeting of GSP. As a minority equity partner in GSP, G&M is entitled to initiate direct negotiations under numeral 4 of Article 1219 of the Peruvian Civil Code which authorizes creditors to exercise the rights of its debtor, either by way of initiating our action or assuming defense.

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/.436 million) and the project’s performance guarantee in amount of US$52.5 million (S/.177 million) and recorded them as other financial liabilities and other accounts payable, respectively, in our consolidated financial statements as of December 31,

2018. 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$175.5 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, our 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/.77.4 million (US$22.9 million). Adding these effects, plus the deferred tax effect, we had a net impact of S/.498.0 (US$147.3 million) on our income statement for the year ended December 31, 2016.

In addition, the termination of the GSP gas pipeline concession had reduced our backlog as of December 31, 2016, by US$855 (S/.2,889.0 million), representing 30.2% of our E&C backlog and 33.8% of our total backlog.

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 audited annual 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, conducted congressional inquiries into our company and other construction companies in Peru. These investigations have required certain of our company’s former board members and senior management to provide testimony at hearings before the commission.

Peruvian prosecutors have included José Graña Miró Quesada, the former Chairman of our company, in an investigation for the crime of collusion, and Hernando Graña Acuña, a shareholder, a former board member of our company and 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 our 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 our company and our construction subsidiary, GyM, as criminal defendants in connection with the projects. In response, the Peruvian First National Preparatory Investigation Court (Primer Juzgado de Investigación Preparatoria Nacional) notified us of its decision to formally include our company and GyM in its criminal investigation. We appealed the court’s decision and, in June 2018, the First Court of Appeals of the Superior Court of Lima revoked the judicial order that indicted our company and GyM, among other corporate defendants, in the criminal investigation on charges of collusion and other crimes and rejected the petition, without prejudice, made by the prosecutor to incorporate both companies in the aforementioned process. Nevertheless, we cannot assure you that the criminal prosecutor will not file a new motion to charge our company and/or GyM or that our position will ultimately prevail if such motion is filed.

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. GyM has been included as civilly-responsible third party in the mentioned investigation along with eleven other construction companies. In December 2018, GyM was formally included in this criminal investigation as civilly-responsible third party along with eleven other construction companies.

We ce annot 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 our 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. The Peruvian government is required to determine the amount of such guarantee pursuant to Law 30,737. On May 9, 2018, Supreme Decree No. 096-2018-EF was passed, which provides guidelines for such determination. Following discussions with the Peruvian government, in March 2019, we established the trust in favor of the Peruvian government and funded the trust in the amount of S/.79.1 million (US$23.4 million) by assigning shares of our subsidiary GMI to such trust. We cannot assure you that the Peruvian government will not claim the assets set forth in this trust or require that our company place additional assets in trust. 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. Management has estimated that the value of the contingency for the matters described above should not exceed US$45.8 million (S/.148.4 million).

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:

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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$37.50 million (S/126.70 million) as of December 31, 2018, and is US$31.45 million (S/103.95 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; 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”;

•

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; 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$63.47 million (S/.214.46 million) as of December 31, 2018, and as of the date of this annual report, there is US$47.25 million (S/.156.16) outstanding on the term loan.

•

Proportional Repayment Obligations under the 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 in the amount of US$52.5 milllion (S/.177.4 million) became due. On December 6, 2018, we paid the final installment with respect to our our obligations to Chubb Insurance Company.

•

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. As of December 31, 2018 and the date of this annual report, there is US$59.44 million (S/200.83 million) outstanding.

For more information, see “—Liquidity and Capital Resources—Indebtedness.” We are currently in default under the financial stability framework agreement. For more information, see “Item 13. Default. Dividend Arrearages and Delinquencies.

Asset Sales

As of the date of this annual report, we have entered into the following transactions:

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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);

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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);

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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;

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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);

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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);

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Sale of Almonte properties. On May 31, 2018, Almonte signed an agreement to sell 4,208,769 square meters of land for an aggregate price of US$92.7 million. The amount of the sale proceeds corresponding to our company is proportional to its 50.45% ownership stake; and

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Sale of our interest in CAM Chile and CAM Servicios: On December 4, 2018, we sold our 73.16% interest in CAM Chile and CAM Servicios, our subsidiaries engaged in the operation and maintenance of electric utilities, to GDF Suez Energie Services Chile Holding SpA and ENGIE Services Perú S.A., for a price of US$18.75 million (S/63.34 million).

•

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, the proceeds of which were applied to the reduction of indebtedness related to GSP.

Additionally, 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 events described above, we conducted an internal investigation led by external counsel with respect to our participation in consortia with Odebrecht. The 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 our 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

In 2017, we 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.

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 moved to dismiss the complaint during the fourth quarter of 2018. The court has not yet ruled on that motion, but has granted plaintiffs leave to file a further amended complaint. We continue to 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 2017

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

Reclassification

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 years ended December 31, 2017 and 2018. We have reclassified our consolidated financial for the year ended December 31, 2016, and selected financial information for the years ended December 31, 2014 and 2015, included in this annual report, to show GMD as a discontinued operation. In addition: (i) on December 4, 2018, we sold our 73.16% interests in each of CAM and CAM Servicios, (ii) on April 11, 2018, we sold our interest in Stracon GyM, and (iii) we are in the process of marketing our subsidiary Adexus for sale. As a result, we present CAM, CAM Servicios and Stracon GyM as discontinued operations, and Adexus as an investment held for sale, in our audited annual consolidated financial statements for the year ended December 31, 2018. We have reclassified our consolidated financial information for the years ended December 31, 2016 and 2017, and the selected financial information for the years ended December 31, 2014 and 2015 included in this annual report, to show CAM, CAM Servicios and Stracon GyM as discontinued operations as Adexus as an investment held for sale.

Internal Control over Financial Reporting

In 2018, 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

73.5%, 72.0% and 86.1% of our revenues in 2016, 2017 and 2018 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, 11.4%, 17.3% and 5.8% of our revenues in 2016, 2017 and 2018 were derived from activities in Chile and 9.2%, 4.7% and 8.1% of our revenues in 2016, 2017 and 2018 were derived from activities in Colombia.

The Peruvian real GDP has grown at an average rate of 3.5% during the three years from 2016 to 2018. With increasing disposable income and an expanding middle class, private consumption grew at an average annual rate of 3.2% in real terms from 2016 to 2018. In 2016, 2017 and 2018 private investment decreased at an average rate of 5.9% and increased 0.1% and 4.4%, 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 3.2% in 2016, 1.4% in 2017 and 2.2% in 2018. The sol appreciated versus the U.S. dollar by 1.5% in 2016 and 3.3% in 2017 and depreciated by 16.9% in 2018. Peru’s sovereign debt has been rated investment grade by S&P, Fitch and Moody’s. At the end of 2018, 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 2019), and A3 by Moody’s (August 2018).

The Chilean economy grew at an average annual rate of 2.3% during the three years from 2016 to 2018 in real terms. Total fixed investment increased at an annual average rate of 2.5% in real terms during the three years from 2016 to 2018. Inflation in Chile, as measured by the change in the consumer price index, was 2.7% in 2016, 2.3% in 2017 and 2.6% in 2018. The Chilean peso appreciated versus the U.S. dollar by 5.7% in 2016 and 7.8% in 2017 and depreciated by 12.8% in 2018. Chilean sovereign debt has the highest rating in the South America region, rated A+ by S&P (July 2017), A1 by Moody’s (July 2018) and A by Fitch (February 2019).

The Colombian real GDP grew at an average annual rate of 2.2% during the three years from 2016 to 2018. Inflation has decreased during recent years, with inflation of 5.8% in 2016, 4.1% in 2017 and 3.1% in 2018. The Colombian peso apreciated against the U.S. dollar by 4.7% in 2016 and 0.6% in 2017 and depreciated by 7.5% in 2018. Colombia’s sovereign debt was rated BBB by Fitch in November 2018, BBB- by S&P in December 2017, and Baa2 by Moody’s in February 2018.

From 2014 to 2018 our revenues declined at a compound annual growth rate (CAGR) of 4.3%excluding acquisitions and asset sales). Our organic revenues decreased 2.9% in 2018 from 2017, principally as a result of lower activity levels in our E&C segment in 2018.

Fluctuations in Exchanges Rates

We estimate that in 2018, 32.5%, 55.6% and 11.8% of our revenues were denominated in soles, U.S. dollars and other currencies respectively, while 63.2%, 23.1% and 13.7% of our cost of sales during the year were denominated in soles, U.S. dollars and other currencies. In addition, as of December 31, 2018, 56%, 41% and 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 appreciated in 2016 and 2017, and depreciated in 2018, which impacted our results of operations.

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 represented 25.3% of our cost of sales and 37.9% of our administrative expenses in 2018; services provided by third parties, which represented 33.0% of our cost of sales and 35.2% of our administrative expenses in 2018; and inputs (including raw materials), which represented 23.4% of our cost of sales in 2018. 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 2016 to 2017 our personnel charges increased by 13.5%, and from 2017 to 2018 our personnel charges decreased by 15.2%. 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 2016 to 2017 our costs related to services provided by third parties decreased by 27.7% and from 2017 to 2018 our costs related to services provided by third parties decreased by 15.4%. The principal inputs we use are fuel, cement and steel, which in the aggregate represented 20% of our total input costs in 2018. 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 2016 to 2017, our input costs increased by 26.1%, and from 2017 to 2018, our input costs decreased by 40%. Our cost of labor, third party services and inputs decreased in 2018 primarily due to lower activity levels in our E&C segment.

Acquisitions and Dispositions

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 participated 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 CCDS. For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”

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 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—Strategic Action Plan.”

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. 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.

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 2017 and 2018, 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 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. 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.

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. 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.”

During 2018, activity levels in our E&C segment decreased as a result of the divestment plan executed by our company. In April 2018, our subsidiary GyM sold its 87.59% interest in Stracon GyM, our subsidiary that engaged contracts mining services in Perú. We also experienced lower activity levels in our business units engaged in electromechanical and civil works.

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 3.2% from 2016 to 2017 and 6.3% from 2017 to 2018 (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, during the first quarter of 2017. 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 October 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 2016 and 2018 were influenced by the timely acquisition, set up, reliability and proper operation of our trains. We currently have all 44 trains in operation (including three backup trains).

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 2016, 2017 and 2018, average Brent crude prices were approximately US$43.55, US$53.02 and US$69.69 per barrel, and the average fee we received in these years was US$38.54, US$49.19 and US$64.72 per barrel of extracted oil, respectively. During the first quarter of 2019, the Brent crude price was approximately US$63.08 per barrel and our fee was approximately US$58.83 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. (ENEL), a thermal power generation subsidiary of the Endesa group. Under this contract, ENEL 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 ENEL. Approximately 75% of the total volume of natural gas processed by our Pariñas gas processing plant depend upon gas volumes demanded by ENEL for its gas-fired turbines, which can vary significantly. 15% 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 33.2 MMcf per day during 2016, 30.57 MMcf per day during 2017 and 30.12 MMcf per day during 2018. These volumes vary per month and depend upon the power dispatch curve of ENEL 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 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 and again in July 2018 until August 2019.

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, 2018, we had six concessions as well as long-term government contracts in this segment. These include the concession for Via Expresa Sur, with respect to which we recently received a letter from the Municipality of Lima in which the Municipality communicated its desire to terminate the concession, 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 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.

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 934, 1,418 and 1,276 units in 2016, 2017 and 2018, 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.”

Critical Accounting Estimates and Judgments

For information on critical accounting estimates and judgments, see note 5 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 2018, we obtained 16.7% of the revenues in our E&C segment from the construction of the expansion works of Line 1 at GyM Ferrovias; and 30% 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 included in this annual report.

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 2.26 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 10% of the contract price in 2018, 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:

•

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

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•

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 2018, the fees related to items (i), (ii) and (iii) were S/.224 million, S/.10.9 million and S/.43 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 2018, the income related to the investment components was S/.278 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 obtained 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 in 2015 and 2016, 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.

(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.

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

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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 2018, our cost of land that is allocated to units delivered during these periods amounted to S/.40.8 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 50.45% 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.”

Comparison of Results of Operations of 2017 and 2018

The following table sets forth the components of our consolidated income statement for 2017 and 2018.


	Year ended December 31,
	2017 Restated			2018			Variation
	(in millions of S/.)						%
Revenues		4,014.0			3,899.5			(2.9	)%
Cost of sales		(3,511.6	)		(3,225.0	)		(8.2	)%

Gross profit		502.4			674.5			34.3	%
Administrative expenses		(322.5	)		(278.4	)		(13.7	)%
Other income (expenses)		(33.3	)		(61.2	)		(83.8	)%
Other (losses) gains, net		0.5			(0.1	)		(120.0	)%
Profit from sale of investments		34.5			–			NM

Operating profit		181.6			334.8			84.4	%
Financial (expense) income, net		(137.0	)		(197.1	)		43.9	%
Share of profit and loss in associates		0.5			(3.7	)		NM

Profit (loss) before income tax		45.1			134.0			197.1	%
Income tax		(46.3	)		(113.3	)		144.7	%

Net profit from continuing operations		(1.2	)		20.7			NM
Profit from discontinued operations		210.4			36.8			(82.5	)%
Net profit (loss)		209.2			57.5			(72.5	)%
Net profit (loss) attributable to controlling interest		148.7			(83.2	)		(156.0	)%
Net profit attributable to non-controlling interest		60.5			140.6			132.4	%

Revenues

Our total revenues decreased by 2.9%, or S/.114.5 million, from S/.4,014 million for 2017 to S/.3,899.5 million for 2018. Revenues decreased due to the lower number of projects under execution in the E&C segment. This was offset, in part, by the increase of revenues in the Mass Transit business, which increased due to expansion works and the operation of new trains. In addition, there was an increase in maintenance of works at Concar, an increase in crude oil production (barrels per day) and higher oil prices. Revenues in the Real Estate segment reflected proceeds from the sale of land by Almonte and were adversely impacted by fewer units being delivered during the year.

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The following table sets forth a breakdown of our revenues by segment for 2017 and 2018.


	Year ended December 31,
	2017						2018						Variation
	(in millions of S/.)			% of Total			(in millions of S/.)			% of Total			%
Engineering and Construction		2,331.9			58.1	%		1,960.9			50.3	%		(15.9	)%
Infrastructure		1,447.9			36.1	%		1,883.3			48.3	%		30.1	%
Real Estate		647.5			16.1	%		630.1			16.2	%		(2.7	)%
Corporate		70.0			1.7	%		62.1			1.6	%		(11.3	)%
Eliminations		(483.4	)		(12.0	)%		(636.9	)		(16.3	)%		31.8	%
Total		4,014.0			100.0	%		3,899.5			100.0	%		(2.9	)%

Cost of Sales

Our total cost of sales decreased by 8.2%, or S/.286.6 million, from S/.3,511.6 million for 2017 to S/.3,255.0 million for 2018. This decrease is mainly due to a reduction in revenues.

Gross Profit

Our gross profit increased by 34.3%, or S/.172.1 million, from S/.502.4 million for 2017 to S/.674.5 million for 2018. Our gross margin (i.e., gross profit as a percentage of revenues) for 2018 was 17.3%, compared to 12.5% for 2017. In 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 prices, and in our Real Estate segment by the sale of Cuartel San Martín in February 2017. During 2018, gross profit was impacted in our Infrastructure segment by expansion works and the operation of new trains, in our E&C segment by an increase in oil prices, and in our Real Estate segment by the sale of land by Almonte. In our E&C Segment gross profit was also impacted by works we performed, but which were not accepted by the client and costs not recognized in the Talara refinery project.

The following table sets forth a breakdown of our gross profit by segment for 2017 and 2018.


	Year ended December 31,
	2017						2018						Variation
	(in millions of S/.)			% of Total			(in millions of S/.)			% of Total			%
Engineering and Construction		176.5			35.1	%		62.1			9.2	%		(64.8	)%
Infrastructure		260.2			51.8	%		350.6			52.0	%		34.7	%
Real Estate		147.4			29.3	%		288.0			42.7	%		95.4	%
Corporate		(37.8	)		(7.5	)%		(10.6	)		(1.6	)%		72.0	%
Eliminations		(43.8	)		(8.7	)%		(15.6	)		(2.3	)%		(64.4	)%
Total		502.4			100.0	%		674.5			100.0	%		34.3	%

Administrative Expenses

Our administrative expenses decreased by 13.7%, or S/.44.1 million, from S/.322.5 million for 2017 to S/.278.4 million for 2018. This decrease is mainly due to a reduction of personnel in the E&C Segment and services provided by third parties principally relating to legal, accounting and tax consultancy. As a percentage of revenues, our administrative expenses decreased to 7.1% in 2018 from 8.0% in 2017.

Other Income (Expenses)

Our other income (expenses) decreased by 83.8%, or S/.27.9 million, from S/.33.3 million in expenses for 2017 to S/.61.2 million in expenses for 2018. In 2017, our other income included the sale of machinery and equipment, as well as the impairment of the Vial y Vives DSD brand. In 2018, our other income included a provision related to the potential civil compensation in favor of the Peruvian state that may be required to pay in connection with the investigations related to the IIRSA South project concession (tranches II and III) and Tranches 1 and 2 of the Lima Metro in which our company and GyM have been included as civilly-responsible third parties as described under “Item 8A. Financial Information—Consolidated Financial Statements and Other Information—Legal and Administrative Proceedings.”

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Profit from Sale of Investments

In 2018, there was no profit from the sale of investments, compared to S/.34.5 million from the sale of the certain investments in 2017.

Operating Profit

Our operating profit increased 8.4%, or S/.153.2 million, from S/.181.6 million for 2017 to S/.334.8 million for 2018. Our operating margin (i.e., operating profit as a percentage of revenues) was 8.6% for 2018, compared to 4.5% for 2017. The increase in operating margin is primarily due to the increase in gross profit and the reduction of administrative expenses explained above.

The following table sets forth a breakdown of our operating profit by segment for 2017 and 2018.


	Year ended December 31,
	2017									2018			2018
	(in millions of S/.)			Percentage of Total			(in millions of S/.)			Percentage of Total			Variation %
Engineering and Construction		(58.1	)		(32.0	)%		(87.5	)		(26.1	)%		(50.6	)%
Infrastructure		202.5			111.5	%		283.0			84.5	%		39.8	%
Real Estate		171.5			94.4	%		235.3			70.3	%		37.2	%
Corporate		(146.9	)		(80.9	)%		(1.9	)		(0.6	)%		(98.7	)%
Eliminations		12.7			7.0	%		25.1			7.5	%		97.6	%
Total		181.6			100.0	%		334.8			100.0	%		84.4	%

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,
	2017			2018			Variation
	(in millions of S/.)						%
Revenues		2,331.9			1,960.9			(15.9	)%
Gross profit		176.5			62.1			(64.8	)%
Operating profit (loss)		(58.1	)		(87.5	)		(50.6	)%

Revenues. Our E&C revenues decreased 15.9%, or S/.371.0 million, from S/.2,331.9 million for 2017 to S/.1,960.9 for 2018.

The decrease 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,
	2017		2018
	%		%
Engineering services		8.4		9.4
Electromechanic construction		31.2		22.4
Civil construction		49.8		52.4
Building construction activities		10.6		8.8
Other Services		—		7.1

Total		100.0		100.0

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	Year ended December 31,
	2017		2018
	%		%
Cost + fee		1.6		1.0
Unit price		42.9		41.0
Lump sum		47.3		38.9
EPC contracts		8.2		19.1

Total		100.0		100.0

	Year ended December 31,
	2017		2018
	%		%
Mining		24.1		23.0
Real estate buildings		10.8		9.1
Power		—		1.8
Oil and gas		31.4		40.6
Transportation		22.9		21.6
Water and sewage		2.0		1.3
Other end markets		8.7		2.6

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 decreased 64.8%, or S/.114.4 million, from S/.176.5 million for 2017 to S/.62.1 million for 2018. Our E&C gross margin for 2018 was 3.2% compared to 7.6% for 2017. This reduction in our E&C gross profit was mainly due to works we performed, but which were not accepted by the client and additional costs and expenses not recognized in the Talara refinery project as well as the deterioration of accounts receivable.

Other income (expenses). Other income (expenses) increased in our E&C segment, from S/.46.5 million in expenses in 2017 to S/.13.5 million in expenses for 2018, mainly due to the sale of machinery and equipment, the sale of the stake in one consortium, partially offset by the provision for potential civil compensation in favor of the Peruvian state that may be required to pay in connection with the investigations related to the IIRSA South project concession (tranches II and III) and Tranches 1 and 2 of the Lima Metro in which our company and GyM have been included as civilly-responsible third parties as described under “Item 8A. Financial Information—Consolidated Financial Statements and Other Information—Legal and Administrative Proceedings”.

Operating Profit (loss). Our E&C operating profit decreased S/.29.4 million, from a S/.(58.1) million loss for 2017 to a S/.(87.5) million loss for 2018, due to the reduction of gross profit and partially offset by the reduction of administrative expenses as a consequences of the reduction of personnel. Our E&C operating margin was (4.5)% for 2018, compared to (2.5)% for 2017.

Infrastructure

The table below sets forth selected financial information related to our Infrastructure segment.


	Year ended December 31,
	2017		2018		Variation
	(in millions of S/.)				%
Revenues		1,447.9		1,883.3		30.1	%
Gross profit		260.2		350.6		34.7	%
Operating profit		202.5		283.0		39.8	%

Revenues. The table below sets forth the breakdown of our Infrastructure revenues by principal lines of business.

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	Year ended December 31,
	2017		2018		Variation
	(in millions of S/.)				%
Toll Roads		263.8		280.8		6.4	%
Mass Transit		365.8		586.3		60.3	%
Water Treatment		3.2		3.3		3.1	%
Energy		436.9		560.5		28.3	%
Operation and Maintenance of Infrastructure Assets		378.3		452.3		19.6	%
Total		1,447.9		1,883.3		30.1	%

Our Infrastructure revenues increased 30.1% or S/.435.4 million, from S/.1,447.9 million for 2017 to S/.1883.3 million for 2018. The variation in our Infrastructure revenues principally reflected the following:

•

Toll Roads: a 6.4%, or S/.17 million, increase in revenues, from S/.263.8 million for 2017 to S/.280.8 for 2018, primarily due to the increase in traffic and more maintenance works;

•

Mass Transit: a 60.3%, or S/.220.5 million, increase in revenues, from S/.365.8 million for 2017 to S/.586.3 million for 2018, primarily due to the revenues recognized for the advance of the construction of the infrastructure expansion and the operation of new trains;

•

Water Treatment: a 3.1%, or S/.0.1 million, increase in revenues, from S/.3.2 million for 2017 to S/.3.3 million for 2018, primarily due to the larger volume of treated wastewater during 2018 compared to 2017;

•

Energy: a 28.3%, or S/.123.6 million, increase in revenues, from S/.436.9 million for 2017 to S/.560.5 million for 2018, primarily due to an increase in our barrel daily production (3,651 barrel daily production in 2018 versus 3,140 barrel daily production in 2017), and better results in our fuel terminals business (3.9 MM barrels in storage per month in 2018 versus 3.39 MM barrels in storage per month in 2017, and 3.35 MM barrels dispatched per month in 2018 versus 3.43 MM barrels dispatched per month in 2017). Additionally, gas processing levels in our gas processing plant were lower (30.12 MMcf per day in 2018 to 30.57 MMcf per day in 2017), and the prices of liquefied petroleum gas (“LPG”) increased from US$48.18/bbl in 2017 to US$59.36 in 2018. The price of HAS (CGN) went from US$49.44/bbl in 2017 to US$59.36 in 2018; and

•

Operation and Maintenance of Infrastructure Assets: a 19.6%, or S/.74.0 million, increase in revenues, from S/.378.3 million for 2017 to S/.452.3 million for 2018, due to new contracts awarded during 2017 that initiated works in 2018.

Gross Profit. The table below sets forth the breakdown of our Infrastructure gross profit by principal lines of business.


	Year ended December 31,
	2017		2018		Variation
	(in millions of S/.)				%
Toll Roads		89.9		70.5		(21.6	)%
Mass Transit		48.7		122.6		151.7	%
Water Treatment		0.4		0.6		50.0	%
Energy		71.8		120.4		67.7	%
Operation and Maintenance of Infrastructure Assets		49.3		36.6		(25.8	)%
Total		260.2		350.6		34.7	%

Our Infrastructure gross profit increased 34.7%, or S/.90.4 million, from S/.260.2 for 2017 to S/.350.6 million for 2018. Our Infrastructure gross margin was 18.6% for 2018 and 18% for 2017 as well. The variation in our Infrastructure gross profit principally reflected the following:

•

Toll Roads: a 21.6%, or S/.19.4 million, decrease in gross profit, from S/.89.9 million for 2017 to S/.70.5 million for 2018. Our toll roads gross margin decreased from 34.1% for 2017 to 25.1% for 2018 as a consequence of the amortization of the investment made in the Norvial toll road during 2017;

•

Mass Transit: a 151.7%, or S/.73.9 million, increase in gross profit, from S/.48.7 million for 2017 to S/.122.6 million for 2018, primarily due to the expansion works and the operation of new trains. Our gross margin for 2018 was 20.9%, compared to 13.3% in 2017.

107

•

Water Treatment: a 50%, or S/.0.2 million, increase in gross profit for 2018, from S/.0.4 million gross profit for 2017 to S/.0.6 million gross profit for 2018, due to the larger volume of treated wastewater during 2018 compared 2017. Our water treatment gross margin was 18.2% for 2018, compared to 12.5% for 2017;

•

Energy: a 67.7%, or S/.48.6 million, increase in gross profit, from S/.71.8 million for 2017 to S/.120.4 million for 2018, primarily due to the increase in the price of oil from US$52.84 in 2017 to US$69.29 in 2018. Our energy gross margin was 21.5% for 2018, compared to 16.4% for 2017; and

•

Operation and Maintenance of Infrastructure Assets: a 25.8%, or S/.12.7 million, decrease in gross profit, from S/.49.3 million for 2017 to S/.36.6 million for 2018, due to the impairment of provisions as the result of the passage of time of the Red Vial 1 Road and the Red Vial 3 Road, two contracts with the regional government of Cuzco, Peru. Our operation and maintenance of infrastructure assets gross margin was 8.1% for 2018, compared to 13.0% for 2017.

Operating Profit. The table below sets forth the breakdown of our Infrastructure operating profit by principal lines of business.


	Year ended December 31,
	2017		2018		Variation
	(in millions of S/.)				%
Toll Roads		80.1		59.4		(25.8	)%
Mass Transit		33.4		110.6		231.1	%
Water Treatment		0.1		0.3		200.0	%
Energy		61.1		100.7		64.8	%
Operation and Maintenance of Infrastructure Assets		27.7		12.1		(56.3	)%
Total		202.5		283.0		39.8	%

Our Infrastructure operating profit increased 39.8%, or S/.80.5 million, from S/.202.5 million for 2017 to S/.283.0 million for 2018. Our Infrastructure operating margin was 15.0% for 2018, compared to 14.0% for 2017. The variation in our Infrastructure operating profit principally reflected the following:

•

Toll Roads: a 25.8%, or S/.20.7 million, decrease in operating profit, from S/.80.1 million for 2017 to S/.59.4 million for 2018, primarily due to the reduction of gross profit and an increase in administrative expenses due to extraordinary legal expenses in respect of a road accident. Our toll roads operating margin was 21.2% for 2018, compared to 30.4% for 2017;

•

Mass Transit: a 231.1%, or S/.77.2 million, increase in operating profit, from an operating profit of S/.33.4 million for 2017 to S/.110.6 million for 2018, primarily due to the increase in gross profit and the reduction of administrative expenses compared to 2017, including due to extraordinary legal expenses related to arbitrages and a fine from the Peruvian tax authority (SUNAT). Our mass transit operating margin for 2018 was 18.9%, compared to 9.1% for 2017;

•

Water Treatment: a 200%, or S/.0.2 million, increase in operating profit, from an operating profit of S/.0.1 million in 2017 to an operating profit of S/.0.3 in 2018, mainly due to the increase in gross profit and the reduction of administrative expenses as in 2017 there were extraordinary expenses for studies made for a potential expansion of the plant. Our water treatment operating margin for 2018 was 9.1%, compared to 3.1% for 2017;

•

Energy: a 64.8%, or S/.39.6 million, increase in operating profit, from S/.61.1 million for 2017 to S/.100.7 million for 2018, primarily due to the increase in gross profit partially offset by an increase in administrative expenses as a consequence of an increase in services provided by third parties related to IT, accounting and tax consultancy. Our Energy operating margin was 18.0% for 2018, compared to 14.0% for 2017; and

•

Operation and Maintenance of Infrastructure Assets: a S/.56.3%, or S/.15.6 million decrease in operating profit, from a S/.27.7 million profit in 2017 to a S/.12.1 million profit for 2018, primarily due to the amortization of an intangible assets that had resulted from the purchase of an asset. Our Operation and Maintenance of Infrastructure Assets operating margin was 2.7% for 2018, compared to 7.3% for 2017.

Real Estate

The table below sets forth selected financial information related to our Real Estate segment.

108


	Year ended December 31,
	2017		2018		Variation
	(in millions of S/.)				%
Revenues		647.5		630.1		(2.7	)%
Gross profit		147.4		288.0		95.4	%
Operating profit		171.5		235.3		37.2	%

Revenues. Our Real Estate revenues decreased 2.7%, or S/.17.4 million, from S/.647.5 million for 2017 to S/.630.1 million for 2018. The decrease is primarily due to fewer units delivered in 2018 (1,278 units in 2018 and 1,418 units in 2017). In addition, revenues in 2017 and 2018 were impacted by the sale of Cuartel San Martin in February 2017 for US$50.0 milllion and the sale of land by Almonte in May 2018 for US$92.7 million, respectively.

Gross Profit. Our Real Estate gross profit increased 95.4%, or S/.140.6 million, from S/.147.4 million for 2017 to S/.288.0 million for 2018, mainly as a result of the sale of land by Almonte. Our Real Estate gross margin was 45.7% for 2018, compared to 22.8% for 2017.

Operating Profit. Our Real Estate operating profit increased 37.2%, or S/.63.8 million, from S/.171.5 million for 2017 to S/.235.3 million for 2018, primarily as a result of the increase in gross profit due to the sale of land by Almonte in May 2018.

Financial (Expense) Income, Net

Our net financial expense increased S/.60.0 million from net financial expense of S/.137.0 million in 2017 to net financial expenses of S/.197.1 million in 2018. Excluding foreign exchange differences, our net financial expense increased 21.8%, or S/.31.1 million, from net financial expense of S/.142.6 million for 2017 to net financial expense of S/.173.8 million for 2018, due to a financial discount applied to the long term account receivable of GSP (see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments”), an increase in rates and bank commissions, and the accrual of interest for the beginning of the operations of the second road of Norvial, partially offset by the financial income from the sale of U.S. dollar-denominated obligations of the Peruvian government (CRPAOs) related to the financing of the expansion of Line One of the Lima Metro. Our net exchange difference decreased S/.28.9 million, from a profit of S/.5.6 million for 2017 to a loss of S/.23.3 million for 2018. This decrease is due to depreciation of the sol.

Share of Profit and Loss in Associates

Our share of profit and loss in associates decreased S/.4.2 million, from a profit of S/.0.5 million in 2017 to a loss of S/.3.7 million in 2018, primarily due to the profit from the sale of COGA for S/.4.4 million in 2017.

Income Tax

Our income tax increased S/.67.0 million, from S/.46.3 million for 2017 to S/.113.3 million for 2018. This increase in income tax was primarily due to an increase in profit before tax. Our effective tax rates for 2017 and 2018 were 84.6% and 102.6%, respectively, due to more non-deductible expenses, such as the provision of certain civil compensation.

Net Profit

Our net profit decreased 72.5%, or S/.151.7 million, from a S/.209.2 million profit for 2017 to a S/.57.5 million profit in 2018. Net profit attributable to controlling interests decreased 156.0%, while net profit attributable to non-controlling interests increased 132.4%. Net profit attributable to non-controlling interests increased primarily due to the sale of land by Almonte in May 2018. See “—General—Accounting for Subsidiaries, Joint Operations, Joint Ventures and Associated Companies.”

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.

109


	Year ended December 31,
	2016			2017 Restated			Variation
	(in millions of S/.)						%
Revenues		4,137.3			4,014.0			(3.0	)%
Cost of sales		(3,821.2	)		(3,511.6	)		(8.1	)%

Gross profit		316.1			502.4			58.9	%
Administrative expenses		(278.3	)		(322.5	)		15.9	%
Other income (expenses)		(21.9	)		(33.3	)		52.1	%
Other (losses) gains, net		(0.5	)		0.5			(200.0	)%
Profit from sale of investments		46.3			34.5			(25.5	)%

Operating profit		61.7			181.6			194.3	%
Financial (expense) income, net		(179.8	)		(137.0	)		(23.8	)%
Share of profit and loss in associates		(590.1	)		0.5			(100.1	)%

Profit before income tax		(708.2	)		45.1			(106.4	)%
Income tax		152.2			(46.3	)		(130.4	)%
Net Profit from continuing operations		(556.0	)		(1.2	)		(99.8	)%
Profit from discontinued operation		104.4			210.4			101.5	%
Net Profit (loss)		(451.6	)		209.2			(146.3	)%
Net Profit attributable to controlling interest		(509.7	)		148.7			(129.2	)%
Net Profit attributable to non-controlling interest		58.1			60.5			4.1	%

Revenues

Our total revenues decreased by 3.0 %, or S/.123.3 million, from S/.4,137.3 million for 2016 to S/.4,014.0 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		2,936.8			71.0	%		2,331.9			58.1	%		(20.6	)%
Infrastructure		1,174.8			28.4	%		1,447.9			36.1	%		23.2	%
Real Estate		411.5			9.9	%		647.5			16.1	%		57.4	%
Corporate		62.1			1.5	%		70.0			1.7	%		12.7	%
Eliminations		(447.9	)		(10.8	)%		(483.4	)		(12.0	)%		7.9	%

Total		4,137.3			100.0	%		4,014.0			100.0	%		(3.0	)%

Cost of Sales

Our total cost of sales decreased by 8.1%, or S/. 309.6 million, from S/.3,821.2 million for 2016 to S/.3,511.6 million for 2017. This decrease is mainly due to the reduction of revenues.

Gross Profit

Our gross profit increased by 58.9% or S/.186.3 million, from S/.316.1 million for 2016 to S/.502.4 million for 2017. Our gross margin (i.e. gross profit as a percentage of revenues) for 2017 was 12.5% compared to 7.6 % 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.

110

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		60.2			19.0	%		176.5			35.1	%		193.2	%
Infrastructure		211.4			66.9	%		260.2			51.8	%		23.1	%
Real Estate		136.5			43.2	%		147.4			29.3	%		8.0	%
Corporate		(0.2	)		(0.1	)%		(37.8	)		(7.5	)%		NM
Eliminations		(91.9	)		(29.1	)%		(43.8	)		(8.7	)%		(52.3	)%

Total		316.1			100.0	%		502.4			100.0	%		58.9	%

Administrative Expenses

Our administrative expenses increased by 15.9 %, or S/.44.2 million, from S/.278.3 million for 2016 to S/.322.5 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 8 % in 2017 from 6.7% in 2016.

Other Income (Expenses)

Our other income (expenses) increased by 52.1%, or S/.11.4 million, from S/.21.9 million in expenses for 2016 to S/.33.3 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/.34.5 million from the sale of the certain investments, mainly due to the sales of Red Eagle Mining, PRINSUR and COGA in 2017.

The following table sets forth a breakdown of our operating profit by segment for 2016 and 2017.

Operating Profit

Our operating profit increased 194.3%, or S/.119.9 million, from S/.61.7 million for 2016 to S/.181.6 million for 2017. Our operating margin (i.e., operating profit as a percentage of revenues) was 4.5% for 2017 compared to 1.5% 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		(166.1	)		(269.2	)%		(58.1	)		(32.0	)%		(65.0	)%
Infrastructure		146.1			236.8	%		202.5			111.5	%		38.6	%
Real Estate		108.9			176.5	%		171.5			94.4	%		57.5	%
Corporate		4.4			7.1	%		(146.9	)		(80.9	)%		NM
Eliminations		(31.6	)		(51.2	)%		12.7			7.0	%		(140.2	)%
Total		61.7			100.0	%		181.6			100.0	%		194.3	%

Engineering and Construction

The table below sets forth selected financial information related to our E&C segment.

111


	Year ended December 31,
	2016			2017			Variation
	(in millions of S/.)						%
Revenues		2,936.8			2,331.9			(20.6	)%
Gross profit		60.2			176.5			193.2	%
Operating profit		(166.1	)		(58.1	)		(65.0	)%

Revenues. Our E&C revenues decreased 20.6%, or S/.604.9 million, from S/.2,936.8 million for 2016 to S/.2,331.9 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		4.5		8.4
Electromechanic construction		44.6		31.2
Civil construction		35.5		49.8
Building construction activities		15.3		10.6
Other Services		—		—

Total		100.0		100.0

	Year ended December 31,
	2016		2017
	%		%
Cost + fee		3.6		1.6
Unit price		16.9		42.9
Lump sum		79.5		47.3
EPC contracts		—		8.2

Total		100.0		100.0

	Year ended December 31,
	2016		2017
	%		%
Mining		10.7		24.1
Real estate buildings		15.9		10.8
Power		5.1		—
Oil and gas		54.0		31.4
Transportation		5.2		22.9
Water and sewage		4.6		2.0
Other end markets		4.6		8.7

Total		100.0		100.0

Gross Profit. Our E&C gross profit increased 193.2%, or S/.116.3 million, from S/.60.2 million for 2016 to S/.176.5 million for 2017. Our E&C gross margin for 2017 was 7.6% compared to 2.0% 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/.14.2 million in expenses for 2016 to a S/.46.5 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.

112

Operating Profit. Our E&C operating profit increased S/.108.0 million, from a S/.166.1 million loss for 2016 to a S/.58.1 million loss 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 GyM. Our E&C operating margin was (2.5)% for 2017 compared to (5.7)% 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

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.

113

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

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;

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•

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;

•

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.

Financial (Expense) Income, Net

Our net financial expense decreased S/.42.8 million from net financial expenses of S/.179.8 million in 2016 to net financial expenses of S/.137.0 million in 2017. Excluding foreign exchange differences, our net financial expense decreased 14.6%, or S/.24.5 million, from net financial expenses of S/.167.1 million for 2016 to net financial expenses of S/.142.6 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/.18.1 million, from a loss of S/.12.5 million for 2016 to a profit of S/.5.6 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/.590.6 million from a loss of S/.590.1 million in 2016 to a profit of S/.0.5 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.”

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Income Tax

Our income tax increased S/.198.5 million, from a negative income tax of S/.152.2 million in 2016 to an income tax of S/.46.3 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 102.6% 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.”

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. 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.

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; 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.”

On November 6, 2018, our company’s general meeting of shareholders and board of directors approved an offering and sale of our company’s common shares in a private placement. Accordingly, in December 2018, our company issued and sold a total of 69,380,402 common shares to certain of our company’s existing shareholders that exercised preemptive rights in accordance with Peruvian law. Additionally, on April 2, 2019, our company issued and sold 142,483,633 common shares pursuant to the private placement, of which: (i) 55,291,877 shares were paid in full and (ii) 87,191,786 shares were paid 50% with 50% to be paid by July 1, 2019. In total, our company issued and sold 211,864,065 common shares, with the proceeds amounting to US$130 million to use to reduce debt, to pay our vendors and for working capital of one of our company’s subsidiaries.

We believe that our 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 and our other sources of cash are sufficient to satisfy our current capital expenditures and debt service obligations through the next twelve months.

We are currently in default under one of our debt instruments. In addition, in the past we were in default under certain of our debt instruments and procured waivers from our creditors under such instruments. For more information, see “Item 13. Defaults, Divided Arrearages and Delinquencies.”

We had credit lines with various financial institutions for a total amount of US$1,427.3 million as of December 31, 2017 and US$661.6 million as of December 31, 2018. However, our banks have currently restricted us from taking out further lines of credit to finance new operations. See “—A. Operating Results—Recent Developments—Emergency Decree and Subsequent Legislation.”

At December 31, 2018, our cash and cash equivalents totaled S/.801.1 million (US$237.1 million), of which S/.76.3 million (US$22.6 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 2016, 2017 and 2018.

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	Year ended December 31,
	2016			2017			2018
	(in millions of S/.)
Net cash provided by (used in) operating activities		333.7			491.2			279.3
Net cash provided by (used in) investing activities		(373.7	)		348.9			137.9
Net cash provided by (used in) financing activities		(85.8	)		(786.1	)		(300	)
Net increase (net decrease) in cash		45.8			54.0			117.1

Cash Flow from Operating Activities

Net cash flow used in in operating activities in 2018 was lower than in 2017. For 2018, this reflects the reduction of accounts payable according to terms with our suppliers, and a decrease in accounts receivable due to a reduction in accounts advanced to suppliers, taxes paid in advance and other accounts receivable.

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.

Cash Flow from Investing Activities

Net cash flow provided by investing activities in 2018 was lower than in 2017. In 2018, we sold more property, plant and equipment than we did in 2017.

Net cash flow provided by investing activities in 2017 was higher than in 2016. In 2017, there was more cash flow from the sale of assets than cash flow used in investments.

Cash Flow from Financing Activities

Net cash flow provided by financing activities in 2018 was lower than in 2017. This is primarily due to less reduction of debt during the course of the year compared to 2017, and the capital increase approved at the end of the year.

Net cash flow provided by financing activities in 2017 was higher than in 2016. This is primarily due to the reduction of GSP debt with the sale of assets.

Indebtedness

As of December 31, 2018, we had a total outstanding indebtedness of S/.2,139.7 million (US$633.2 million) as set forth in the table below.


Segment	Type	Debt Amount								Total in millions of S/.		Total in millions of US$		Weighted average interest rate			Range of Maturity Dates
Segment	Type	(in millions of US$)		(in millions of S/.)		(in millions of CLP)⁽¹⁾		(in millions of COP)		Total in millions of S/.		Total in millions of US$		Weighted average interest rate			Minimum		Maximum
E&C	Leasing		2.4		—		1,901.4		1,364.1		18.8		5.6		3.9	%		02/01/2019		02/01/2023
	Promissory Note		18.6		154.9		—		5,038.9		222.9		66.0		7.1	%		01/01/2019		31/12/2020
Infrastructure	Leasing		0.7		5.1		—		—		7.6		2.2		6.1	%		20/01/2019		01/11/2021
	Long term loan		94.0		937.0		—		—		1,254.7		371.3		5.7	%		25/07/2019		25/11/2039
	Promissory Note		4.1		—		—		—		13.9		4.1		15.8	%		04/01/2019		22/02/2019
Real Estate	Leasing		—		12.1		—		—		12.1		3.6		7.8	%		02/01/2019		01/07/2022
	Promissory Note		—		131.7		—		—		131.7		39.0		8.0	%		18/01/2019		26/01/2020
Corporate	Long term loan⁽²⁾		141.5		—		—		—		478.0		141.5		8.4	%		11/06/2019		10/12/2020
	Total		261.3		1,240.8		1,901.4		6,403.0		2,139.7		633.2

(1)	Includes debt held by Vial y Vives—DSD that is denominated in Chilean pesos.

(2)	Does not include our payable to Chubb Insurance Company related to our proportional repayment obligation under the GSP performance guarantee, which was repaid in full on December 6, 2018.

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As of March 31, 2019, S/.149.0 million (US$44.1 million) of our total indebtedness indicated in the table above has matured, of which S/.39.0 million (US$11.5 million) was repaid and S/.110.0 million (US$32.5 million) was renewed by extending the maturities. The weighted average interest rate of this renewed indebtedness and additional indebtedness was 7.7% and the maturity dates range from April 4, 2019 to June 26, 2019.

Set forth below is a description of our material outstanding indebtedness as of December 31, 2018.

Leasing. As of December 31, 2018, we were party to numerous leasing agreements with several financial institutions which in the aggregate amounted to approximately S/.42.97 (US$12.64 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/.20.70 million (US$6.13 million) as of December 31, 2018 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, 2018, Norvial had S/.325.4 million (US$96.3 million) outstanding under these bonds.

Senior Secured Notes. On February 2015, GyM Ferrovías issued a total of S/.629 million (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, 2018, GyM Ferrovías had S/.52.8 million (US$15.7 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 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, 2018, US$62.0 million was outstanding under this financing structure.

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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, 2018, GMP S.A. had US$24.6 million (S/.83.0 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 GSP, which was the concessionaire of the southern gas pipeline project. As of December 31, 2018, the principal amount outstanding under this loan was US$37.5 million (S/.127 million) and, as of the date of this annual report, the principal amount outstanding under this loan is US$31.45 million (S/.103.45 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; 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.

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. 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; and (vii) a first lien on cash flows from the sale of certain assets. The principal amount outstanding under the new term loan was US$63.47 million (S/.214.46 million) as of December 31, 2018, and as of the date of this annual report, there is US$47.25 million (S/.156.16) outstanding on the term loan.

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 in the amount of US$52.5 milllion (S/.177.4 million) became due. On December 6, 2018, we paid the final installment with respect to our our obligations to Chubb Insurance Company.

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Financial Stability Framework Agreement. On July 31, 2017, we, and certain of our subsidiaries, GyM, Construyendo País 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$1.6 million and S/.143.9 million, which may be increased by an additional US$14 million subject to certain conditions; (ii) grant GyM a line of credit of up to US$51.6 million and S/.33.6 million; (iii) grant us, GyM, Construyendo País 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 million (which may be increased by an additional US$50 million 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 Construyendo País S.A., Vial y Vives – DSD and Concesionaria Vía Expresa Sur S.A. In April 2018, we repaid US$72.7 million of the facility with the proceeds of the sale of Stracon GyM and in July of 2018 we repaid an additional of US$ 15.4 million. As of December 31, 2018, there was US$59.44 million outstanding under this agreement.

As of December 31, 2018 and as of the date hereof, our construction subsidiary GyM is under a continuing default under the Financial Stability Framework Agreement with respect to its failure to comply with certain ratios between Tranche A (client invoices) and Tranche B (client provisions). No event of default has been formally notified to GyM by the lenders, and our subsidiary has requested a waiver from the lenders, which is pending. If duly notified to GyM by the lenders, the consequence of this default would be to transfer certain amounts due under Tranche A to Tranche B, for which payment is not due until July 2019. As of December 31, 2018, there was US$43.7 million (S/.147.8 million) outstanding under Tranche A and US$15.7 million (S/.53.0 million) outstanding under Tranche B of the facility, for a total of US$59.4 million.

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.

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 2016, 2017 and 2018.


		2016						2017						2018
		(in millions of S/.)			(in millions of US$)			(in millions of S/.)			(in millions of US$)			(in millions of S/.)			(in millions of US$)
E&C⁽¹⁾⁽²⁾	Capital expenditure		116.8			34.8			49.4			15.2			(40.2	)		(11.9	)
	Divestitures		—			—			(11.8	)		(3.6	)		(257.6	)		(76.2	)
	Total E&C		116.8			34.8			37.6			11.6			(297.8	)		(88.1	)
Infrastructure	Capital expenditure		146.8			43.7			122.6			37.8			131.7			39.0
	Divestitures		—			—			—			—			—			—
	Total Infrastructure		146.8			43.7			122.6			37.8			131.7			39.0
Real Estate⁽³⁾	Capital expenditure		49.7			14.8			39.7			12.2			(4.9	)		(1.5	)
	Divestitures		—			—			(36.3	)		(11.2	)		—			—
	Total Real Estate		49.7			14.8			3.4			1.0			(4.9	)		(1.5	)
Corporate⁽²⁾	Capital expenditure		529.5			157.6			(-0.6	)		(0.2	)		2.2			0.6
	Divestitures		(107.6	)		(32.0	)		(121.7	)		(37.5	)		(12.1	)		(3.6	)
	Total Corporate		421.9			125.6			(122.3	)		(37.7	)		(10.0	)		(3.0	)
	TOTAL⁽⁴⁾⁽⁵⁾		735.2			218.8			41.2			12.7			(181.0	)		(53.6	)

(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/.73.4 million, S/.0 million and S/.0 million of capital expenditures related to acquisitions in 2016, 2017 and 2018, respectively.

(3)	Includes S/.13.9 million, S/.1.0 and S/.8.3 million in investments in 2016, 2017 and 2018, 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.”

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(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.

(5)	Divestitures are related to the sale of non-strategic assets, and minor divestitures are in capital expenditures.

Capital expenditures for our E&C segment of approximately S/.116.8 million (US$34.8 million), S/.49.9 million (US$15.2 million) and S/.(40.2) million (US$(11.9) million), in 2016, 2017 and 2018, respectively, primarily correspond to the purchase and sale of equipment and machinery and, to a lesser extent, investments relating to mining services contracts. In 2016, capital investments in the E&C segment also included S/.51.1 million (US$15.2 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 and sale of equipment and machinery. In 2018, capital investments in the E&C segment only included the sale of equipment.

Capital expenditures for our Infrastructure segment of approximately S/.146.8 million (US$43.7 million), S/.122.6 million (US$37.8 million) and S/.131.7 million (US$39 million) in 2016, 2017 and 2018, respectively, correspond to periodic maintenance and the construction of the second stage of our Norvial toll road concession and, in our Energy line of business, oil development drilling activities as well as improvements for our gas processing plant and investments in the Lima Metro. In 2016, capital expenditures mainly corresponded to the start of the campaign to drill wells in Block IV, the expansion of tanks at Terminales del Peru and the construction of the second stage of our Norvial toll road concession. In 2017, capital expenditures for our Infrastructure segment continued with the construction and maintenance of second stage of Norvial toll road concession, and also investments incurred in drilling wells in Blocks IV. In 2018, capital expenditures for our infrastructure segment also included the continuation of drilling wells and, to a lesser extent, the maintenance of the Lima Metro and the second stage of our Norvial toll road concession.

Capital expenditures for our Real Estate segment of approximately S/.49.7 million (US$14.8 million), S/.39.7 million (US$12.2 million) and S/.(4.9) million (US$(1.5) million) in 2016, 2017 and 2018, respectively, primarily correspond to the purchase of land for real estate projects, including the Pezet and Paul Harris projects in 2016, an additional purchase for the Paul Harris project in 2017, and the liquidation of Panorama project, and an additional purchase for the Paul Harris project in 2018.

In 2016, corporate segment investments were S/ 529.5 million, which mainly included S/426.4 million (US$127 million) for the acquisition of our 20% stake in GSP and S/.22.3 million (US$6.6 million) for an additional stake in Adexus. In 2017 and 2018, there were no relevant corporate segment investments, as the company initiated a divestment process of non-strategic assets.

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). Divestitures in 2017 consisted of approximately S/.169.8 million (US$52.3 million) relating to the sale of our stake in Red Eagle of 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. Divestitures in 2018 consisted of S/.269.7 million (US$79.8 million) relating to the sale of our interests in Stracon GyM, CAM Chile and CAM Servicios.

We have budgeted S/.268.8 million (US$79.6 million) in capital expenditures for 2019. Our current plans for our E&C segment contemplate capital expenditures in 2019 of approximately S/.11.5 million (US$3.4) million, mainly for the purchase of equipment and machinery. Our current plans for our Infrastructure segment contemplate capital expenditures in 2019 of approximately S/.230.4 million (US$68.2 million), principally for investments in oil development drilling activities. Our current plans for our Real Estate segment contemplate expenditures in 2019 of approximately S/.59.9million (US$17.7 million) for the purchase of land for real estate development projects. Our current plans for our Corporate segment contemplate divestitures in 2019 of approximately S/.33 million (US$9.8 million).

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. Forward-Looking Statements.”

C. Research and Development, Patents and Licenses, Etc.

Not applicable.

D. Trend Information

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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 2014 to 2018. According to the Peruvian Central Bank, Peruvian real GDP grew at an average rate of 3.24% 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/. 21,959.3 in 2014 to S/. 23,670.2 in 2018, a 7.79%% increase. Average annual inflation, measured by the change in the CPI index, was 2.9% in the period from 2014 to 2018. On the other hand, Peru’s Sol, depreciated from an average of S/.2.84 per US$1.00 in 2014 to an average of S/.3.29 per US$1.00 in 2018, a depreciation of 14.3%. Peru’s sovereign debt has been granted investment grade rating by S&P, Fitch and Moody’s. At the end of 2018, 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 2019) and A3 by Moody’s (August 2018).

The following table sets forth the main economic indicators of the Peruvian economy from 2014 to 2018:


	2014			2015			2016			2017			2018
Nominal GDP (US$ billions)		202.8			192.3			195.3			215.1			225.3
Nominal GDP / capita (US$)		6,455.0			6,172.7			6,204.5			6,756.7			7,005.1
Real GDP growth rates (% based on local currency GDP)		2.4	%		3.3	%		4.0	%		2.5	%		4	%
Private consumption growth rate		3.9	%		4.0	%		3.3	%		2.5	%		3.8	%
Private investment growth rate		(2.3	%)		(4.3	%)		(5.9	%)		0.1	%		4.4	%
Foreign direct investment growth rate		(15.2	%)		4.9	%		(17.0	%)		(1.4	%)		(8.8	%)
Public expenditure (consumption and investment) growth rate		3.6	%		3.6	%		(0.2	%)		1.1	%		4.3	%
Total private and public fixed investment growth rate⁽¹⁾		(2.1	%)		(5.3	%)		(4.6	%)		0.0	%		5.2	%
Exports growth rate		(0.9	%)		4.0	%		9.5	%		8.5	%		2.5	%
Imports growth rate		(1.4	%)		2.4	%		(2.2	%)		4.0	%		3.4	%
Inflation (measured by change in CPI)		3.2	%		4.4	%		3.2	%		1.4	%		2.2	%
Average exchange rate (S/./US$)		2.84			3.19			3.38			3.26			3.29
End of period exchange rate (S/./US$)		2.99			3.41			3.36			3.25			3.38
Central Bank interest rate (end of period)		3.50	%		3.75	%		4.25	%		3.25	%		2.80	%
Population (million)⁽¹⁾		31.4			31.1			31.5			31.8			32.5
Unemployment rate⁽¹⁾		6.0	%		6.4	%		6.7	%		6.7	%		6.6	%
Total public debt (US$ billions)		38.6			41.8			46.7			53.6			57.9
Public debt/nominal GDP (%)		20.0	%		23.3	%		23.8	%		24.8	%		25.7	%
Net reserves (US$ billions)		62.3			61.5			61.7			63.6			60.2
Net reserves/nominal GDP (%)		30.7	%		32.0	%		31.6	%		29.6	%		26.7	%
Fiscal surplus (deficit)/nominal GDP (%)		(0.3	%)		(2.1	%)		(2.6	%)		(3.1	%)		(2.4	%)

Source: Peruvian Central Bank, SBS, Ministry of Economy and Finance, National Statistical Institute of Peru (INEI), IMF.

(1)	2018 projected by IMF.

The following table sets forth real gross domestic product by expenditure for the years indicated.


GDP by Expenditure (% of GDP unless otherwise stated)	2014		2015		2016		2017		2018
Government consumption		12.2		12.6		12.0		11.8		11.5
Private consumption		63.0		65.5		65.5		64.8		64.7
Total fixed investment		26.3		24.6		22.6		21.1		22.4
Public sector		5.6		5.0		4.8		4.6		4.8

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GDP by Expenditure (% of GDP unless otherwise stated)	2014			2015			2016			2017			2018
Private sector		20.1			19.3			17.8			16.9			17.6
Change in inventories⁽¹⁾		0.6			0.3			(0.0	)		(0.5	)		(0.6	)
Exports of goods and services		22.4			21.0			22.1			24.3			25.0
Imports of goods and services		24.0			23.7			22.2			22.0			23.0
Net exports		(1.6	)		(2.7	)		(0.1	)		2.3			2.0
GDP (in billions of US$)		202.8			192.3			195.3			215.1			225.3

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$13.3 billion and accounted for 5.9% of the country’s nominal GDP in 2018 according to the Peruvian Central Bank. Construction GDP grew at an average of 0.5% annually in real terms during the five years from 2014 to 2018. The following table illustrates, from 2014 to 2018, 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

LOGO

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 15.9% of global silver reserves, 12.3% of global zinc reserves, 11.4% of global copper reserves and 4.4% of global gold reserves, as of March 2019. According to the Peruvian Central Bank, mining exports reached approximately US$ 28.8 billion and represented 59% of total Peruvian exports in 2018.

As of December 2017, the Peruvian Ministry of Energy and Mines estimates 48 mining projects at various stages of development involving an estimated investment of US$59.1 billion.

Mining Investment Projects by Level of Development


	Number of Projects		US$ billion
Under construction		7		10.1
Detailed Engineering		5		4.9
Feasibility		14		14.6
Pre-feasibility		22		29.4
Total		48		59.1

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Source: Peruvian Ministry of Energy and Mines.

Oil and Gas

The oil and gas activity in Peru has decreased with a sector nominal GDP average annual growth rate of (3.0)% during the five years from 2014 to 2018. 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 2018, local production of petroleum was approximately 48.5 Mbbl per day, 12.25% more than 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 2017, proven reserves of oil and gas amounted to 3,131 MMboe. 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)

LOGO

Source: Peruvian Ministry of Energy and Mines

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 2014 to 2018.


Values in nominal US$ billion unless otherwise stated	2014			2015			2016			2017			2018
Nominal GDP		261.1			244.0			250.1			276.9			298.8
Nominal GDP / capita (US$)		14,655.5			13,548.4			13,743.8			15,057.6			15,934.7
Real GDP growth rate (%)		1.9	%		2.2	%		1.3	%		1.5	%		4.0	%
Inflation (%, measured by change in CPI)		4.6	%		4.4	%		2.7	%		2.3	%		2.6	%
Total private and public fixed investment		58.4			53.6			57.8			61.8			58.7
Average exchange rate (CLP/US$)		570.0			654.2			676.8			649.3			640.29
End of period exchange rate (CLP/US$)		607.4			707.3			667.3			615.2			694.0
Population (million)⁽¹⁾		17.8			18.0			18.2			18.4			18.8

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Values in nominal US$ billion unless otherwise stated	2014			2015			2016			2017			2018
Unemployment rate		6.4	%		6.2	%		6.5	%		7.0	%		6.7	%
Public Debt / nominal GDP (%)		14.0	%		16.0	%		21.3	%		24.9	%		25.6
Net reserves / nominal GDP (%)		15.5	%		15.8	%		16.2	%		14.1	%		14.5	%
Fiscal surplus (deficit) / nominal GDP (%)		(1.5	%)		(2.1	%)		(2.7	%)		(2.8	%)		(3.1	%)

Source: Chilean Central Bank, Chilean Government Budget Office, IMF, Global Insight

(1)	2018 projected by the IMF

The Chilean real GDP grew at an average annual rate of 2.2% during the five years from 2014 to 2018 in real terms. The country’s nominal GDP per capita has increased 24.2% from CLP 8.9 million in 2014 to CLP 11.1 million in 2018. 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 2014 to 2018. Inflation has remained stable since 2014, averaging 3.3% between 2014 and 2018, in line with the Chilean Central Bank’s inflation target of 3% +/- 1%. Chilean sovereign debt has the highest rating in the South America region, rated A+ by S&P (July 2017), A1 by Moody’s (July 2018) and A by Fitch (February 2019).

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 2014 to 2018.


Values in nominal US$ billion unless otherwise stated	2014			2015			2016			2017			2018
Nominal GDP		377.9			288.4			280.4			309.2			266.4
Nominal GDP / capita (US$)		7,928.1			5,983.0			5,751.6			6,272.4			5,349.1
Real GDP growth rate (%)		4.6	%		3.1	%		2.0	%		1.8	%		2.7	%
Inflation (%, measured by change in CPI)		3.7	%		6.8	%		5.8	%		4.1	%		3.1	%
Total private and public fixed investment		76.5			60.7			66.7			66.7			64.6
Average exchange rate (COP/US$)		2,001.1			2,771.5			3,051.0			2,951.3			2,956.6
End of period exchange rate (COP/US$)		2,392.5			3,149.5			3,000.7			2,984.0			3,208.6
Population (million)⁽¹⁾		47.7			48.2			48.7			49.3			49.8
Unemployment rate⁽¹⁾		8.7	%		8.6	%		8.7	%		8.6	%		9.7	%
Public Debt / nominal GDP (%)		37.7	%		41.4	%		42.8	%		45.3	%		50.4	%
Net reserves / nominal GDP (%)		12.5	%		16.2	%		16.6	%		15.4	%		14.2	%
Fiscal surplus (deficit) / nominal GDP (%)		(2.6	%)		(3.1	%)		(3.9	%)		(3.3	%)		(3.1	%)

Source: Colombian National Department of Administration of Statistics (DANE), Colombian Central Bank, Colombian Treasury Department, IMF, Global Insight

(1)	2018 projected by the IMF

Colombian real GDP grew at an average annual rate of 2.8% during the five years from 2014 to 2018. The country’s nominal GDP per capita has decreased 9.5% from COP 19.0 mm in 2014 to COP 17.2 mm in 2018. Inflation has increased in recent years, averaging 4.7% per year from 2014 to 2018, 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 2,001.1 per US$1.00 in 2014 to an average of COP 2,956.6 per US$1.00 in 2018. Colombia’s sovereign debt currently holds BBB rating from Fitch (November 2018) BBB- from S&P (December 2017), and Baa2 from Moody’s (February 2018). Colombia is also recognized for its investor-friendly legal regime.

E. Off-Balance Sheet Arrangements

As of December 31, 2018, we did not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our 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

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The following table sets forth our contractual obligations with payment terms as of December 31, 2018.


	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⁾		781,649		403,565		175,163		813,495		2,173,872
Capitalized Lease Obligations⁽¹⁾		17,321		7,333		12,998		—		37,652
Interest⁽²⁾		5,022		43,750		41,391		4,138		94,302

Total⁽³⁾		803,992		454,648		229,552		817,633		2,305,826

(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)	Excludes building leases, which are not material.

G. Safe Harbor

See “Part I. Forward-Looking Statements.”

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. 26,887 (“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 eight 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. As of the date of this annual report, we have one vacancy in our board of directors. We expect to fill this vacancy in the near term.

The board of directors typically meets monthly, 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. 29,720, 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.

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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. 29,720, 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. The term of the current board of directors 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		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
Roberto Abusada Salah	Director		1946		2017
Alfonso de Orbegoso Baraybar	Director (Independent)*		1962		2017
Manuel del Río Jiménez	Director (Independent)*		1952		2017
Ernesto Balarezo Valdez	Director (Independent)*		1967		2018

*	Independent member under the Exchange Act 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, Peru.

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

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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, 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, 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. 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 Pontificia Universidad Católica del Perú, as well as in private companies.

Ernesto Balarezo Valdez. Mr. Balarezo has a Master´s Degree in Industrial Management and a Bachelor´s Degree in Industrial Engineering, both degrees obtained at the University of Texas A&M in United States. He holds post-graduate specializations in Management, Finance, Human Resources, at Institutions such as Institute of Directors (IoD), Harvard, Wharton, INSEAD, IESE, among others. He is currently working as a partner and director of Comunal Coworking. In the previous three years, he held the positions of Executive Vice President for the Americas at Gold Fields Limited, and CEO of Gold Fields La Cima S.A. He previously worked for sixteen years for the Hochschild Group. His last position was as Vice President of Operations at Hochschild Mining. He was also Chief Executive Officer of Hochschild Mining in Mexico and then in Peru, as well as Deputy Chief Executive Officer and Chief Financial Officer in Cementos Pacasmayo. He has also been Director of several companies related to the Hochschild Group and Gold Fields Ltd and Director—Founder of the Peruvian—South African Chamber. He has also contributed as Director of Peru 2021 and in IPAE Acción Empresarial.

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 our company and their respective positions:

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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
Daniel Urbina Pérez	Chief Legal Officer		1969		2018		2018
Marlene Negreiros Bardales	Chief Human Resources Officer		1972		2019		2019
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
Luis Fukunaga Mendoza	Chief Executive Officer of GMI		1970		2018		2002
Reynaldo Llosa Martinto	Chief Executive Officer of GMP		1960		2014		2014
Jorge Luis Izquierdo Ramirez	Chief Executive Officer of CONCAR		1973		2019		1999
Manuel Wu Rocha	Chief Executive Concessions Officer		1977		2018		2001
Mario Gálvez Abad	Chief Executive Officer of GyM Ferrovías		1972		2018		2017
Antonio Rodríguez Canales	Chief Executive Officer of Morelco		1963		2018		1999
Alejandro Palma Jara	Chief Executive Officer of Vial y Vives-DSD		1959		2018		2018
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	Chief Executive Officer of Qualys/Chief of Information Technology		1958		2019		2016
Julia Sobrevilla Perea	Corporate Affairs Offer		1969		2018		2018

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 and Viva 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.

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.

Marlene Negreiros Bardales joined the group in February 2019 as Corporate Human Resources Officer. Before that, she served as Corporate Human Resources Officer in Gloria Group, and prior to that, she served as a Global Human Resources Director in AJE Group. She holds a degree in business administration from Universidad Peruana de Ciencias Aplicadas, a Human Resources Business Partner certification from Human Resources Certification Institute (HRCI), and a postgraduate certification in Human Resources from INCAE Executive Education and the MCDonough School of Business from Georgetown University.

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.

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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 he 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 the chief executive officer of our subsidiary GyM.

Luis Fukunaga Mendoza. Mr. Fukunaga joined the group in 2002 and has been our roads concessions manager in the infrastructure area since October 2012. He also served as director of our subsidiaries Survial, Norvial, Concesionaria Vía Expresa Sur and Concar. 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 an 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 is currently a director 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.

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. He is currently a director of our subsidiary Concar.

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. Mr. Wu is currently Chief Executive Concessions Officer.

Mario Gálvez Abad. Mr. Gálvez joined the group in January 2017, assuming the Deputy General Manager of our subsidiary GyM Ferrovías. He holds a bachelor’s degree in economics with complementary studies in negotiation, project evaluation and credit risk. He has more than 15 years of experience in commercial and consumer banking. He served as general manager at Aeropuertos del Perú and also held the position of Administration and Finance Manager at the same company. He is currently a director of our subsidiary GyM Ferrovías.

Antonio Rodriguez Canales. Mr. Rodríguez joined the group in 1999, and has been our chief commercial officer from 2015 to 2017. He previously served as chief investment officer, from 2010 to 2014. Before that, he was the chief executive officer of Larcomar from 1999 to 2010. He also served as director of our subsidiaries CAM and GMD and is currently a director of our subsidiary Morelco. 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.

Alejandro Palma Jara. Mr. Palma joined Vial y Vives – DSD in June 2018 as Mining Commercial Manager, and was appointed as Interim General Manager in January 2019. He is a Construction Engineer (Chile) and holds a Masters in Civil Engineering in Geotechnical Engineering and Infrastructure from the University of Hannover (Germany), and has been recognized as well as a Diplom-Bau Ingenieur in Germany. He has over 34 years of national and international professional experience in construction, mining consulting and engineering. He is also a Qualified Person at the Registro Público de Personas Competentes en Recursos y Reservas Mineras of Chile. He was general manager at SRK Consulting Chile for 15 years, Board Director in Chile for 13 years, Board Director of SRK Consulting (Global) for 10 years, Board Director and Vice President of SRK Consulting (Argentina) for 7 years and Board Director of SRK Consulting (North America (USA-Canada-Mexico)) for 3 years. He was also, from July 2016 until February 2018, Vice President Mining Consulting for South America and Vice President for Ausenco Chile & Argentina. He was a key player introducing successfully in Chile the first double shield Tunneling Boring Machine TBM for the 7.9 Km long Tunnel Sur Los Bronces from Anglo American and worked as project director until the excavation was completed. He led directly the Prefeasibility Study for the 95 ktpd iron ore project Dominga (US$2.4 Billion), with more than 130,000 manhours with a scope from mine to port (including R&R estimation), and also led most of the large projects carried out at SRK for 15 years.

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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. He is currently a director of Adexus.

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 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 our 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 also served as director 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. Mr. Fernandez is currently a director of our subsidiary QUALYS and Chief Information Technology.

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.

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Executive Commission

The Executive Commission is currently comprised by our Chief Executive Officer, Chief Operating Officer, the Business Segment Executive Officer for each of the three segments, our Chief Financial Officer, our Chief Legal Officer, Public Affairs Officer, our Chief Human Resources Officer, our Chief Audit Executive, our Chief Risk and Compliance Officer and Corporate Information Technology 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.

Kinship

None.

B. Compensation

Compensation of Directors and Executive Officers

Director compensation must be approved by a majority of shareholders at our annual shareholders’ meeting.

In 2018, total compensation paid to our board of directors amounted to S/.2.6 million including compensation paid to directors that serve on our subsidiaries’ board of directors. In 2018, total compensation paid to our executive officers amounted to S/.23.8 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 our 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 incentive.

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 our 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.

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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 our 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.

C. Board Practices

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 three directors, all of which are independent under the Exchange Act. The current members of our Audit and Process Committee are Mr. Pedro Pablo Errazuriz Domínguez, Mr. Manuel del Río (chairman of the committee) and Mr. Alfonso de Orbegoso. These directors have extensive business and economic experience in Peru. Mr. Manuel del Río qualifies as an “audit committee financial expert” in accordance with NYSE independence standards and applicable 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 our 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 NYSE independence standards. The current members of the committee are Mr. Rafael Venegas (chairman of the committee), Mr. Pedro Pablo Errázuriz and Mr. Ernesto Balarezo. 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 our 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.

Strategy and Investment Committee

Our Strategy and Investment Committee is comprised of four directors, with independent members under NYSE independence standard, currently comprising the majority of the committee. The current members of the committee are Mr. Augusto Baertl, Mr. Rafael Venegas and Mr. Ernesto Balarezo Valdez (chairman of the committee). Once appointed, the new member of our board of directors is expected to be appointed to this committee.

The Strategy and 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 four directors, with independent members under NYSE independence standard, currently comprising the majority of the committee. The current members of the committee are Mr. Alfonso de Orbegoso Baraybar (chairman of the committee), Mr. Augusto Baertl and Mr. Manuel del Río. Once appointed, the new member of our board of directros is expected to be appointed to this committee. 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 our company, and supervising the development of the risks and compliance area;

•

ensuring compliance with our 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 our company; and

•

supervising and reporting to our board of directors on social responsibility practices and management.

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 NYSE independence standards per committee.

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Engineering and Construction Committee

Our Engineering and Construction Committee supervises the operations of our E&C segment. The current members of the committee are Mr. Augusto Baertl and Mr. Alfonso de Orbegoso. Once appointed, the new member of our board of directors is expected to be appointed to this committee.

Infrastructure Committee

Our Infrastructure Committee supervises the operations of our Infrastructure segment. The current members of the committee are Mr. Rafael Venegas, Mr. Manuel del Río and Mr. Pedro Pablo Errazuriz.

D. Employees

We have developed an extensive and talented team, including more than 1,700 engineers, which gives us the capability and scale to undertake large and complex projects. We also have access to a network of approximately 132,000 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, 2018, we had a total of 11,891 full-time employees, including approximately 4,279 manual laborers, a number that fluctuates depending on our project backlog. At such date, we also worked with 2,506 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, 2018, 69% of our employees worked outside Peru. The following table sets forth a breakdown of our employees by category as of December 31, 2018.


Salaried Employees	E&C		Infrastructure		Real Estate		Corporate		TOTAL
Engineers		1,229		434		29		37		1,729
Other Professionals		480		260		33		130		903
Technical specialists		1,070		2,081		42		26		3,219
Manual Laborers⁽¹⁾		4,279		—		—		—		4,279
Joint operation employees⁽²⁾		1,627		134		—		—		1,761
Subtotal		8,685		2,909		104		193		11,891
Subcontracted employees		1,166		1,340		—		—		2,506
Total		9,851		4,249		104		193		14,397

(1)	The number of manual laborers, who form part of our network of approximately 132,000 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, 2015 to December 31, 2018.

LOGO

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 2018, we invested more than US$0.36 million in continuing education, reaching approximately 341,802 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.

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.

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In 2018, our company trained our top and middle management, collaborators and suppliers or subcontractors in security matters. During this period, we reported an accident incidence rate of 0.32 accidents for every 200,000 hours worked, remaining at a level similar to 2017.

Our occupational health and safety management system in all of our subsidiaries (Chile, Peru, Colombia) 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 143,000 hours of training in risk prevention for managers and directors, more than 529,000 hours of training for employees and nearly 326,000 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.

E. Share Ownership

As of March 31, 2019, 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 3.98% 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 3.87% 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 our 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

A. Major Shareholders

As of April 2, 2019, our issued and outstanding share capital was comprised of 871,917,855 common shares. The following table sets forth the beneficial ownership of our common shares as of April 2, 2019, based on information provided to us by CAVALI S.A. ICLV, the Peruvian clearing house (“CAVALI”) and The Bank of New York Mellon, as depositary for the holders of ADS, except as set forth below.


Shareholder	Number of shares		Percentage owned
GH Holding Group⁽¹⁾		117,538,203		13.48	%
Pacifico Corp S.A.C.		87,191,786		10.00	%
Fratelli Investment Limited⁽³⁾		86,633,390		9.94	%
AFP INTEGRA S.A. (Sura Group)		72,296,726		8.29	%
AFP PRIMA S.A. (Grupo Crédito)		61,902,445		7.10	%
Aberdeen Asset Management PLC⁽²⁾		43,298,200		4.97	%
AFP PROFUTURO S.A. (Grupo Scotiabank)		38,751,338		4.44	%
Bethel Enterprises Inc.⁽⁴⁾		33,785,285		3.87	%
The Bank of New York Mellon, as depositary for the holders of ADS⁽⁵⁾		74,782,955		8.58	%
Other Shareholders⁽⁶⁾		255,737,527		29.33	%

Total		871,917,855		100.00	%

(1)	GH Holding Group is owned by: (i) Enriqueta Graña Miró Quesada, with 30.0%; José Graña Miró Quesada, our former chairman, with 26.1%; Teresa Canepa Yori de Graña, with 26.1%; Maria Francisca Graña Canepa, with 6.0%; and Maria Teresa Graña Canepa, with 6.0%; and Luis Brahim, with 5.8%.

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(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 3.87% 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, 2018.

(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, 2018, 26 record holders of our common shares were located in the United States (including Bank of New York Mellon, 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, and 23,747 shares of GMI, representing 0.279%.

Additionally, on April 2, 2019, our company issued and sold 142,483,633 common shares pursuant to a private placement, of which: (i) 55,291,877 shares were paid in full and (ii) 87,191,786 shares were paid 50% with 50% to be paid by July 1, 2019. For more information, see “Item 5.—Liquidity and Capital Resources.”

The following table sets forth the changes in beneficial ownership of our common shares from December 31, 2016, to December 31, 2018, based on information provided to us by CAVALI and the depositary for the holders of ADS. ADS data as of December 31, 2016 and 2017 was provided by JPMorgan Chase Bank NA, as depositary. ADS data as of December 31, 2018 was provided by The Bank of New York Mellon, as depositary.


	As of December 31, 2016				As of December 31, 2017				As of December 31, 2018
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		16.11
AFP PRIMA S.A.		4,387,824		0.66		74,011,175		11.21		61,902,445		8.49
IN-CARTADM (AFP Integra-Sura Group)		38,384,976		5.82		72,223,691		10.94		72,296,726		9.91
PR-CARTADM (Profuturo AFP-Grupo Scotiabank)		36,968,166		5.60		23,136,533		3.51		38,751,338		5.31
Aberdeen Asset Management PLC⁽²⁾		35,501,465		5.38		49,730,025		7.53		43,298,200		5.94
Bethel Enterprises Inc.⁽³⁾		33,785,285		5.12		33,785,285		5.12		33,785,285		4.63
JPMorgan Chase Bank NA, as depositary for the holders of ADS⁽⁴⁾		229,683,570		34.80		96,482,855		14.62		—		—
The Bank of New York Mellon, as depositary for the holders of ADS⁽⁵⁾		—		—		—		—		75,050,020		10.29

(1)	GH Holding Group is owned by: Enriqueta Graña Miró Quesada, with 30.0%; José Graña Miró Quesada, our former chairman, with 26.1%; Teresa Canepa Yori de Graña, with 26.1%; Maria Francisca Graña Canepa, with 6.0%; and Maria Teresa Graña Canepa, with 6.0%; and Luis Brahim, with 5.8%.

(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.

(5)	Depositary change reported through Form 6-K filed on December 10, 2018.

Our major shareholders do not have different voting rights.

B. Related Party Transactions

Peruvian Law Concerning Related Party Transactions

Peruvian law sets forth certain restrictions and limitations on transactions with certain related parties.

Valuation: 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:

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•

The directors and managers of our company cannot, without the prior authorization of the board of directors, (i) receive in the form of a loan money or assets of our company; or (ii) use, for their own benefit or for the benefit of related parties, assets, services or credits of our company.

•

The execution of agreements that involve at least 5% of the assets of our 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 our 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 determined by Resolución SMV N° 029-2018-SMV-01).

Independent review: 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 such parties involved.

Terms and conditions: 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.

Approve and accounting: 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 Risk, Compliance and Sustainability Committee is responsible for 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, the authorization is delegated to the operations of the business line. 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 2018 (other than the sale of Stracon GyM) were material to our 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 2018:

•

Our subsidiary Viva GyM paid a total of US$166,500 for advertising and publishing services to Editora El Comercio S.A., a company where Mr. José Graña Miró Quesada, the former Chairman of our Board of Directors and current shareholder, is a shareholder.

•

In April 2018, we sold our 87.59% interest in Stracon GyM for US$76.82 million to Stracon SAC, a company of which Steve Dixon, the former chief executive officer of Stracon GyM, holds 36.84%.

•

We signed a consulting agreement with Augusto Baertl, the Chairman of our Board of Directors, in the amount of US$124,000. The consulting agreement renews annually.

•

In September 2018, our subsidiary GyM signed loan agreements with Mr. Renato Eduardo Rojas Balta, chief executive officer of our subsidiary GyM, and members of his family, under which GyM borrowed an aggregate of US$319,820, at 10% interest, to pay tax debts of the company. In November 2018, GyM repaid these loans in full.

•

On January 30, 2019, an associated company of Viva GyM, Obratres SAC, sold to Antonio Rodriguez, chief executive officer of our subsidiary Morelco, three apartments in the JAUS—Barranco Project, for a total of US$696,000.

C. Interests of Experts and Counsel

Not applicable.

ITEM 8.

FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information.

See Item 18 of this annual report on Form 20-F.

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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, 2018, we had recorded provisions amounting to S/.84.7 million in connection with legal and administrative proceedings. See note 23 to our audited annual consolidated financial statements included in this annual report.

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, conducted congressional inquiries into our company and other construction companies in Peru. Certain of our company’s former board members and executive officers have been required to give testimony at hearings before the commission, during which they have affirmed that our company was unaware of Odebrecht’s illicit activities.

Peruvian prosecutors have included José Graña Miró Quesada, the former Chairman of our company, in an investigation for the crime of collusion, and Hernando Graña Acuña, a shareholder, a former board member of our company and 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 our 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 our company and our construction subsidiary, GyM, as criminal defendants in connection with the projects. In response, the Peruvian First National Preparatory Investigation Court (Primer Juzgado de Investigación Preparatoria Nacional) notified us of its decision to formally include our company and GyM in its criminal investigation. We appealed the court’s decision and, in June 2018, the First Court of Appeals of the Superior Court of Lima revoked the judicial order that indicted our company and GyM, among other corporate defendants, in the criminal investigation on charges of collusion and other crimes and rejected the petition, without prejudice, made by the prosecutor to incorporate both companies in the aforementioned process. Nevertheless, we cannot assure you that the criminal prosecutor will not file a new motion to charge our company and/or GyM or that our position will ultimately prevail if such motion is filed.

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. 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. In December 2018, GyM was formally included in this criminal investigation as civilly-responsible third party along with eleven other construction companies.

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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 our 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 pay any dividends until the common shares issued in our recent capital increase have been inscribed in the public registry and all such shares are paid 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/.)
2016		30,854,000		0.046700000
2017		—		—
2018		—		—

B. Significant Changes.

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

A. Offer and Listing Details

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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 NYSE under the symbol “GRAM.” On April 26, 2019, the closing price on the NYSE was US$3.5 per ADS. On May 17, 2018, the NYSE suspended the trading of our ADSs and commenced proceedings to delist our company. Our company appealed the decision. From May 21, 2018 until July 5, 2018, our ADSs were available for trading on the over-the-counter (OTC) market in the United States. On Friday, July 6, 2018, trading of our ADSs resumed on the NYSE.

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 April 26, 2018, the closing price on the Lima Stock Exchange was S/.2.20 per common share. As of December 31, 2018, 28 record holders of our common shares were located in the United States, according to CAVALI.

B. Plan of Distribution

Not applicable.

C. Markets

Trading in the Peruvian Securities Market

Lima Stock Exchange

As of the day of this annual report, there were 271 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:


	2014		2015		2016		2017		2018
Market capitalization (in millions of soles)⁽¹⁾		360,960		309,412		416,787		526,841		481,081
Volume (in millions of soles)		17,301		12,001		15,342		29,022		20,975
Average daily trading volume (in millions of soles)		69		48		61		116		84

(1)	End-of-period figures for trading on the Lima Stock Exchange.

The stock market capitalization of companies listed on the Lima Stock Exchange was US$142.4 billion at the end of 2018, compared to US$120.8 billion, US$90.7 billion, US$124.0 and US$162.4 billion at the end of 2014, 2015, 2016 and 2017 respectively.

Total market volume in 2018 was US$6.2 billion, reflecting a 30.59% decrease compared with 2017. Equity market volume, which represented 54.7% of total market volume, ended the year at US$3.4 billion, 46.1% lower than the previous year. The repo market, which represented 11.2% of total market volume, reported volume of US$694.0 million in 2018, reflecting a decrease of 0.59%.

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The total number of operations in the market in 2018 decreased by 28.3%, closing the year at 113,828 operations. The number of operations in the equity market in 2018 decreased by 30.6% to 102,503 operations.

In 2015, the S&P/BVL Peru General Index (Índice S&P/BVL Peru General) 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. In 2018, it reached 19,350 points, decreasing 3.1% compared to 2017.

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.

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.

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D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

ITEM 10.

ADDITIONAL INFORMATION

A. Share Capital

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 NYSE.

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.

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.

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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 the Peruvian tax authority (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.

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 our 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

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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 our 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.

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:

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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;

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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;

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arbitrations shall be conducted before a panel of three arbitrators;

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arbitrators shall consider only the applicable law for their award (arbitration in law and not arbitration in equity);

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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;

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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.

C. Material Contracts

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 incorporated by reference as Exhibit 10.01 to this annual report.

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. The principal amount outstanding under the new term loan was US$63.47 million (S/.214.46 million) as of December 31, 2018, and as of the date of this annual report, US$47.25 million (S/.156.16) is outstanding on the term loan. For more information, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” This agreement and the amendments thereto have been incorporated by reference as Exhibit 10.02 to this annual report.

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Financial Stability Framework Agreement

On July 31, 2017, we, and certain of our subsidiaries, GyM, Construyendo País 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. As of December 31, 2018 and the date of this annual report, US$59.44 million (S/200.83 million) was outstanding under the Financial Stability Framework Agreement. For more information, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” This agreement and the amendments thereto have been incorporated by reference 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 incorporated by reference 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. This agreement and the amendments thereto have been incorporated by reference 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.”

D. Exchange Controls

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 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.

E. Taxation

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.

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For purposes of Peruvian taxation:

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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

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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 – including branches, agencies (agencias), and permanent establishment (establecimientos permanents) of 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 the 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.

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, will be exempt from income tax, provided, however, that the following conditions are met:

With respect to (i), (ii) and convertible bonds:

(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

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(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/.4,200.00) shall have occurred in at least 27 business days out of any 180 business day period including the date of the transaction.

With respect to (iii), (iv), (v) and (vi):

(a)

The transfer must be performed through a centralized trading mechanism supervised by the Securities Market Superintendence; and

(b)

The shares must have a “market presence,” meaning that transactions in respect of those shares for a value exceeding four Tax Units (currently, S/.4,200.00) shall have occurred in at least 27 business days out of any 180 business day period including the date of the transaction.

With respect to (vii), the transfer must be performed through a centralized trading mechanism supervised by the Securities Market Superintendence.

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.

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, provided that the Lima Stock Exchange applies a discount of 90% of such commission if stock is included in the Good Corporate Governance Index), fees payable to the Peruvian Securities Commission (0.0135% of value sold, provided that the Peruvian Securities Commission applies a discount of 90% of the abovementioned commission if stock is included in the Good Corporate Governance Index), brokers’ fees (about 0.05% to 0.50% of value sold by legal entities) 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:

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an individual citizen or resident of the United States;

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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;

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an estate the income of which is subject to United States federal income taxation regardless of its source; or

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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:

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a dealer in securities or currencies;

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a financial institution;

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a regulated investment company;

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a real estate investment trust;

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an insurance company;

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a tax-exempt organization;

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a person holding our common shares or ADSs as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;

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a trader in securities that has elected the mark-to-market method of accounting for your securities;

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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 stock (by vote or value);

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a person required to accelerate the recognition of any item of gross income with respect to our common shares or ADSs as a result of such income being recognized on an applicable financial statement;

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a partnership or other pass-through entity for United States federal income tax purposes; or

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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.

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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 NYSE, will be 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.

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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.

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 other disposition 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 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. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

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. In addition, the SEC maintains an Internet website at http://www.sec.gov, from which you can electronically access these materials.

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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.

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.

I. Subsidiary Information

See the notes 2.2 and 6 to our audited annual consolidated financial statements included in this annual report for a description of our subsidiaries.

ITEM 11.

QUANTITATIVE 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 2018, we estimate that 32.53%, 55.63% and 11.83% of our revenues were denominated in soles, U.S. dollars and other currencies (principally Chilean pesos), respectively, while 63.22%, 23.11% and 13.67% of our cost of sales during the year were denominated in soles, U.S. dollars and other currencies. In addition, as of December 31, 2018, 56%, 41% and 3% of our total debt was denominated in soles, U.S. dollars and other currencies, respectively. If, at December 31, 2018, 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/.0.5 million.

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, 2018, 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/.0.75 million annually.

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 2018. We do not have long-term contracts for the supply of these key inputs. Based upon our consumption of these inputs during 2018, a 10% increase/decrease in the prices of each of oil, steel and cement would have increased/decreased our costs of sales by S/.1.0 million, S/.6.8 million and S/.1.7 million, respectively. However, based on our production of oil during 2018, a 10% increase/decrease in the price of oil would have increased/decreased our revenues by S/.29.3 million.

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ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American 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 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;

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•

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 2018, the depositary reimbursed us for expenses in an aggregate amount of US$90,718 (S/.306,538).

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PART II.

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

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 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.

During 2018, GyM Ferrovias was in continuing default under the financing of the expansion project due to the non-delivery of our audited consolidated financial statements for the 2016 fiscal year, in our capacity as guarantor of the obligations of GyM Ferrovias under the agreement. The financing required that we provide the financial statements no later than April 4, 2018. Also, the financing required that we deliver our audited consolidated financial statements for the 2017 fiscal year by May 15, 2018. We were not able to deliver those financial statements on time. We requested a waiver from the lenders, which we received on July 2, 2018, by which time we had already delivered our audited financial statements for the 2016 and 2017 years.

Syndicated Loan

Due to the termination of the GSP gas pipeline concession on January 24, 2017, we were in breach of our covenants, including our Consolidated Leverage Ratio, under our syndicated loan as of December 31, 2016, as the effects on our financial condition and results of operations of the concession termination were taken into account for the purposes of calculating compliance with our financial covenants for 2016. However, as of December 31, 2017 our Consolidated Leverage Ratio (as defined therein) was 2.2x, no more than 3.5x as required under the syndicated loan. Upon the termination of the GSP gas pipeline concession on January 24, 2017, we were required to prepay our syndicated loan. We amended the terms of our syndicated loan, including certain financial covenants and certain prepayment requirements.

During 2018, and due to the accounting adjustments in connection to the termination of the GSP gas pipeline concession, we were again under certain continuing defaults under the syndicated loan with respect to certain financial ratios and the failure to timely deliver our audited consolidated financial statements for the 2016 and 2017 fiscal years. The syndicated loan required that we provide the financial statements for the 2016 and 2017 fiscal years no later than April 30, 2018. As of March 31, 2018, our Consolidated Leverage Ratio (as defined therein) was 2.6, rather than no more than 2.50 as required under the syndicated loan. We have requested a waiver from the lenders, which we received on August 17, 2018, by which time we had already delivered our audiated financial statements for the 2016 and 2017 years.

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, 2017, there was US$72.5 million (S/.235.2 million) of principal amount outstanding under our corporate guarantee. 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 2018, we were under certain defaults under the new term loan with respect to the failure to timely deliver by April 30, 2018 our audited consolidated financial statements for the 2016 and 2017 fiscal years, which we delivered in July 2018. In addition, the company was in default as of December 31, 2018 due to its failure to make payment on June 27, 2018 of 40% of the amounts outstanding under the term loan. The company requested a waiver, which it formally received from the lenders on January 31, 2019, concurrent with which the company repaid the amounts that were overdue (US$16.2 million).

Financial Stability Framework Agreement

As of December 31, 2018 and as of the date hereof, our construction subsidiary GyM is under a continuing default under the Financial Stability Framework Agreement with respect to its failure to comply with certain ratios between Tranche A (client invoices (facturas)) and Tranche B (client provisions). No event of default has been formally notified to GyM by the lenders, and our subsidiary has requested a waiver from the lenders, which is pending. If duly notified to GyM by the lenders, the consequence of this default would be to transfer certain amounts due under Tranche A to Tranche B, for which payment is not due until July 2019. As of December 31, 2018, there was US$43.7 million (S/.147.8 million) outstanding under Tranche A and US$15.7 (S/.53.0) outstanding under Tranche B of the facility, for a total of $US$59.4 million.

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For more information, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments” and “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”

ITEM 14.

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

Material Modifications to the Rights of Security Holders

None.

Use of Proceeds

On November 6, 2018, our company’s general meeting of shareholders and board of directors approved an offering and sale of our company’s common shares pursuant to a private placement. In December 2018, our company issued and sold a total of 69,380,402 common shares, to certain of our company’s existing shareholders that exercised preemptive rights in accordance with Peruvian law. On April 2, 2019, our company issued and sold 142,483,633 common shares pursuant to the private placement, of which: (i) 55,291,877 shares were paid in full and (ii) 87,191,786 shares were paid 50% with 50% to be paid by July 1, 2019. In total, our company issued and sold 211,864,065 common shares with the proceeds used to reduce debt, to pay our vendors and for working capital of one of our company’s subsidiaries.

ITEM 15.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, our disclosure controls and procedures were not effective as a result of the material weaknesses in internal control over financial reporting described below.

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for our company as such term is defined by Exchange Act rules 13(a)-15(f) and 15(d)-15(f). In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002 (“SOX”), management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted IFRS accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have established a continuous testing process throughout the year. From this assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018, we have identified certain material weaknesses. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual and interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses identified are described below:

•

deficiencies in the design and operational effectiveness of controls over segregation of duties to help ensure that personnel with potential conflicts were not involved in non-compatible activities;

•

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•

Conclusion

These material weaknesses resulted in adjustments to the accounting for revenue and accounts receivable. 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, 2018, based on criteria in Internal Control-Integrated Framework (2013) issued by the COSO.

Moore Stephens SCAI S.A. (a member firm of Moore Stephens International), an independent registered public accounting firm, which has audited and reported on the consolidated financial statements as of and for the year ended December 31, 2018 contained in this annual report on Form 20-F, has issued an attestation report on our internal control over financial reporting as of December 31, 2018.

Remediation Plan

We are in the process of implementing significant improvements to our internal control over financial reporting, as described in our annual report on Form 20-F for fiscal year 2017 and as described herein. As part of this process, we are taking remedial actions to address the material weaknesses that have been identified with respect to our internal control over financial reporting.

We are currently preparing a draft company risk manual that includes a methodology, a process of identification, evaluation and quantification of risks, a continuous improvement plan and a monitoring and reporting process. In parallel and for the key processes, management is identifying significant risks and their impact to prioritize their review and control enhancement and monitor their implementation as necessary.

As of December 31, 2018, we completed the implementation of controls over substantially all (and as of the date hereof, we have completed the implementation of controls over all) of our subsidiaries to comply with the SOX requirements, and the testing of these controls in design and effectiveness over financial reporting will be performed in 2019.

In relation to controls on segregation of duties, we have completed the identification of the conflicted accesses to our accounting and key systems, and a remediation plan is in progress. This plan includes making changes to those accesses in order to ensure there is no conflict over the segregation of duties.

We will continue providing proper training to our accounting team in matters related to IFRS, and to employees responsible for our internal controls, to ensure they have an appropriate level of knowledge and can build on our experience with those controls, specifically, relating to monitoring and accounting, in order to execute their control responsibilities. In addition, controls over the accounting process are under review to ensure that information is provided to the accounting department in a complete, accurate and timely fashion, financial statements are assessed, supporting documentation of accounting entries is provided, there is a correct segregation of duties between preparation and approval of accounting entries, and access control to spreadsheets used for manual accounting are kept correctly. In addition, as part of this plan, controls in revenue recognition will be reinforced with the implementation of policies and procedures in accordance with IFRS.

Furthermore, moving forward, we will continue to monitor and assess our remediation activities to address the material weaknesses described above through remediation as soon as practicable. The implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting described above.

The process of designing and implementing an effective reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. 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 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.” If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and investor confidence and the market price of our ADSs may be materially and adversely affected.

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Attestation Report of the Registered Public Accounting Firm

See Item 18. Financial Statements.

Changes in Internal Control Over Financial Reporting

During 2018, the company made changes to its internal control over financing reporting to address material weaknesses identified during 2017. The company continued implementing its remedial plan as described in Item 15.B. of the annual report for the 2017 fiscal year. Specifically, the company addressed material weaknesses in its control environment, the timely accounting for signed contracts, controls over the accounting of inventory, and the role of the internal audit function, as follows:

During 2017 and 2018, the company, through its senior management, began to implement programs to strengthen the tone of the top of the organization affecting how the organization performs risk management, financial analysis, accounting and financial reporting. These activities have included during 2018: the launch of an updated code of ethics to all officers and employees; ethics training programs, which have been completed by 90% of employees; conflicts of interest declarations for all employees; the strengthening of our hiring process; the launch of a communication program for all employees with respect to the company’s compliance policies; the implementation of an updated organizational structure, including the review and adjustment of the delegation of authority; the development of a plan to implement the new internal control system across the company, the completion of which is ongoing; and the implementation of a due diligence program to third parties (partners and suppliers) as part of the implementation of a fraud risk program.

During 2018, the company began the review of the main processes to identify deficiencies in controls to address risks related to material misstatements. This review included the following processes: accounting closing, inventory, signing of contracts, segregation of duties, project management, and new business development.

One of the material weaknesses identified in 2017 was the timely accounting for signed contracts. During 2018, this process was reviewed and changes were made to ensure that all signed contracts were accounted for on a timely basis. The deficiencies identified in 2017 with respect to the accounting for inventory were related to inventory reviews that were not performed on a timely basis. During 2018, inventory reviews were performed in all our applicable subsidiaries and actions were taken to address discrepancies.

Additionally, the company’s internal audit function was reorganized. A new Chief Executive Auditor, who reports directly to the Audit Committee, was appointed in January 2018. Additionally, we hired personnel within the internal audit department with the appropriate training and experience in auditing to ensure that our internal control system and processes are executed adequately.

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ITEM 16.

[RESERVED]

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

Mr. Manuel del Río qualifies as an “audit committee financial expert” and is independent under the Exchange Act.

ITEM 16B.

CODE OF BUSINESS CONDUCT AND ETHICS

We are committed to responsible, honest, transparent and ethical conduct. Our management system enables us to communicate our corporate values and principles to all levels of the organization, offers a confidential reporting mechanism (canal ético), and has a governance structure, independent from management, to investigate and remedy potential breaches of our code.

We have adopted a code of business conduct and it applies to our directors, officers and employees. Our code of business conduct is available on our website www.granaymontero.com.pe. Information on our website is not incorporated by reference in this annual report.

If we make any substantive amendment to the code of business conduct or if we grant any waiver, including any implicit waiver, from a provision of the code of business conduct that applies to our chief executive officer, chief financial officer or controller, we will disclose the nature of such amendment or waiver in our website or in our next Form 20-F to be filed with the SEC to the extent required under applicable rules. During the year ended December 31, 2018, no such waiver was granted. Certain amendments to our code of business conduct were made as described below.

In 2015, we reinforced our ethics management system as a preventative measure. Our board of directors approved an anti-corruption compliance program, which establishes the leadership and commitment of senior management on this matter, defines supervisory bodies and the reporting lines, establishes new policies and procedures, identifies additional internal controls, and proposes training plans for the entire organization. This program applies to all companies in the group and to any third parties that may act on our behalf. Within the program, the anti-corruption policy provides the guidelines required to avoid acts of corruption in our business or in our relations with any state entity, and reinforces the obligation to have accounting records and internal controls.

During 2016, our efforts regarding compliance and prevention were focused on the deployment of the anti-corruption program across our companies. As part of this process, we implemented in our web-based platform a training program with respect to the principal anti-corruption guidelines. Additionally, we have included anti-corruption matters in our board of directors’ periodic agenda, and we also have established a compliance officer who reports to the Audit and Processes Committee. We continue performing due diligence in connection with acquisitions, and used the “Know Your Partner” initiative (2015), through which preventive assessments were performed on potential strategic partners, suppliers and potential recipients of grants in 2016. In this regard, anti-corruption clauses were included in contracts with suppliers and a specific procedure was implemented for charitable donations.

In March 2017, our board of directors created the Risk, Compliance and Sustainability Committee to enhance our ethics and compliance program. That committee then created the Risk and Compliance Corporate Function, which reports to the committee. A new Chief Risk and Compliance Officer for the group was appointed on July 1, 2017 to enhance and develop further our ethics and compliance program. Our board of directors also appointed an External Advisory Council to provide the Board with independent advice and recommendations on corporate governance and compliance matters. The first meeting was held in Lima on October 10, 2017. In 2017, we launched training sessions, combined with specialized courses addressed to middle and senior managers as well as to all members of our board of directors.

161

On February 5, 2018 we launched a revised, risk-based due diligence corporate policy with respect to our employees and existing and potential third-parties. The first phase began immediately and we renewed the due diligence with our partners and customers. We also trained our commercial force and managers on the new policy and launched a modern, risk-based approach supported by proven tools that have been worldwide. We are currently undergoing the second phase, which was launched in September 2018 and focuses on due diligence with our suppliers and sub-contractors.

On the May 11, 2018, the chairman of our board of directors launched the group’s new Code of Business Conduct. We consolidated, in a single, enhanced document, our previous Ethics Charter and our Code of Conduct, and complemented it with additional relevant topics in accordance with benchmarks from peer organizations, best practices and guidance from international organizations.

From September to December 2018, 1,200 leaders within our organization were trained through 48 face-to-face sessions in matters related to compliance, such as conflict of interest, ethical management and anti-corruption norms. The Risks and Compliance staff, as well as the Chief Risk and Compliance Officer and the Chief Executive Officer conducted the training sessions. Once these face-to-face trainings were carried out, e-learning trainings were launched to the rest of our employees. 88% of the target group had completed the e-learning trainings by December 31, 2018.

On October 29, 2018, we concluded the recruitment of all approved positions for the Risk and Compliance function across Peru, Colombia and Chile. The function is independent from management and reports directly to the Risk, Compliance and Sustainability Committee of the Board of Directors through the Chief Risk and Compliance Officer. The function is structured in four areas (each area has a manager in charge and a specialist): (i) Risks and Monitoring, (ii) Ethics and Training, (iii) Due Diligence and Research, (iv) Integration into the Business Area, and (v) Country Compliance Officer. The staff of the Risk and Compliance function bring various experience in matters of risk, ethics and compliance at both the national and international level and have completed undergraduate and post-graduate studies in a variety of areas, including risk, law, administration, finance, accounting, auditing, economics, engineering, compliance, ethics and human resources.

In November 2018, we initiated an active corporate communication campaign to re-launch our confidential reporting mechanism (canal ético). This included re-iterating our company values and encouraging employees and management to report cases where they have identified activities outside of those values. In 2018, this confidential reporting mechanism increased the number of cases reported, which has helped to strengthen our internal controls.

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and Non-Audit Fees

The following table sets forth the fees billed to us by our current independent registered public accounting firm, Moore Stephens, in connection with its audit of our annual consolidated financial statements for the fiscal years ended December 31, 2017 and 2018, which are included in this report.


	For the year ended December 31,
	2017		2018
	(in thousands of S/.)
Audit fees		4,932.4		5,406
Audit-related fees		—		—
Tax fees		—		—
All other fees		—		—

Total fees		4,932.4		5,406

Audit fees in the table above are the aggregate fees billed and billable by our independent auditor in connection with the audit of, or audit procedures in connection with, our annual consolidated financial statements and review of our internal controls.

Audit-related fees in the tables above relate to accounting consultation.

Tax fees in the tables above are fees billed relating to tax compliance services.

Our Audit and Process Committee is responsible for the oversight of the independent auditors and has established pre-approval procedures for the engagement of our registered public accounting firm for audit and non-audit services. Such services can only be contracted if they are approved by the Audit and Process Committee, they comply with the restrictions provided under applicable rules and they do not jeopardize the independence of our auditors. All services provided by our current independent auditor for our fiscal years ended December 31, 2017 and 2018 were pre-approved by our Audit and Process Committee.

162

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

(a) Dismissal of Independent Registered Public Accounting Firm

Our company and Gaveglio, Aparicio y Asociados S.C. de R.L., a member firm of PricewaterhouseCoopers (“PwC”) determined that PwC lacked independence from our company with respect to our company’s financial statements for the fiscal year 2016 as a consequence of non-audit services provided by PwC to our company beginning in the fourth quarter of the fiscal year 2016. The services related to our company’s testing of internal controls in accordance with the Sarbanes-Oxley Act. As a result, our company and PwC mutually agreed on October 4, 2017 to our company’s dismissal of PwC as auditor of our company’s consolidated financial statements for the fiscal year 2016. Our company’s Audit and Process Committee and Board of Directors participated in and approved the decision to dismiss PwC and recommended the appointment of our company’s new independent registered public accounting firm.

(b) New Audit of 2015

The independence issue described above did not affect the independence of PwC with respect to PwC’s audit of our company’s consolidated financial statements for the fiscal years 2014 and 2015. The audit reports of PwC on our company’s consolidated financial statements for the fiscal years 2014 and 2015 did not contain any adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

On or about March 23, 2018, PwC informed our company that it would not authorize the use of its 2015 audit opinion in connection with the filing of our company’s annual report on Form 20-F without conducting substantial additional procedures. PwC could not give any assurance as to when it could complete such additional procedures and stated it could take several months. PwC informed our company that professional standards required the performance of substantial additional procedures with respect to the 2015 consolidated financial statements because of publicly reported procedural developments since the firm’s dismissal in October 2017 concerning the cumulative effect of the decision of the Peruvian court to include three former executives of our company and our company in its ongoing criminal investigation relating to projects involving Odebrecht, coupled with a 2015 agreement that was first provided to PwC in May 2017 while PwC was conducting the audit for the fiscal year 2016.

On April 17, 2018, to avoid further delay, our company appointed Moore Stephens SCAI S.A. (“Moore Stephens”) as its new independent registered public accounting firm for the fiscal year 2015 and announced that the previously issued consolidated financial statements of our company for the 2015 fiscal year (and the related audit opinion of PwC) should no longer be relied upon. Among other factors, as our company’s current auditor, Moore Stephens, was in the process of completing its audit work with respect to the 2016 fiscal year (see (d) below) and thus, in our company’s view, could more timely and efficiently complete the 2015 audit processes as well.

(c) Disagreements and Reportable Events

During the 2015 and 2016 fiscal years and the subsequent interim period through October 4, 2017, there were no “disagreements” (as described in Item 16.F(a)(1)(iv) of Form 20-F) with PwC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of PwC, would have caused them to make reference thereto in their reports on the financial statements for such years.

During the 2015 and 2016 fiscal years and the subsequent interim period through October 4, 2017, there were “reportable events” (as that term is defined in Item 16.F(a)(1)(v) of Form 20-F) as follows: (i) as disclosed in our company’s annual report on Form 20-F for the 2015 fiscal year, our company’s management and PwC each concluded that our company did not maintain effective internal control over financial reporting as of December 31, 2015, because of a material weakness related to inadequate controls over segregation of duties in certain activities in some subsidiaries; (ii) PwC advised our company that our company did not maintain effective internal control over financial reporting as of December 31, 2016 as a result of the material weaknesses described in Item 15.B of our company’s annual report on Form 20-F for the fiscal year ended December 31, 2016, except that the following items were not advised by PwC: (1) inadequate oversight by the Audit Committee regarding the role of the Internal Audit Department, (2) a control environment not always sufficient to ensure adequate enterprise risk management (including fraud risk), and (3) the conclusion which states that there

163

were no significant impacts in our consolidated financial statements because clarifying addendums were signed by the parties; and (iii) at the time of PwC’s dismissal, as described in (a) above, PwC’s audit of the consolidated financial statements for the fiscal year 2016 was not complete, including the final resolution of matters related to the accounting for two contracts and any related implications from the finalization of the internal investigation conducted by our company.

The Audit and Process Committee of our company discussed the subject matter of each of the reportable events with PwC. Our company authorized PwC to fully respond to the inquiries of the successor accountant concerning these reportable events.

Our company has requested that PwC furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, dated May 15, 2018, is filed as Exhibit 16.01 to our company’s annual report on Form 20-F for the fiscal year ended December 31, 2016.

(d) Appointment of New Independent Registered Public Auditing Firm

A shareholders’ meeting of our company held on November 2, 2017 appointed Moore Stephens as the new independent auditor for the fiscal year 2016.

On April 17, 2018, the Audit and Process Committee of our company appointed Moore Stephens to audit the 2015 fiscal year. The shareholders’ meeting of our company held on May 14, 2018 ratified the appointment.

During the 2015 and 2016 fiscal years and the subsequent interim period through April 16, 2018, our company did not consult with Moore Stephens regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our company’s consolidated financial statements, other than in connection with the ongoing audit work by Moore Stephens of our company’s consolidated financial statements for the 2016 fiscal year; or (ii) any matter that was either the subject of a disagreement or a reportable event.

ITEM 16G.

CORPORATE GOVERNANCE

We are a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange.

We currently follow certain Peruvian practices concerning corporate governance and intend to continue to do so. There are significant differences in the Peruvian corporate governance practices as compared to those followed by United States domestic companies under the NYSE’s listing standards.

The NYSE listing standards provide that the board of directors of a U.S. listed company must have a majority of independent directors. Under Peruvian corporate governance practices, a Peruvian company is not required to have a majority of independent members on its board of directors. However we currently have a majority of independent directors on our board in accordance with NYSE independence standards. Our Audit and Process Committee is comprised of independent directors under SEC rules applicable to foreign private issuers. Additionally, our Human Resource Management Committee is currently comprised of independent directors, while our Investment Committee and our Risk, Compliance and Sustainability Committee are currently comprised of a majority of independent directors, in each case under NYSE independence standards. Our Human Resource Management Committee is not the equivalent of, or wholly comparable to, a U.S. compensation committee.

The listing standards for the NYSE also require that U.S. listed 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 such committees, which may be composed partially or entirely of non-independent directors. Accordingly, we do not have a nominating/corporate governance committee and a compensation committee.

In addition, NYSE rules require the independent non-executive directors of U.S. listed companies to meet on a regular basis without management being present. There is no similar requirement under Peruvian law, accordingly, we do not have such meetings.

The NYSE’s listing standards also require U.S. listed companies to adopt and disclose corporate governance guidelines. In July 2002, the Peruvian Securities Commission and a committee comprised of regulatory agencies and associations prepared and published a list of suggested non-mandatory corporate governance guidelines called the “Principles of Good Governance for Peruvian Companies.” These principles are disclosed on the Peruvian Securities Commission web page http://www.smv.gob.pe and the Lima Stock Exchange web page http://www.bvl.com.pe. Although we have implemented a number of these measures and have been selected to form part of the Best Corporate Governance Practices Index of the Lima Stock Exchange, we are not required to comply with the referred corporate governance guidelines by law or regulation.

164

ITEM 16H.

MINE SAFETY DISCLOSURE

Not applicable.

ITEM 17.

FINANCIAL STATEMENTS

Not applicable.

ITEM 18.

FINANCIAL STATEMENTS

See our consolidated financial statements beginning at page F-1 of this annual report. See also Oil and Gas Supplementary Schedules beginning on page S-1.

ITEM 19.

EXHIBITS

The agreements and other documents filed as exhibits to this annual report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and for the benefit of the other parties to the agreements and they may not describe the actual state of affairs as of the date they were made or at any other time.


Exhibit Number		Description

1.01*		By-Laws of the Registrant, as currently in effect

2.01**		Registrant’s Form of American Depositary Receipt

2.02**		Deposit Agreement, dated as of December 31, 2018, among the Registrant, The Bank of New York Mellon, as depositary, and all owners and holders from time to time of American depositary shares issued thereunder

8.01		Subsidiaries of the Registrant

10.01***		Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.1***		Amendment No. 1, dated as of December 22, 2015, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.2***		Amendment No. 2, dated as of February 1, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.3***		Amendment No. 3, dated as of February 12, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.4***		Amendment No. 4, dated as of February 29, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.5***		Amendment No. 5, dated as of April 15, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.
10.01.6***		Waiver and Amendment No. 6, dated as of September 15, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

165


Exhibit Number		Description

10.01.7***		Amendment No. 7, dated as of December 16, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.8*** +		Amendment No. 8, dated as of June 27, 2017, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.9***		Amendment No. 9, dated as of October 12, 2017, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.02***		Loan Agreement, dated as of June 27, 2017, by and among, inter alia, Graña y Montero, as borrower, and Natixis, New York Branch, as administrative agent.

10.02.1***		Waiver and Amendment, dated as of March 26, 2018, to the Credit Agreement, dated as of June 27, 2017, by and among, inter alia, Graña y Montero, as borrower, and Natixis, New York Branch, as administrative agent.

10.03***		English translation of Financial Stability Framework Agreement, dated as of July 31, 2017, by and among, inter alia, Graña y Montero, as borrower, and Scotiabank Perú 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., as lenders.

10.04***		English translation of Section 20 of Concession Agreement, dated as of July 22, 2014, by and among the Peruvian Ministry of Energy and Mines, as contracting authority and the concessionaire party thereto.

10.05***		English translation of Memorandum of Understanding, dated as of September 26, 2017, by and among Graña y Montero, Negocios de Gas S.A., Enagás S.A., Odebrecht S.A., and Inversiones en Infraestructura de Transporte por Ductos S.A.C.

10.05.1***		English translation of Rights Subordination Agreement, dated as of April 29, 2016, by and among Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., and Gasoducto Sur Peruano S.A.

10.05.1.1***		English translation of Addendum No. 1, dated as of June 24, 2016, to the Rights Subordination Agreement, dated as of April 29, 2016, by and among, inter alia, Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, GyM S.A., Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., Gasoducto Sur Peruano S.A., Odebrecht Perú Ingeniería y Construcción S.A.C., and Constructora Norberto Odebrecht S.A., Sucursal del Perú.

10.05.1.2***		English translation of Addendum No. 2 and Assignment Agreement, dated as of August 11, 2016, to the Rights Subordination Agreement, dated as of April 29, 2016, by and among, inter alia, Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, GyM S.A., Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., Gasoducto Sur Peruano S.A., Odebrecht Perú Ingeniería y Construcción S.A.C., and Constructora Norberto Odebrecht S.A., Sucursal del Perú.

10.05.1.3***		English translation of Modification to Addendum No. 2 and Assignment Agreement, dated as of October 25, 2016, to the Rights Subordination Agreement, dated as of April 29, 2016, by and among, inter alia, Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, GyM S.A., Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., Gasoducto Sur Peruano S.A., Odebrecht Perú Ingeniería y Construcción S.A.C., and Constructora Norberto Odebrecht S.A., Sucursal del Perú.

12.01		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

12.02		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
13.01****		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act

13.02****		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act

16.01***		Letter dated May 15, 2018 by Gaveglio, Aparicio y Asociados S.C. de R.L., a member firm of PricewaterhouseCoopers, as required by Item 16F of Form 20-F.

101. INS		XBRL Instance Document

101. SCH		XBRL Taxonomy Extension Schema Document

166


Exhibit Number		Description

101. CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101. DEF		XBRL Taxonomy Extension Definition Linkbase Document

101. LAB		XBRL Taxonomy Extension Label Linkbase Document

101. PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Incorporated herein by reference to exhibit 1.01 of the Registrant’s Form 20-F (File No. 333-172855) filed with the SEC on April 30, 2014.

**	Incorporated herein by reference to exhibit 1 to the Registrant’s registration statement on Form F-6 (File No. 333-228727) filed with the SEC on December 10, 2018.

***	Incorporated herein by reference to the Registrant’s Form 20-F (File No. 333-172855) filed with the SEC on May 15, 2018.

****

This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. §78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

+	Confidential treatment requested.

167

(All amounts expressed in thousands of S/ unless otherwise stated)

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2017 AND 2018

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2017 AND 2018


CONTENTS	Page

Report of Independent Registered Public Accounting Firm		1-2

Consolidated Statement of Financial Position		3

Consolidated Statement of Income		4

Consolidated Statement of Comprehensive Income		5

Consolidated Statement of Changes in Equity		6

Consolidated Statement of Cash Flows		7-8

Notes to the Consolidated Financial Statements		9 – 112


S/	=	Peruvian Sol
US$	=	United States dollar

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Graña y Montero S.A.A. and its subsidiaries

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial position of Graña y Montero S.A.A. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because the following material weaknesses in internal control over financial reporting existed as of that date:

-	Deficiencies in a formally established and documented process for enterprise and fraud risk management.

-	Deficiencies in the design and operational effectiveness of controls over segregation of duties to help ensure that personnel with potential conflicts were not involved in incompatible activities.

Deficiencies in the design and operational effectiveness of the controls established in the accounting closing process with respect to the preparation and review of the annual and interim financial statements, including controls over the review, approval, and supporting documentation related to journal entries.

-	Deficiencies in the design and operational effectiveness of controls established with respect to the recognition of revenue and determination of related estimates, including construction contract revenues and contingent revenues.

-	Deficiencies in the operational effectiveness of controls over SOX compliance.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management Report on Internal Control over Financial Reporting appearing under Item 15. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

- 1 -

LOGO

Emphasis of Certain Matters

As discussed in Note 1 to the financial statements, Graña y Montero S.A.A. has been included as civilly liable third party in the investigations in connection with the IIRSA Project and GyM S.A. (a subsidiary of Graña y Montero S.A.A.) has been included as civilly liable third party in the IIRSA project, the Construction of the Electric Train project and the Constructors’ Club. The Note also states that GyM S.A. is being investigated by a Peruvian regulatory entity for the existence of an alleged cartel called the Constructors’ Club. The Company’s Management does not rule out the possibility of finding, in the future, adverse evidence, nor does it rule out that authorities or third parties will find, in the future, adverse evidence not currently known to date during the investigations being conducted.

As discussed in Note 2.31 to the consolidated financial statements, the Company has restated the consolidated statement of income for the year ended December 31, 2017, which included the net gain on the sale of the former subsidiary GMD (S/218.3 million (US$64.6 million)) in the “Gain from the sale of investments” line item rather than the “Profit from discontinued operations” line item. While there was no effect of the restatement on Net profit, the restatement had the effect of reducing the operating profit, (loss) profit from continuing operations and earnings (loss) per share from continuing operations attributable to owners for 2017.

Basis for Opinion

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the Management’s Report on Internal Control over Financial Reporting referred to above. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

/s/ Moore Stephens SCAI S.A.

Moore Stephens SCAI S.A.

We have served as the Company’s auditor since 2017.

Bogota, Colombia

April 30, 2019

- 2 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(All amounts are expressed in thousands of S/ unless otherwise stated)

ASSETS


			As at December 31,		As at December 31,
	Note		2017		2018
Current assets
Cash and cash equivalents		9		626,180		801,140
Financial asset at fair value through profit or loss				181		—
Trade accounts receivables, net		11		1,515,673		1,007,828
Work in progress, net		12		61,804		28,538
Accounts receivable from related parties		13		100,752		34,903
Other accounts receivable		14		765,445		588,451
Inventories, net		15		770,711		514,047
Prepaid expenses				33,478		10,549

				3,874,224		2,985,456

Non-current assets classified as held for sale		37		17,722		247,798

Total current assets				3,891,946		3,233,254

Non-current assets
Long-term trade accounts receivable, net		11		907,587		1,020,067
Long-term work in progress, net		12		28,413		32,212
Long-term accounts receivable from related parties		13		773,930		778,226
Prepaid expenses				38,082		33,697
Other long-term accounts receivable		14		470,852		302,957
Investments in associates and joint ventures		16		268,671		257,765
Investment property				45,687		29,133
Property, plant and equipment, net		17		865,735		470,554
Intangible assets, net		18		940,070		847,095
Deferred income tax asset		25		436,697		425,436

Total non-current assets				4,775,724		4,197,142

Total assets				8,667,670		7,430,396

LIABILITIES AND EQUITY


			As at December 31,			As at December 31,
	Note		2017			2018
Current liabilities
Borrowings		19		1,056,764			826,474
Bonds		20		36,655			39,167
Trade accounts payable		21		1,453,046			1,079,531
Accounts payable to related parties		13		55,174			55,941
Current income tax				85,543			25,807
Other accounts payable		22		848,500			632,669
Provisions		23		13,503			6,197

Total current liabilities				3,549,185			2,665,786

Non-current liabilities classified as held for sale		37		—			225,828

Total current liabilities				3,549,185			2,891,614

Non-current liabilities
Borrowings		19		633,299			376,198
Long-term bonds		20		910,912			897,875
Other long-term accounts payable		22		852,473			574,110
Long-term accounts payable to related parties		13		25,954			21,849
Provisions		23		33,914			103,411
Derivative financial instruments				383			61
Deferred income tax liability		25		72,472			75,347

Total non-current liabilities				2,529,407			2,048,851

Total liabilities				6,078,592			4,940,465

Equity		24
Capital				660,054			729,434
Legal reserve				132,011			132,011
Voluntary reserve				29,974			29,974
Share Premium				881,795			992,144
Other reserves				(169,671	)		(170,620	)
Retained earnings				589,167			375,417

Equity attributable to controlling interest in the Company				2,123,330			2,088,360
Non-controlling interest				465,748			401,571

Total equity				2,589,078			2,489,931

Total liabilities and equity				8,667,670			7,430,396

The accompanying notes on pages 9 to 113 are an integral part of the consolidated financial statements.

- 3 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

(All amounts are expressed in thousands of S/ unless otherwise stated)


		For the year ended December 31,
	Note	2016			2017			2018
					(as restated)
Revenues from construction activities			2,713,013			2,214,108			1,961,100
Revenues from services provided			869,106			956,300			1,003,623
Revenue from real estate and sale of goods			555,190			843,605			934,739

			4,137,309			4,014,013			3,899,462

Cost of construction activities			(2,683,703	)		(2,107,206	)		(1,921,112	)
Cost of services provided			(763,193	)		(770,792	)		(741,172	)
Cost of real estate and goods sold			(374,324	)		(633,563	)		(562,689	)

	27		(3,821,220	)		(3,511,561	)		(3,224,973	)

Gross profit			316,089			502,452			674,489

Administrative expenses	27		(278,303	)		(322,454	)		(278,433	)
Other income and expenses	29		(22,360	)		(32,869	)		(61,335	)
Gain (loss) from the sale of investments			46,336			34,545			(7	)

Operating profit			61,762			181,674			334,714

Financial expenses	28		(198,055	)		(150,777	)		(247,982	)
Financial income	28		18,225			13,742			50,925
Share of the profit or loss in associates and joint ventures	16 a) b)		(590,066	)		473			(3,709	)

(Loss) profit before income tax			(708,134	)		45,112			133,948
Income tax	30		152,182			(46,305	)		(113,318	)

(Loss) profit from continuing operations			(555,952	)		(1,193	)		20,630

Profit from discontinued operations	37		104,354			210,431			36,785

(Loss) profit for the year			(451,598	)		209,238			57,415

(Loss) profit attributable to:
Owners of the Company			(509,699	)		148,738			(83,188	)
Non-controlling interest			58,101			60,500			140,603

			(451,598	)		209,238			57,415

Earnings (loss) per share from continuing operations attributable to owners of the Company during the year	35		(0.772	)		0.225			(0.125	)

The accompanying notes on pages 9 to 113 are an integral part of the consolidated financial statements.

- 4 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(All amounts are expressed in thousands of S/ unless otherwise stated)


		For the year ended December 31,
		2016			2017			2018
Profit (loss) for the period			(451,598	)		209,238			57,415

Other comprehensive income:
Items that will not be reclassified to profit or loss
Remeasurement of actuarial gains and losses, net of tax			(1,531	)		(4,031	)		16,589

Items that may be subsequently reclassified to profit or loss
Cash flow hedge, net of tax			883			482			119
Foreign currency translation adjustment, net of tax			14,307			(11,341	)		5,733
Change in value of available-for-sale financial assets, net of tax			(2,220	)		—			—
Transfer to profit or loss from sales of available-for-sale financial assets, net of tax	10		(41,461	)		—			—
Exchange difference from net investment in a foreign operation, net of tax			7,860			6,610			(8,147	)
Exchange difference from foreign net investment, net of tax			1,563			—			—

			(19,068	)		(4,249	)		(2,295	)

Other comprehensive income for the period, net of tax			(20,599	)		(8,280	)		14,294

Total comprehensive income for the period			(472,197	)		200,958			71,709

Comprehensive income attributable to:
Owners of the Company			(534,492	)		143,575			(67,548	)
Non-controlling interest			62,295			57,383			139,257

			(472,197	)		200,958			71,709

Comprehensive income attributable to owners of the Company:
Continuing operations			(639,371	)		(62,773	)		(131,284	)
Discontinued operations			104,879			206,348			63,736

			(534,492	)		143,575			(67,548	)

The accompanying notes on pages 9 to 113 are an integral part of the consolidated financial statements.

- 5 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR DECEMBER 31, 2016, 2017 AND 2018

(All amounts are expressed in thousands of S/ unless otherwise stated)


	Attributable to the controlling interests of the Company
	Number of shares In thousands		Capital		Legal reserve		Voluntary reserve		Share Premium			Other reserves			Retained earnings			Total			Non-controlling interest			Total
Balances as of January 1, 2016		660,054		660,054		132,011		29,974		897,532			(143,784	)		982,987			2,558,774			523,138			3,081,912

(Loss) profit for the year		—		—		—		—		—			—			(509,699	)		(509,699	)		58,101			(451,598	)
Cash flow hedge		—		—		—		—		—			839			—			839			44			883
Adjustment for actuarial gains and losses		—		—		—		—		—			—			(1,121	)		(1,121	)		(410	)		(1,531	)
Foreign currency translation adjustment		—		—		—		—		—			9,885			—			9,885			4,422			14,307
Change in value of available-for-sale financial assets		—		—		—		—		—			(2,220	)		—			(2,220	)		—			(2,220	)
Transfer to profit or loss for sale of investment of available-for-sale financial assets, net of tax		—		—		—		—		—			(41,461	)		—			(41,461	)		—			(41,461	)
Exchange difference from net investment in a foreign operation		—		—		—		—		—			7,722			—			7,722			138			7,860
Transfer to profit or loss of exchange difference from net investment in a foreign operation, net of tax		—		—		—		—		—			1,563			—			1,563			—			1,563

Comprehensive income of the year		—		—		—		—		—			(23,672	)		(510,820	)		(534,492	)		62,295			(472,197	)

Transactions with shareholders:
- Dividend distribution (Note 36 d)		—		—		—		—		—			—			(30,853	)		(30,853	)		(25,473	)		(56,326	)
- Contributions (devolution) of non-controlling shareholders, net (Note 36 c)		—		—		—		—		—			—			—			—			(19,099	)		(19,099	)
- Additional acquisition of non-controlling interest (Note 36 a)		—		—		—		—		(15,167	)		—			—			(15,167	)		(35,972	)		(51,139	)
- Sale to non-controlling interest		—		—		—		—		99			—			—			99			236			335
- Purchase of subsidiaries		—		—		—		—		—			—			—			—			4,153			4,153
- Deconsolidation of former subsidiary		—		—		—		—		—			—			2,063			2,063			35			2,098

Total transactions with shareholders		—		—		—		—		(15,068	)		—			(28,790	)		(43,858	)		(76,120	)		(119,978	)

Balances as of December 31, 2016		660,054		660,054		132,011		29,974		882,464			(167,456	)		443,377			1,980,424			509,313			2,489,737

Balances as of January 1, 2017		660,054		660,054		132,011		29,974		882,464			(167,456	)		443,377			1,980,424			509,313			2,489,737

Profit for the year		—		—		—		—		—			—			148,738			148,738			60,500			209,238
Cash flow hedge		—		—		—		—		—			458			—			458			24			482
Adjustment for actuarial gains and losses		—		—		—		—		—			—			(2,948	)		(2,948	)		(1,083	)		(4,031	)
Foreign currency translation adjustment		—		—		—		—		—			(9,166	)		—			(9,166	)		(2,175	)		(11,341	)
Exchange difference from net investment in a foreign operation		—		—		—		—		—			6,493			—			6,493			117			6,610

Comprehensive income of the year		—		—		—		—		—			(2,215	)		145,790			143,575			57,383			200,958

Transactions with shareholders:
- Dividend distribution (Note 36 d)		—		—		—		—		—			—			—			—			(59,677	)		(59,677	)
- Contributions (devolution) of non-controlling shareholders, net		—		—		—		—		—			—			—			—			(33,197	)		(33,197	)
- Additional acquisition of non-controlling interest (Note 36 a)		—		—		—		—		(669	)		—			—			(669	)		(273	)		(942	)
- Deconsolidation of former subsidiary		—		—		—		—		—			—			—			—			(7,801	)		(7,801	)

Total transactions with shareholders		—		—		—		—		(669	)		—			—			(669	)		(100,948	)		(101,617	)

Balances as of December 31, 2017		660,054		660,054		132,011		29,974		881,795			(169,671	)		589,167			2,123,330			465,748			2,589,078

Balances as of January 1, 2018		660,054		660,054		132,011		29,974		881,795			(169,671	)		589,167			2,123,330			465,748			2,589,078

- IFRS adoption		—		—		—		—		—			—			(52,564	)		(52,564	)		(979	)		(53,543	)

Initial balances restated		660,054		660,054		132,011		29,974		881,795			(169,671	)		536,603			2,070,766			464,769			2,535,535

(Loss) profit for the year		—		—		—		—		—			—			(83,188	)		(83,188	)		140,603			57,415
Cash flow hedge		—		—		—		—		—			113			—			113			6			119
Adjustment for actuarial gains and losses		—		—		—		—		—			—			16,589			16,589			—			16,589
Foreign currency translation adjustment		—		—		—		—		—			6,930			—			6,930			(1,197	)		5,733
Exchange difference from net investment in a foreign operation		—		—		—		—		—			(7,992	)		—			(7,992	)		(155	)		(8,147	)

Comprehensive income of the year		—		—		—		—		—			(949	)		(66,599	)		(67,548	)		139,257			71,709

Transactions with shareholders:
- Dividend distribution (Note 36 d)		—		—		—		—		—			—			—			—			(102,772	)		(102,772	)
- Contributions (devolution) of non-controlling shareholders, net		—		—		—		—		—			—			—			—			(84,442	)		(84,442	)
- Additional acquisition of non-controlling interest (Note 36 a)		—		—		—		—		(9,583	)		—			—			(9,583	)		(4,050	)		(13,633	)
- Capital Increase		69,380		69,380		—		—		68,223			—			—			137,603			—			137,603
- Deconsolidation CAM Group		—		—		—		—		—			—			(42,878	)		(42,878	)		18,221			(24,657	)
- Deconsolidation Stracon GyM		—		—		—		—		51,709			—			(51,709	)		—			(29,412	)		(29,412	)

Total transactions with shareholders		69,380		69,380		—		—		110,349			—			(94,587	)		85,142			(202,455	)		(117,313	)

Balances as of December 31, 2018		729,434		729,434		132,011		29,974		992,144			(170,620	)		375,417			2,088,360			401,571			2,489,931

The accompanying notes on pages 9 to 113 are an integral part of the consolidated financial statements.

- 6 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

(All amounts are expressed in thousands of S/ unless otherwise stated)

CONSOLIDATED STATEMENT OF CASH FLOWS


			For the year ended December 31,
	Note		2016			2017			2018
OPERATING ACTIVITIES
(Loss) profit before income tax				(603,780	)		255,543			170,733
Adjustments to profit not affecting cash flows from operating activities:
Depreciation		27		205,522			199,794			125,419
Amortization of other assets		27		82,743			86,557			112,072
Impairment of inventories		27		36,353			40,908			—
Impairment of accounts receivable and other accounts receivable		27		419,584			19,109			65,076
Reversal of impairment of inventories				—			—			(26,993	)
Debt condonation		5.1-f)		(431,484	)		—			—
Impairment of property, plant and equipment		27		9,263			14,680			5,664
Impairment of intangible assets		29		54,308			49,609			—
Financial expenses-CCDS				7,004			—			—
Expenses for liquidation of works - CCDS				164			—			—
Indemnification				(33,600	)		3,220			686
Profit on fair value of financial asset at fair value through profit or loss				31			(34	)		—
Change in the fair value of the liability for put option		23		(984	)		(1,400	)		(6,122	)
Provisions		23		9,486			9,510			75,369
Proceeds from the returned sale of Morelco				(6,658	)		—			—
Remeasurement of purchase consideration of Morelco				(7,166	)		—			—
Financial expense,net				106,739			138,016			177,649
Other provisions in CCDS				24,915			—			—
Share of the profit and loss in associates and joint ventures under the equity method of accounting		16 a) b)		589,710			(1,327	)		3,709
Reversal of provisions		23		(17,883	)		(1,044	)		(6,218	)
Disposal of assets				3,951			5,438			16,327
Disposal of investments				1,227			106			—
(Profit) loss on sale of property, plant and equipment		17		(18,393	)		(26,883	)		7,105
Loss on sale of financial assets at fair value through profit or loss				221			—			—
Loss on sale of non-current asset held for sale				22			45			—
(Profit) loss on sale of available-for-sale financial assets		10		(46,337	)		(25,768	)		1,529
Profit on sale of investments in subsidiaries				—			(244,313	)		(73,642	)
Loss on remeasurement of accounts receivable				76,864			15,807			25,110
Loss on remeasurement of investment				6,832			—			—
Net variations in assets and liabilities:
Trade accounts receivable and unbilled working in progress				115,263			(213,126	)		(236,011	)
Other accounts receivable				(85,234	)		33,196			190,354
Other accounts receivable from related parties				84,448			(245,688	)		24,609
Inventories				33,709			279,867			200,575
Pre-paid expenses and other assets				(99	)		(6,494	)		18,309
Trade accounts payable				(87,553	)		463,401			10,917
Other accounts payable				156,261			49,319			(311,848	)
Other accounts payable to related parties				45,902			(66,819	)		92,613
Provisions				(2,756	)		(1,680	)		(6,615	)
Interest payment				(171,572	)		(173,662	)		(188,704	)
Payments for purchases of intangibles - Concessions				(97,711	)		(20,178	)		(10,305	)
Payment of income tax				(125,619	)		(144,545	)		(178,094	)

Net cash provided by operating activities				333,693			491,164			279,273

- 7 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

(All amounts are expressed in thousands of S/ unless otherwise stated)

CONSOLIDATED STATEMENT OF CASH FLOWS


			For the year ended December 31,
	Note		2016			2017			2018
INVESTING ACTIVITIES
Sale of investment				107,341			391,786			222,971
Sale of property, plant and equipment				66,086			127,221			31,852
Sale of financial asset at fair value through profit or loss				1,427			98			—
Sale of non-current assets held for sale				117			43,367			16,244
Refunding for price adjustment - Morelco				6,658			—			—
Return of contributions				1,963			—			—
Interest received				15,370			6,992			36,508
Dividends received		16 a) b)		27,992			3,758			1,823
Payment for purchase of investments properties				(17,543	)		(1,183	)		(209	)
Payments for intangible purchase				(45,706	)		(97,112	)		(86,799	)
Payments for purchase and contributions on investment in associate and joint ventures				(389,657	)		(2,116	)		(3,770	)
Payments for property, plant and equipment purchase				(147,732	)		(123,941	)		(80,765	)

Net cash (applied to) provided by investing activities				(373,684	)		348,870			137,855

FINANCING ACTIVITIES
Loans received				3,941,750			1,415,113			1,018,744
Bonds issued				178,640			—			—
Amortization of loans received				(3,914,570	)		(2,044,256	)		(1,265,920	)
Amortization of bonds issued				(25,281	)		(39,151	)		(28,914	)
Payment for transaction costs for debt				(650	)		(31,286	)		—
Dividends paid to owners of the parent				(30,853	)		—			—
Dividends paid to non-controlling interest		36 d)		(25,473	)		(43,942	)		(102,772	)
Cash received (return of contributions) from non-controlling shareholders				(19,099	)		(33,197	)		(59,053	)
Capital increase		24		—			—			137,603
Acquisition or sale of interest in a subsidiary of non-controlling shareholders				(18,702	)		(942	)		389

Net cash provided by (applied to) financing activities				85,762			(777,661	)		(299,923	)

Net increase (net decrease) in cash				45,771			62,373			117,205
Exchange difference				(1,219	)		(34,867	)		57,756
Cash and cash equivalents at the beginning of the year				554,002			598,554			626,060

Cash and cash equivalents at the end of the year		9		598,554			626,060			801,021

NON-CASH TRANSACTIONS:
Debt capitalization				8,308			—			—
Interest debt capitalization				—			26,015			3,361
Acquisition of assets through finance leases				65,336			48,507			2,365
Recognition of debt due to termination of GSP				608,247			—
Accounts payable to the non-controlling interest for purchase of investments				—			—			14,022
Return of contribution in inventories				—			—			25,389
Dividends declared to non-controlling interest				—			15,735			—
Deconsolidation from non-controlling interest				—			7,801			54,069

The accompanying notes on pages 9 to 113 are an integral part of the consolidated financial statements.

- 8 -

GRAÑA Y MONTERO S.A.A. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2017 AND 2018

1	GENERAL INFORMATION

Incorporation and operations

Graña y Montero S.A.A. (hereinafter the Company) was incorporated in Peru on August 12, 1996, as a result of the equity spin-off of Inversiones GyM S.A. (formerly Graña y Montero S.A.). The Company’s legal address is Av. Paseo de la Republica 4675, Surquillo Lima, Peru and is listed on the Lima Stock Exchange and the New York Stock Exchange (NYSE).

The Company is the parent of the Graña y Montero Group that includes the Company and its subsidiaries (hereinafter, the “Group”) and is mainly engaged in holding investments in different Group companies. Additionally, the Company provides services of general management, financial management, commercial management, legal advisory, human resources management and leases office space to the Group companies.

The Group is a conglomerate of companies with operations including different business activities, the most significant are engineering and construction, infrastructure (public concession ownership and operation) and real estate businesses. See details of operating segments in Note 7.

Authorization for the issue of the financial statements

The consolidated financial statements for the year ended December 31, 2018, have been prepared and issued with Management and Board of Directors’ authorization on March 7, 2019, and will be submitted for consideration and approval at the General Shareholders’ Meeting to be held within the term established by Peruvian law. Management expects that the consolidated financial statements as of December 31, 2018, will be approved with no changes.

Current situation of the Company

Projects conducted in association with companies of the Odebrecht Group

Our company and one of its subsidiaries participated as minority partners in certain entities that developed six infrastructure projects in Peru with companies belonging to the group Odebrecht (hereinafter Odebrecht). In 2016, Odebrecht entered into a Plea Agreement with the authorities of the United States Department of Justice and the Office of the District Attorney for the Eastern District of New York by which it admitted corruption acts in connection with two of these projects (tranches 2 and 3 of the Interoceanica Sur highway (“IIRSA Sur”) and the project to construct the Lima Metro (Electric Train)). As a result of this agreement, the Peruvian authorities opened investigations for admitted illicit activities.

IIRSA Sur

With respect to the investigations conducted in relation to IIRSA Sur, the Public Prosecutor’s Office indicted the former Chairman of the Board of Directors, for collusion; a former Director, and a former executive of the Company, for money laundering. Subsequently, Graña y Montero S.A.A. and GyM S.A. were incorporated as subjects investigated in the case described above. The companies appealed this decision, and later the Superior Court ruled in favor of both companies.

In addition, Graña y Montero S.A.A. and GyM S.A. have been incorporated as civilly liable third parties in the investigation process, which means that the court will assess whether these entities are obligated to compensate the Peruvian Government for damages suffered as a result of the facts under investigation.

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ii)

Electric Train

GyM S.A. has been incorporated as a civilly liable third party in the process related to the Electric Train construction project, tranches 1 and 2. However, hitherto, no current or past director or officer of the Company has been incorporated in the investigation.

The Construction Club

On July 11, 2017, the Peruvian Commission for Free Competition (“Indecopi”) initiated an investigation against several construction companies, including GyM S.A., about the existence of an alleged cartel called the Construction Club. Throughout the investigation, GyM S.A. has provided to Indecopi with all the information requested and continues collaborating with the ongoing investigations.

The Company’s former commercial manager is under a criminal investigation, as well as other individuals related to other construction companies. GyM S.A. has been incorporated in the criminal proceedings as a civilly liable third party along with 11 other construction companies.

Independent Investigation related to businesses with Odebrecht Group

On January 9, 2017, the Board of Directors approved a plan to conduct an internal investigation related to six projects executed in association with Odebrecht.

On March 30, 2017, the Board of Directors created a Risk, Compliance and Sustainability Committee who was in charge of the oversight of the investigation independent from management. The external investigation was entrusted to the law firm Simpson, Thatcher and Bartlett, who reported exclusively to the Risk, Compliance and Sustainability Committee in order to preserve the independence of the investigation.

The independent investigation concluded on November 2, 2017, and found no evidence for determining that the Group or any of its former or current directors or executives had intentionally or knowingly participated in acts of corruption related to the six projects developed in association with Odebrecht.

We were informed by the press in February 2019, that Odebrecht has signed an effective collaboration agreement with the Prosecutor´s Office and the Ad Hoc Prosecutor’s Office in which, among other things, it is determined that Odebrecht will pay the Peruvian Government an indemnity calculated according to the parameters established in Law No. 30737 and that Odebrecht will collaborate with the Prosecutor’s Office providing all the relevant information it has about the facts under investigation.

Anticorruption Law - effects on the Group

Law 30737 and its regulation issued by Supreme Decree 096-2018-EF have mitigated the Company and subsidiaries exposure to the cases described in subsections 1) and 2) above. These rules set clear guidelines to estimate the potential compensation reducing the uncertainty derived from the legal proceedings, by among other things, preventing the imposition of liens or attachments of assets that would impair its ability to operate.

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The benefits of the mentioned rules are subject to the fulfillment of the following obligations:

•

The obligation to set up a trust that will guarantee any eventual payment obligation of an eventual civil compensation in favor of the Peruvian Government;

•

The obligation not to transfer funds abroad without the prior consent of the Ministry of Justice;

•

The implementation of a compliance program; and

•

The obligation to disclose information to the authorities and to collaborate in the investigation.

The Group has designed a compliance program which is currently under implementation. In addition, it fully cooperates with the authorities in its investigations and has executed a trust agreement with the Ministry of Justice that provides to the terms and conditions that govern the trust that will secure its contingent obligations for an amount confirmed by authorities of S/73.5 million (equivalent to US$22.3 million) (Note 23).

On the other hand, based on the standards indicated and their guidelines, management has estimated that the value of the contingency for the cases described above should not exceed US$45.8 million (equivalent to S/148.4 million).

If The Construction Club case is deemed incorporated within the scope of the referenced law, then the value of the assets assigned to the trust would need to be increased by approximately US$3 million (equivalent to S/10.1 million), and the potential contingency would increase by approximately US$3.1 million (equivalent to S/10.5 million).

Nonetheless, the Company, through its external attorneys, continues to conduct an ongoing evaluation of the information related to the criminal investigations described in this Note 1 in order to keep its defense prepared in the event of any new charges arises during those investigations. In conducting the aforementioned evaluation, the Company does not rule out the possibility of finding, in the future, adverse evidence nor does rule out that authorities or third parties will find, in the future, adverse evidence not currently known to date during the investigations being conducted.

2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied in all the years presented, unless otherwise stated.

2.1

Basis of preparation

The consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee (IFRIC) applicable to companies reporting under IFRS. The financial statements comply with IFRS as issued by the IASB in force as of December 31, 2017, and December 31, 2018, respectively.

The consolidated financial statements have been prepared under the historical cost convention, except for derivative financial instruments, financial assets at fair value through profit or loss, and available-for-sale financial assets measured at fair value. The financial statements are presented in thousands of Peruvian Sol unless otherwise stated.

The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. Also requires that the management exercise its critical judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5.

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2.2

Consolidation of financial statements

Subsidiaries

Subsidiaries are entities over which the Company has control. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Group applies the acquisition method to account for business combinations. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group evaluates the measurement of the non-controlling interest on an acquisition-by-acquisition basis. At December 31, 2017, and 2018, the measurements of the non-controlling interest in the Group´s acquisitions were made at the non-controlling interest´s proportionate share of the recognized amounts of the acquiree´s identifiable net assets.

Business acquisition-related costs are expensed as incurred.

Any contingent consideration assumed by the Group with the selling party is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognized in accordance with IFRS 9 “Financial Instruments” as profit or loss.

Goodwill is initially measured as the excess of the acquisition cost, the fair value at the acquisition date of any interest previously acquired plus the fair value of the non-controlling interest, over the net identifiable assets acquired and liabilities and contingent liabilities assumed. If the acquisition cost is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss at the time of acquisition.

For consolidating subsidiaries, balances, income, and expenses from transactions between Group companies are eliminated. Profits and losses resulting from inter-company transactions that are recognized as assets are also eliminated. Group companies use common accounting practices, except for those that are specifically required for specific businesses.

Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions, in other words as transactions with owners in their capacity as owners. The difference between the fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interest are also recorded in equity at the time of disposal.

Disposal of subsidiaries

When the Group ceases to have control over a subsidiary, any retained interest in the entity is re-measured at its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss at such date. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that the amount previously recognized in other comprehensive income is reclassified to profit or loss.

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Joint arrangements

Contracts in which the Group and one or more of the contracting parties have joint control on the relevant joint activities are called joint arrangements.

Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be both joint ventures as well as joint operations.

Joint ventures are accounted for using the equity method. Under this method, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses and movements in the comprehensive income statement.

The Group assesses on an annual basis whether there is any objective evidence that the investment in the joint ventures and associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the impairment loss in share of the profit or loss in associates and joint ventures under the equity method of accounting in the income statement. In addition, the Group stops the use of the equity method if the entity ceases to be an operating entity.

Joint operations are joint arrangements whereby the parties that have joint control of the arrangement, have rights over the assets, and obligations for the liabilities, relating to the arrangement. Each party recognizes its assets, liabilities, revenue and cost and its share of any asset or liability jointly held and, on any revenue, or cost arisen from the joint operation.

In the Group, joint operations mainly relate to consortiums (entities without legal personality) created exclusively for the development of a construction contract. Considering that the only objective of the consortium is to develop a specific project, all revenue and costs are included within revenue from construction activities and cost of construction activities, respectively.

Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a holding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method (see section d) above).

Profits and losses resulting from transactions between the Group and its associates are recognized in the Group’s consolidated financial statements only to the extent of unrelated investor’s interests in the associates. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates are changed where necessary to ensure consistency with the policies adopted by the Group.

Impairment losses are measured and recorded in accordance with section d) above.

2.3

Segment reporting

Operating segments are reported in a consistent manner with internal reporting provided to Management of the Group.

If an entity changes the structure of its internal organization in a manner that causes the composition of its reportable segments to change, the Group restates the information for earlier periods unless the information is not available.

2.4

Foreign currency translation

Functional and presentation currency

The consolidated financial statements are presented in soles, which is the functional and presentation currency of the Group. All subsidiaries, joint arrangements, and associates use the Peruvian Sol as their functional currency, except for foreign entities, for which the functional currency is the currency of the country in which they operate.

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Transactions and balances

Foreign currency transactions are translated into the functional currency using prevailing the exchange rates at the date of the transactions or valuation when items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated income statement, except when deferred in other comprehensive income.

Exchange differences arising on loans from the Company to its subsidiaries in foreign currencies are recognized in the separate financial statements of the Company and separate financial statements of the subsidiaries. In the consolidated financial statements, such exchange differences are recognized in other comprehensive income and are re-classified in the income statement on the disposal of the subsidiary or debt repayment to the extent such loans qualify as part of the “net investment in a foreign operation”.

Foreign exchange gains and losses of all monetary items are included in the income statement within financial income or expense.

Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency of the Group are translated into the presentation currency as follows:

Assets and liabilities for each statement of financial position are translated using the closing exchange rate prevailing at the date of the consolidated statement of financial position;

ii)

income and expenses for each income statement are translated at the average exchange rate (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated using the exchange rate on the date of the transaction);

iii)

capital is translated by using the historical exchange rate for each capital contribution made; and

iv)

all exchange differences are recognized as separate components in other comprehensive income (loss), within foreign currency translations adjustment.

Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing exchange rate. Exchange differences are recognized in other comprehensive income.

2.5

Public services concession agreements

Concession agreements signed between the Group and the Peruvian Government entitle the Group, as a Concessionaire, to assume obligations for the construction or improvement of infrastructure and which qualify as public service concessions are accounted as defined by IFRIC 12 “Service Concession Arrangements”. The consideration to be received from the Government for the services of constructing or improving public infrastructure is recognized as a financial asset or as an intangible asset, as set forth below.

It is recognized as a financial asset to the extent that it has a contractual right to receive cash or other financial assets either because the Government secures the payment of specified or determinable amounts or because the Government will cover any difference arising from the amounts actually received from public service users in relation with the specified or determinable amounts. These financial assets are recognized initially at fair value and subsequently at amortized cost (the financial model).

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It is recognized as an intangible asset to the extent that the service agreement grants the Group a contractual right to charge users of the public service. The resulting intangible asset is measured at cost and is amortized as described in Note 2.15 (intangible asset model).

It is recognized as a financial asset and an intangible asset when the Group recovers its investment partially by a financial asset and partially by an intangible asset (bifurcated model).

2.6

Cash and cash equivalents

In the consolidated statements of financial position and cash flows, cash and cash equivalents include cash on hand, on-demand bank deposits, other highly liquid investments with original maturities of three months or less and bank overdrafts. In the consolidated statement of financial position, bank overdrafts are included in the balance of financial obligations as current liabilities.

2.7

Financial assets

2.7.1

Classification and measurement

The Group classifies its financial assets, according to its subsequent measurement, in the following categories: i) amortized cost; ii) financial assets at fair value through other comprehensive income and iii) financial assets at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired on the basis of the Group’s business model for managing the financial assets and the characteristics of the contractual cash flows of the financial asset.

Management determines the classification of its financial assets at the date of its initial recognition and re-evaluates this classification at the date of each closing of its consolidated financial statements. As of December 31, 2017, and 2018, the Group only maintains financial assets in the following categories:

a)	Amortized cost

This category is the most relevant for the Group. The Group measures financial assets at amortized cost if the following conditions are met:

i) The financial asset is held within a business model with the objective of maintaining the financial assets to obtain the contractual cash flows; and

ii) The contractual terms of the financial asset generate cash flows, on specific dates, that are only payments of the principal and interest on the amount of the outstanding principal.

Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Profits and losses are recognized in profits or losses when the asset is written off, modified or impaired.

Trade accounts receivable, accounts receivable from related companies, other accounts receivable, work in progress and cash and cash equivalents are included in current assets except for those over twelve months after the date of the consolidated statement of financial position. The latter are classified as non-current assets.

b)	Financial assets at fair value through other comprehensive results

Financial assets at fair value through other comprehensive income of the Group are classified in this category when they meet the following conditions:

i) keep them within a business model whose objective is achieved by obtaining contractual cash flows and selling financial assets; and

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ii) the contractual terms of the financial asset give rise, on specific dates, to cash flows that are only payments of the principal and interest on the outstanding principal amount.

The investment account at Inversiones en Autopistas S.A. is included in this category.

c)	Financial assets at fair value through profit or loss

Financial assets that do not meet the criteria of amortized costs or fair value through other comprehensive income are measured at fair value through profit or loss. The result in a debt investment that is subsequently measured at fair value through gains and losses is recognized in the consolidated statement of comprehensive income in the period in which it occurs.

Financial assets at fair value through profit or loss are non-derivative financial assets designated by the Group at their fair value upon initial recognition and are held for sale. These are included in current assets.

2.7.2

Derecognition of financial assets

The Group derecognizes a financial asset when the contractual rights over the cash flows of the financial asset expire, or when it transfers the rights to receive the contractual cash flows in a transaction in which all the risks and benefits of ownership of the financial asset are substantially transferred, or does not transfer or retain substantially all the risks and benefits related to the property and does not retain control over the assets transferred.

The Group participates in transactions in which it transfers the assets recognized in its statement of financial position but retains all or substantially all the risks and advantages of the assets transferred, and/or control over them. In these cases, the assets transferred are not derecognized and are measured on a basis that reflects rights and obligations that the Group has retained.

2.8

Impairment of financial assets

IFRS 9 requires to register expected credit losses of all financial assets, except for those that are carried at fair value with an effect on results, estimating it over 12 months or for the entire life of the financial instrument (“lifetime”). In accordance with the provisions of the standard, the Group applies the simplified approach (which estimates the loss for the entire life of the financial instrument), for the commercial debtors of the rental business line of the real estate sector, and the general approach for the trade accounts receivables, work in progress and other accounts receivable; the same that requires evaluating whether or not a significant increase in risk exists to determine whether the loss should be estimated based on 12 months after the reporting date or during the entire life of the asset.

The Group has established a policy to conduct an evaluation, at the end of each reporting period, to identify whether the asset has suffered a significant increase in credit risk since the initial date. Both the credit losses expected at 12 months and the expected credit losses during the life of the asset are calculated individually or collectively, depending on the nature of the portfolio.

For financial assets for which the Group has no reasonable expectation of recovering, either the entire outstanding amount or a portion thereof, the gross carrying amount of the financial asset is reduced. This is considered a decrease in (partial) accounts of the financial asset.

2.9

Derivative financial instruments and hedging activities

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value at the end of each reporting period. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

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The Group designates certain derivatives as hedges of a particular risk associated with a recognized asset or liability (fair value hedge) or a highly probable forecast transaction (cash flow hedge). Derivatives are initially recognized at fair value on the date of subscription of the contract and are subsequently recognized at their fair value. The method to recognize the gain or loss resulting from changes in the fair values of the derivatives depends on the nature of the item being covered.

The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The fair values of various derivative instruments used for hedging purposes and changes in the account reserves for hedging in equity are disclosed in Note 8. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity period of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity period of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability.

Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as fair value hedges is recognized as other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for example, when the forecasted sale that is hedged takes place).

The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognized in the income statement as “Financial income or Financial expenses”.

However, when the forecasted transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed assets), the gains or losses previously deferred in equity are transferred from equity and are included in the initial measurement of the cost of the non-financial asset. The deferred amounts are ultimately recognized in cost of goods sold in the case of inventory or depreciation in the case of fixed assets.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecasted transaction is ultimately recognized in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within “other income and expenses, net”.

2.10

Trade accounts receivables

Trade receivables are amounts due from customers for goods or services sold by the Group. If the collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less any provision for impairment, except for receivables of less than one year that are stated at a nominal amount which is similar to their fair values since they are short term.

Also includes the management estimates related to the engineering and construction, corresponding to rights of executed services that have not been approved by customers (Progress level valuation).

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2.11

Work in progress

This account includes the balance of work in progress costs incurred that relates to future activities of the construction contracts and the constructions phase in concessions (see Note 2.26 for detail on Revenue from construction activities).

Changes in estimates of contract revenues and costs can increase or decrease the estimated margin. When a change in the estimate is known, the cumulative impact of the change is recorded in the period in which it is known.

2.12

Inventories

The inventories include land, works in progress and finished buildings related to the real estate activity, materials used in the construction activity.

Real estate activity

Land used for the execution of real estate projects is recognized at acquisition cost. Work in progress and finished real estate includes the costs of design, materials, direct labor, borrowing costs (directly attributable to the acquisition, construction, production of the asset), other indirect costs and general expenses related to the construction phase.

Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. The Group reviews annually whether inventories have been impaired identifying three groups of inventories to measure their net realizable value: i) land bought for future real estate projects which are compared to their net appraisal value; if the acquisition value is higher, a provision of impairment is made; ii) land under construction, impairment is measured based on cost projections; if these costs are higher than selling prices of each real estate unit, an estimate is made for impairment; and iii) completed real estate units; these inventory items are compared to the selling prices less selling expenses; if these selling expenses are higher, a provision for impairment is made.

For the reductions in the carrying amount of these inventories to their net realizable value, a provision is made for impairment of inventories with a charge to profit or loss for the year in which those reductions occur.

Exploration and extraction activities

Inventories are valued at production costs or net realizable value (NRV), the one with the lowest result, on the basis of the weighted average method. The NRV represents the value at which it is estimated to make oil, gas and its derivatives LPG and HAS, which is calculated on the basis of international prices at which discounts that are usually granted are deducted. Miscellaneous supplies, materials, and spare parts are valued at cost or replacement value, whichever is less based on the average method. The cost of inventories excludes financing expenses and exchange differences. Inventories to be received are recorded at cost by the specific identification method.

The Group constitutes a devaluation of materials charged to income for the year in cases in which the book value exceeds its recoverable value.

Other activities

Materials and supplies are recorded at cost by the weighted average method or at their replacement value, the lower. The cost of these items includes freight and non-refundable applicable taxes.

The devaluation of these items is estimated on the basis of specific analysis made by the Management on its rotation. If it is identified that the book value of the stocks of materials and supplies exceeds their replacement value, the difference is charged to income in the year in which this situation is determined.

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2.13

Investment property

Investment properties are shown at cost less accumulated depreciation and impairment losses, if any. Subsequent costs attributable to investment properties are capitalized only if it is probable that future economic benefits will flow to the Company and the cost of these assets can be measured reliably; if not, they are recognized as expenses when incurred.

Repair and maintenance expenses are recognized in profit and loss when they are incurred. If the property’s carrying amount is greater than its estimated recoverable amount, an adjustment to reduce the carrying amount to the recoverable amount is recognized.

Depreciation is determined at rates calculated to write off cost, less estimated residual value, of each asset on a straight-line basis over its estimated useful life. Significant components with useful lives substantially different are treated separately for depreciation purposes. The estimated useful lives of those properties range from 3 to 33 years.

The investment properties held by the Group correspond to: (i) “Agustino Plaza” Shopping Center, located in the El Agustino District, and (ii) the stores situated within the stations of Line 1 of the Lima Metro; the properties owned by the subsidiary VIVA GyM SA have an estimated fair value of US$19.2 million, equivalent to S/64.3 million as of December 31, 2018 (US$34.5 million, equivalent to S/112.7 million, as of December 31 of 2017).

These investment properties have been leased under the modality of an operating lease.

2.14

Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of these items.

Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs and maintenance expense are charged to the income statement during the financial period in which they are incurred.

Assets under construction are capitalized as a separate component. At their completion, the cost of such assets is transferred to their definitive category.

Replacement units are major spare parts in which depreciation starts when the units are installed for use within the related asset.

Depreciation of machinery, equipment and vehicles recognized as “Major equipment” are depreciated based on their hours of use. Under this method, the total number of work hours that machinery and equipment is capable of producing is estimated and a charge per hour is determined. The depreciation of other assets that do not qualify as “Major equipment” is calculated under the straight-line method to allocate their cost less their residual values over their estimated useful lives, as follows:


		Years
Buildings and facilities		Between 3 and 33
Machinery and equipment		Between 4 and 10
Vehicles		Between 2 and 10
Furniture and fixtures		Between 2 and 10
Other equipment		Between 2 and 10

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Residual values and useful lives are reviewed and adjusted as appropriate at each reporting date. Gains and losses on disposals are recognized in “Other income and expenses, net” in the income statement. Regarding joint operations that carry out construction activities, the difference between the proceeds from disposals of fixed assets and their carrying amount is shown within “revenue from construction activities” and “cost of construction activities”, respectively.

2.15

Intangible assets

Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the purchase consideration, the amount of any non-controlling interest and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the net identifiable assets acquired. If the total of the consideration transferred, the non-controlling interest recognized and previously held interest measured at fair value is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statement of income.

Goodwill acquired in a business combination is allocated to each cash-generating units (CGU), or group of CGUs, that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are performed at least annually and when events or changes in circumstances indicate a potential impairment. Any impairment is recognized immediately as an expense in item “Other income and expenses, net” and cannot be reversed later.

ii)

Trademarks

Trademarks acquired separately are shown at historical cost. Trademarks acquired in a business combination are recognized at fair value at the acquisition date. Management has determined that these trademarks have indefinite useful lives.

Trademark impairment reviews are performed at least annually and when events or changes in circumstances indicate a potential impairment. Any impairment is recognized immediately as an expense in item “Other income and expenses, net”.

iii)

Concession rights

The intangible asset consisting of the right to charge users for the services related to service concessions agreements (Note 2.5 and Note 6.b) is initially recorded at the fair value of construction or improvement services. Before amortization is started, an impairment test is performed; it is amortized under the straight-line method, from the date revenue starts using the lower of its estimated expected useful life or effective period of the concession agreement.

iv)

Contractual relationships with customers

Contractual relationships with customers are assets resulting from business combinations that were initially recognized at fair value as determined based on the expected cash flows from those relations over an estimated period of time based on the time period those customers will remain as customers of the Group (the estimation of useful life is based on the contract terms which fluctuate between 5 and 9 years). The useful life and the impairment of these assets are individually assessed.

Cost of development wells

Costs incurred in preparing wells to extract hydrocarbons in Blocks I, III, IV, and V, located in Talara, are capitalized as part of intangible assets. These costs are amortized over the useful lives of the wells (estimated to be five years for Blocks I and V and the unit of production method for Blocks III and IV), which is less than the period of the service agreement signed with Perupetro.

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vi)

Software and development costs

Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognized as intangible assets when the following criteria are met:

•

It is technically feasible to complete the software product so that it will be available for use;

•

management intends to complete the software product and use or sell it;

•

there is the ability to use or sell the software product;

•

it can be demonstrated how the software product will probably generate future economic benefits;

•

technical, financial and other resources are available to complete the development and to use or sell the software product; and

•

expenses incurred during its development can be reliably measured.

Other development expenditures that do not meet these criteria are expensed as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Computer software development costs recognized as assets are amortized over their estimated useful lives, which fluctuate between 2 to 15 years.

vii)

Land use rights

Refers to the rights maintained by the subsidiary Promotora Larcomar S.A. Land use of rights are stated at historical cost less amortization and any accumulated impairment losses. The useful life of this asset is based on the agreement signed (60 years) and may be extended if agreed by parties. Amortization will begin when it becomes ready for its intended use by Management.

2.16

Impairment of non-financial assets

Assets subject to amortization are subject to impairment tests when events or circumstances occur that indicate that their book value may not be recovered. Impairment losses are measured as the amount by which the book value of the asset exceeds its recoverable value. The recoverable value of the assets corresponds to the higher of its fair value and its value in use. For purposes of the impairment assessment, assets are grouped at the lowest levels in which they generate identifiable cash flows (cash-generating units). The book value of non-financial assets other than goodwill that have been subject to write-offs for impairment is reviewed at each reporting date to verify possible reversals of impairment.

2.17

Financial liabilities

The financial liabilities of the Group include trade accounts payable, accounts payable to related parties, remuneration and other accounts payable. All financial liabilities are initially recognized at fair value and subsequently valued at amortized cost using the effective interest rate method.

Financial liabilities are classified as current liabilities if the payment must be made within a year or less (or in the normal operating cycle of the business if it is greater). Otherwise, they are presented as non-current liabilities.

2.18

Trade accounts payable

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.

- 21 -

Accounts payable are initially recognized at their fair value and subsequently are amortized at amortized cost using the effective interest method, except for accounts payable within less than one year that are recorded at their nominal value that is similar to their fair value due to its maturity in the short term.

2.19

Other financial liabilities

Corresponds to the loans and bonds issued by the Group, which are initially recognized at their fair value, net of the costs incurred in the transaction. These financial liabilities are subsequently recorded at amortized cost; any difference between the funds received (net of transaction costs) and the redemption value is recognized in the income statement during the period of the loan using the effective interest method.

The costs incurred to obtain these financial liabilities are recognized as transaction costs to the extent that it is probable that part or the entire loan will be received. In this case, these charges are deferred until the time the loan is received.

2.20

Borrowing costs

Debt costs are recognized at the income statement in the period in which they have been incurred, except for intangible assets and inventories in which the borrowing costs are capitalized.

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualified assets, which are assets that necessarily take a substantial period (more than 12 months) to reach their condition of use or sale, are added to the cost of said assets until the period when the assets are substantially ready for use or sale. The Group suspends the capitalization of borrowing costs during the periods in which the development of activities of a qualified asset has been suspended. The income obtained from the temporary investment of specific loans that have not yet been invested in qualified assets is deducted from the borrowing costs eligible for capitalization.

2.21

Current and deferred income tax

Income tax expense comprises current and deferred tax. Tax expense is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or equity. In this case, tax is also recognized in the statement of comprehensive income or directly in equity, respectively.

The current income tax is calculated based on the tax laws enacted at the date of the statement of financial position in the countries where the Company and its subsidiaries operate and generate taxable income. Management, where appropriate, establishes provisions based on amounts expected to be paid to the tax authorities.

Deferred tax is recognized on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is determined using tax rates (and legislation) that have been enacted as of the date of the statement of financial position and that are expected to be applicable when the deferred income tax is realized or paid.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax arising from the initial recognition of goodwill is not recognized; likewise, the deferred tax is not recorded if it arises from the initial recognition of an asset or liability in a transaction that is not a combination of businesses that does not affect the accounting or tax profit or loss at the time of the transaction

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2.22

Employee benefits

The Group recognizes a liability when the employee has rendered services in exchange for which is entitled to receive future payments and an expense when the Group has consumed the economic benefit from the service provided by the employee in exchange for the benefits in question.

The Group determines employee benefits in accordance with current labor and legal regulations and classifies them as short-term benefits, post-employment benefits, long-term benefits, and termination benefits.

Short-term benefits are those other than termination indemnities, whose payment is settled in the twelve months following the end of the period in which the employees have rendered the services; they correspond to current remunerations (salaries, and salaries and contributions to social security), annual paid and sick absences, participation in profits and incentives and other non-monetary benefits.

Post-employment benefits are those other than termination benefits that are paid after completing the period of employment with the entity. Retirement benefits or post-employment benefit plans can be classified into (i) Defined contribution plans and (ii) Defined benefit plans. The Group maintains defined benefit plans and therefore assumes the actuarial risk.

Long-term benefits are those benefits that must be paid more than twelve months after the end of the period in which the services were rendered. As of December 31, 2017, and 2018, the Group does not grant benefits in this category.

Termination benefits are those benefits payable as a result of (i) the entity’s decision to terminate the employee’s contract before the retirement date, and (ii) the employee’s decision to voluntarily accept the conclusion of the relationship of work.

Short-term benefits:

Current salaries and wages

The current remunerations are constituted by salaries, wages, contributions to social security, statutory bonuses and compensation for the time of services. Salaries, wages, and contributions to social security are settled on a monthly basis.

Entities of the Group recognize the expense and the related liability for statutory bonuses based on applicable laws and regulations effective in Peru, Chile, Bolivia, Guyana, and Colombia. In Peru bonuses correspond to two monthly payments, settled one in July and one in December of each year.

The compensation for time of service corresponds to the indemnification rights of the staff, and is accrued based on the consideration of the service calculated according to the legislation in force in each country in which the entities that make up the Group operate and determine as follows: (i) in Peru it is equivalent to half the remuneration in force at the date of payment and this is effected by deposit in bank accounts designated by the workers in the months of May and November of each year; (ii) In Colombia, it is equivalent to 8.33% of the monthly remuneration, (iii) in Bolivia, the calculation is made taking into account the average salary or wages of the last three months. In Chile and Guyana, this benefit is not available.

Annual paid absences

Annual holidays are recognized on an accrual basis. The provision for the estimated obligation resulting from the services rendered by employees is recognized on the date of the consolidated statement of financial position and corresponds; (i) one month for personnel in Peru, (ii) fifteen days for personnel in Colombia, and (iii) in the case of Chile, they are subject to the worker’s seniority and range from fifteen to thirty days.

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Workers’ profit sharing and incentives

The workers’ profit sharing is determined on the basis of the legal provisions in force in each country where the entities that make up the Group operate, as follows: (i) in Peru it is equivalent to 5% of the taxable base determined by each Company of the Group, in accordance with current income tax legislation, (ii) in Chile, workers’ participation is a component of the remuneration (equivalent to 4.75 minimum wages per year) and not a determinable percentage of the profit, (iii) in Colombia these benefits are not provided to employees.

Post-employment benefits

The indirect subsidiary Cam Chile Spa has a pension plan for its staff. The liability recognized in the statement of financial position with respect to defined benefit plan is measured based on the present value of the obligation at the end of the reporting period less the fair value of the planned assets.

The present value of the defined benefit obligations is determined by discounting the estimated future cash flows using the interest rates of high-quality corporate bonds denominated in the currency in which the benefits will be paid and with maturity periods similar to the obligations for pension plans. In countries where there is no market with instruments with similar characteristics, the market rate of government bonds will be used.

The remeasurements that arise from adjustments and changes in the actuarial assumptions are recorded in other comprehensive income in the period in which they arise.

Termination benefits

The Group entities recognize the liability and expense for severance payments when they occur, based on the legal provisions in force in each country. In accordance with the legislation of Peru, the compensation for arbitrary dismissal for personnel with an indefinite contract amounts to 1.5 times the monthly remuneration for each year worked.

In Colombian legislation, compensation depends on the remuneration received; in the legislation of Chile is granted compensation of 30 days of salary for each year worked with a maximum salary of 330 days.

2.23

Provisions

General

Provisions are recognized when i) the Group has a present legal or constructive obligation as a result of past events; ii) it is probable that an outflow of resources will be required to settle the obligation; and iii) the amount has been reliably estimated. Provisions are reviewed at year - end. If the time value of money is significant, provisions are discounted using a pre-tax rate that reflects, when applicable, the specific risks related to the liability. Reversal of the discount due to the passage of time results in the obligation being recognized with a charge to the income statement as a financial expense.

Contingent obligations when their existence will only be confirmed by future events or their amount cannot be reliably measured. Contingent assets are not recognized, and are disclosed only if it is probable that the Group will generate an income from economic benefits in the future.

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Provision for the closure of production wells

The subsidiary GMP S.A. recognizes a provision for the closure of operating units that correspond to the legal obligation to close oil production wells once the production phase has been completed. At the initial date of recognition, the liability that arises from this obligation measured at its fair value and discounted at its present value, according to the valuation techniques established by IFRS 13, “Fair Value Measurement”, and is simultaneously charged to the intangible account in the consolidated statement of financial position.

Subsequently, the liability is increased in each period to reflect the financial cost considered in the initial measurement of the discount, and the capitalized cost is depreciated based on the useful life of the related asset. When a liability is settled, the subsidiaries recognize any gain or loss that may arise. The fair value changes estimated for the initial obligation and the interest rates used to discount the flows they are recognized as an increase or decrease in the book value of the obligation and the asset to which they relate to, any decrease in the provision, and any decrease of the asset that may exceed the carrying amount of said asset is immediately recognized in the consolidated statement of income.

If the review of the estimated obligation results in the need to increase the provision and, accordingly, increase the carrying amount of the asset, the subsidiaries should also take into consideration if the said increase corresponds to an indicator that the asset has been impaired and, if so, impairment tests are to be carried out (Note 2.16).

2.24

Put option arrangement

The subsidiary GyM S.A. signed a sale option contract on the equity of its subsidiary Morelco SAS (Note 33 b) that allows the shareholder to reallocate its shares over a period of 10 years. The amount payable under the option is initially recognized at the present value of the reimbursement under “Other accounts payable”, directly charged to equity. The charge to equity is recorded separately as put options subscribed on the non-controlling interest, adjacent to the non-controlling interest in the net assets of the consolidated subsidiaries.

Subsequently, the financial liability is updated by changes in the assumptions on which the estimation of the expected cash flows is based and by the financial component due to the passage of time. The effects of this update are recognized in results. In the event that the option expires without being exercised, the liability is written off with the corresponding adjustment to equity.

2.25

Capital

Common shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity, as a deduction, of the proceeds, net of taxes.

When any Group company purchases Company’s equity shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the company’s equity holders until the shares are canceled, placed or reissued. When such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects is included in equity attributable to the Group’s equity holders.

2.26

Revenue recognition from contracts with customers

Revenues from contracts with customers are recognized, for each performance obligation, either during a period of time or at a specific time, depending on which method best reflects the transfer of control of the underlying products or services to the obligation of particular performance with the client.

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The Group recognizes the income through the application of the five steps defined in the regulation i) identification of the contract with the client; ii) identification of performance obligations in the contract; iii) determination of the price of the transaction; iv) allocation of the transaction price for performance obligations; and v) recognition of income when (or as) a performance obligation is satisfied.

Subsequently, the Group policy of recognition of each type of income according to IFRS 15:

Engineering and construction

The Company recognizes revenues from engineering and construction contracts over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Engineering and construction contracts are generally accounted for as a single unit of account (a single performance obligation) and are not segmented between types of services.

Construction

Revenues from construction contracts are recognized using the percentage-of-completion method which is based on the completion of a physical proportion of the overall work contract considering total costs and revenues estimated at the end of the project. Under this method, revenues are determined based on the proportion of actual physical completion compared to the total contracted physical construction commitment.

The contract generates assets when the costs incurred are greater than the cost associated with those revenues. Otherwise liabilities are generated for the accrued costs not invoiced.

When it is probable that the total costs of the contract will exceed the related revenue, the expected loss is immediately recognized.

When the construction contract profit cannot be estimated reliably, the associated revenue is recognized to the extent of costs incurred are recoverable. Revenue is billed once approval is received by the owners of the work in progress.

Revenues for additional works come from a modification or instruction received from the client to make a change in the scope of work or the price, or both, and which may result in an increase or decrease in contract revenue. A modification is included in the contract revenue when the customer is likely to approve the modification, as well as when the amount of income arising from such modification can be measured reliably.

A claim is an amount that the Group seeks to collect from the customer or third party as reimbursement for costs not included in the contract price. Claims are included in contract revenue only when it is probable that the cost incurred are recoverable and the amount can be reliably measured.

Engineering

Revenues from engineering services are recognized using the method of the level of progress on the basis of the progress or percentage of completion in the accounting periods in which the services are provided. In this type of income there is a single performance obligation, which is performed when the service is provided over time, based on the degree of progress.

ii)

Real-estate – Real estate, urban and industrial lots

Sale of Real estate

Revenue from sales of real estate properties is recognized when control over the property has been transferred to the client with the delivery record. Revenue is measured based on the price agreed under the contract. Until this is met, the incomes received will be counted as customer advances. These sales contracts have two performance obligations: i) the one corresponding to the transfer of the property,

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which includes the common areas of the building where these real estate are located, and ii) the one corresponding to the transfer of the common area outside the real estate assets but that are part of the real estate projects, which are recognized when the common area has been delivered.

Sale of urban lots

Revenue related to sales of urban lots is recognized when control over the property is transferred to the customer. Until this is met, the incomes received will be recognized as customer advances. Revenue is measured based on the transaction price agreed under the contract. These sales contracts have a single performance obligation for the sale of lots, which is executed upon delivery of the sale of the assets.

Sale of industrial lots

Revenue related to sales of industrial lots is recognized when control over the property has been transferred to the customer. Until this is met, the incomes received will be counted as customer advances. These sales contracts have two performance obligations: i) transfer of the industrial lot and ii) urban authorization of the industrial lot.

iii)

Infrastructure

Income for provided services of oil and gas extraction, fuel dispatch and other services

Revenues from the provision of these services are recognized using the level of advance method based on the progress or percentage of completion in the accounting periods in which the provision of the service takes place. In this type of income there is a single performance obligation, which is performed when the service is provided over time, based on the level of progress.

Income from the sale of oil and derivative products

Revenue from the sale of goods is recognized when the control of the assets is transferred to the customer, which is when the goods are delivered. In this type of income there is only one performance obligation for the sale of oil; which is executed at the delivery of the goods.

Income from concession services

Revenues from concession services correspond to operation and maintenance services, and are recognized according to its nature in the accounting periods in which the service is provided. In this type of income there is only one performance obligation, executed when the service is provided.

2.27

Recognition of cost and expenses

Construction contracts

The costs of construction contracts are recognized as an expense in the period in which they are incurred.

Contract costs include all direct costs such as materials, labor, subcontracting costs, manufacturing and supply costs of equipment, start-up costs and indirect costs. Periodically, the Group evaluates the reasonableness of the estimates used in the determination of the percentage-of-completion. If, as a result of this evaluation, there are modifications to the revenue or cost previously estimated, or if the total estimated cost of the project exceeds expected revenues, an adjustment is made in order to reflect the effect in results of the period in which the adjustment or loss is incurred.

When the outcome of a construction work cannot be estimated reliably, the revenue of the contract is recognized only up to the amount of the contractual costs incurred and that are likely to be recovered.

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Costs for sale of oil and derivative products

The costs of the services rendered and the costs of sales of petroleum and derivative products are recognized when they are incurred, simultaneously with the recognition of related revenues. Other costs and expenses are recognized as they accrue, regardless of when they are paid and are recorded in the accounting periods to which they relate.

Costs for concession operation services

The costs of the operation and maintenance services are recognized when they are incurred, simultaneously with the recognition of related revenues. Other costs and expenses are recognized as they are accrued, regardless of when they are paid and are recorded in the accounting periods with which they are related.

2.28

Leases

The Group as a lessee

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases, including prepayments (net of any incentives received from lessor) are recognized in the consolidated income statement under the straight-line method over the lease term. The Group’s major kinds of operating leases are leases of machinery, computer equipment, printing equipment, among others.

Finance leases

Leases in which the Group assumes substantially all the risks and rewards of ownership of an asset are classified as finance leases. Each lease payment is allocated between the liability and finance charges so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The corresponding rental obligations, net of finance charges, are included in other payables, short- and long-term in the consolidated statement of financial position. The interest element of the finance cost is charged to the consolidated income statement of over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the useful life of the asset or the lease term.

The Group as a lessor

Operating leases and the leased assets are stated in the statement of financial position based on the nature of the asset. Revenue from operating leases are recognized under the straight-line method over the lease term and the incentives given to lessees reduce the revenue obtained from leases.

2.29

Dividend distribution

Dividend distribution to the Group shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved.

2.30

Significant non-operating items

Significant non-operating items are separately shown in the financial statements when they are necessary to provide an adequate understanding of the Group’s financial performance. These material items are income or expenses shown separately due to their nature or significant amount.

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2.31

Restatement of the Statement of Income as of December 31, 2017

The consolidated statement of income for the year ended December 31, 2017 included the net gain on the sale of our former subsidiary GMD (S/218.3 million (US$64.6)) under the “Gain from the sale of investments” line item, rather than the “Profit from discontinued operations” line item in accordance with IAS 8, Accounting Policies, changes in Accounting Estimates and errors, such amount has been restated in application of IFRS 5 paragraph 33 a).


	2017 Audited			Restatement GMD (i)			2017 Restated
Revenues		6,080,142			—			6,080,142
Operating costs		(5,407,355	)		—			(5,407,355	)

Gross profit (loss)		672,787			—			672,787

Administrative expenses		(429,181	)		—			(429,181	)
Other (expenses) income, net		(20,545	)		—			(20,545	)
Gain (loss) from the sale of investments		274,363			(218,264	)		56,099

Operating profit (loss)		497,424			(218,264	)		279,160

Financial expenses		(185,445	)		—			(185,445	)
Financial income		15,407			—			15,407

Share of the profit or loss in associates and joint ventures		1,327			—			1,327

Profit (loss) before income tax		328,713			(218,264	)		110,449
Income tax		(123,037	)		63,940			(59,097	)

Profit (loss) from continuing operations		205,676			(154,324	)		51,352

Profit from discontinued operations		3,562			154,324			157,886

Profit of the year		209,238						209,238

Earnings per share attributable to owners of the Company during the year		0.225						0.225

Loss per share from continuing operations attributable to owners of the Company during the year		0.220						(0.014	)

(i)	In application of IAS 8 paragraph 42, line items affected of the Statement of Income are disclosed.

2.32

Reclassified discontinued operations from 2016 and 2017

As part of the divestment process, the results of operations of the following entities have been reclassified to discontinued operations for the year ended December 31, 2016 and 2017: i) sale of investments in subsidiaries completed in 2018 (Stracon GyM S.A., CAM Chile SpA, CAM Servicios del Peru S.A., and; ii) planned sale of subsidiary Adexus S.A. See Note 37. These reclassifications have no effect on net profit (loss) as previously reported.

3	STANDARDS, AMENDMENTS, AND INTERPRETATION ADOPTED IN 2018

3.1.

Current standards, amendments, and interpretations adopted

The following current standards, amendments to the policies and interpretations were adopted by the Group on January 1, 2018:

•

IFRS 9, financial instruments comprise mainly: i) the classification and measurement of financial assets and financial liabilities; ii) the new impairment model for the recognition of expected credit losses; and iii) the new hedge accounting model.

•

IFRS 15, income resulting from revenues from contracts with customers, outlines a single integral model for the entities that will be used in accounting for the income derived from contracts with customers. It replaces the previous income recognition guide, including IAS 18, income, IAS 11, construction contracts and related interpretations.

•

The amendments to IFRS 15 clarify how to: i) identify a performance obligation in a contract; ii) determine if a company is a director or an agent and iii) determine whether the income from the granting of a license should be recognized at a specific time or over time. In addition, the amendments to IFRS 15 include two additional transition exceptions.

•

The amendments to IFRS 2, payment on the basis of the shares, provide accounting requirements for i) the effects of the conditions of becoming and not becoming a beneficiary (Vesting and no-Vesting) in the measurement of cash payments settled on the basis of shares; ii) payment transactions based on shares with a net settlement characteristic for the withholding tax obligations; and iii) a modification of the terms and conditions of a payment based on assets that change the classification of a payment transaction in cash to payment in equity.

•

The amendments to IAS 28, investments in associates and joint ventures, clarify that the choice to measure at fair value through profit or loss an investment in an associate or a joint venture that retains an entity that is a capital organization of the risk, or other qualifying entity, is available for each investment in an associate or joint venture on the basis of investment by investment, after its initial recognition.

•

Interpretation of IFRIC 22, Transactions in foreign currency and anticipated consideration, clarifies that: i) the date of the transaction, in order to determine the exchange rate, is the date of initial recognition of the non-monetary asset paid in advance and of the liability for deferred income; and ii) if there are several payments or collections in advance, a transaction date is established for each payment or collection.

•

Transfers of real estate investments (amendments to IAS 40, real estate investments) state that an entity will transfer real property to, or from, real estate investments when, and only when, there is evidence of a change in use. A change in use occurs if the property meets, or fails to meet, the definition of real estate investment. A change in management’s intentions for the use of a property by itself does not constitute evidence of a change in use.

Current standards, amendments, and interpretations adoption did not have a significant impact on the Group’s financial statements, except for IFRS 9, IFRS 15 and the amendments to IFRS 15, described below.

IFRS 9 “Financial Instruments”

Transition

IFRS 9, financial instruments, replaced IAS 39, financial instruments: recognition and measurement and was applied in accordance with the transitional provisions of IFRS 9, which require an entity to apply IFRS 9 in accordance with IAS 8, Accounting policies, change in accounting estimates and errors. The transitional provisions of IFRS 9 for the classification and measurement of financial assets and financial liabilities require an entity to retrospectively apply the requirements of IFRS 9.

In accordance with the optional exception of IFRS 9, the Group chose not to redo comparative figures.

IFRS 9 does not apply to financial assets and financial liabilities that have been written off on the date of the initial adoption (i.e. the date an entity applies IFRS 9 for the first time), which for the Group corresponds to January 1, 2018).

Main changes

In general, the main changes introduced by IFRS 9 relating to the classification and measurement of financial assets, the introduction of a new impairment model based on expected credit losses (instead of losses incurred under IAS 39) and the accounting treatment of hedges.

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Classification and measurement of financial assets and liabilities

The table below explains the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of financial assets of the Group and financial liabilities as of January 1, 2018:

IAS 39

IFRS 9

Financial assets

Measurement

category

Balance

Measurement

category

Balance

Cash and cash equivalents

Loans and accounts receivables

626,180

Amortized cost

626,180

Trade accounts receivables and other account receivables

Loans and accounts receivables

1,447,629

Amortized cost

1,447,629

Unbilled work in progress

Loans and accounts receivables

672,163

Amortized cost

672,163

Financial assets related to Concession arrangements

Loans and accounts receivables

952,780

Amortized cost

952,780

Accounts receivable from related parties

Loans and accounts receivables

874,682

Amortized cost

872,110

Other accounts receivable

Fair value through profit or loss

181

Fair value through profit or loss

181

IAS 39

IFRS 9

Financial liabilites

Measurement

category

Balance

Measurement

category

Balance

Other financial loans

Amortized cost

1,561,754

Amortized cost

1,561,754

Finance leases

Amortized cost

128,309

Amortized cost

128,309

Accounts payable and other accounts payable

Amortized cost

2,054,217

Amortized cost

2,054,217

Accounts payable to related parties

Amortized cost

81,128

Amortized cost

81,128

Derivative financial instruments used in hedging transactions

Fair value through other comprehensive income

383

Fair value through other comprehensive income

383

New Impairment Model

The model of credit loss incurred by IAS 39 was replaced by the expected credit loss model by IFRS 9. The expected credit losses are the present value of all unpaid amounts over the expected life of the financial instrument.

The new impairment model generally requires entities to recognize the expected credit losses in gains and losses for all financial assets, including those that originated or acquired recently. Although IFRS 9 does not require recognition of a provision for the loss in the initial recognition of the new financial asset, it is required for the following reporting date. This treatment is different from that of IAS 39, which did not require recognizing any impairment unless and until a loss event occurred after the initial recognition of the financial asset.

Under IFRS 9, impairment is measured as i) expected credit losses in 12 months; or ii) expected credit losses over the life of the instrument.

The Group applies the simplified approach (which estimates the lifetime loss of the financial instrument), for the commercial debtors of the Real Estate business line of income, and the general approach for trade accounts receivable, pending work in progress receivable and other accounts receivable; the same that requires evaluating whether or not a significant increase in risk exists to determine whether the loss should be estimated based on 12 months after the reporting date or during the entire life of the asset.

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Hedge accounting

As permitted by IFRS 9, the Group continues to apply the requirements contained in IAS 39 for hedge accounting.

At the beginning of a hedging operation, the Group documents the relationship between the hedging instruments and the elements covered, as well as its risk management objectives and its strategy for carrying out various hedging transactions. The Group also documents its assessment, both at the beginning of the hedges and subsequently as to whether the derivative financial instruments used in hedging transactions are highly effective in offsetting changes in the fair values or cash flows of the hedged items.

The effective portion of changes in the fair value of derivative financial instruments that are designated as hedges of a particular risk associated with a recognized asset or liability or with a highly probable projected transaction is recognized in Other Comprehensive Income (OCI). The gain or loss related to the ineffective part, if any, is recognized immediately in the consolidated statement of profit and loss.

The realized gain or loss recognized in the settlement of a hedging instrument designated as a cash flow hedge will be reclassified to the gains on the same basis as the cash flows received from the hedged item. When a hedging instrument no longer meets the criteria for hedge accounting, the accumulated gains or losses existing in OCI at that time are recognized in the profits immediately.

IFRS 15 “Revenue from Contracts with Customers” and amendments of IFRS 15

IFRS 15 introduces a 5-step model for revenue recognition for contracts with customers. This model requires that an entity: 1) identify the contract with the client; 2) identify performance obligations related to that contract; 3) determine the transaction price of the contract; 4) assigning said transaction price among the performance obligations; and 5) recognize income when (or as) the performance obligations are met. In addition to recognition and measurement, IFRS 15 also provides new requirements in the presentation and disclosures.

Transition

The Group chose to adopt IFRS 15 using the modified retrospective method, with the recognition of transitory adjustments in the opening of retained income at the date of initial application (January 1, 2018), without restating comparative figures.

IFRS 15 provides for certain optional practical expedients, including those related to the initial adoption of the standard. The Group applied the following practical expedients after the adoption of IFRS 15 on January 1, 2018:


Practical Resource		Description
Contract		The Group applied IFRS 15 retrospectively only to contracts that have not been completed as of January 1, 2018.

Contract modifications		The Group did not separately evaluate the effects of each contract modification before January 1, 2018. Instead, it reflects the cumulative effect of all modifications that occurred prior to January 1, 2018, when: i) satisfied and unsatisfied performance obligations were identified; ii) the prices of the transaction were determined, and iii) the transaction price was assigned to satisfied and unsatisfied performance obligations.

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The Group evaluated the impact of the adoption of IFRS 9 and IFRS 15 in its consolidated financial statements; the impacts in Equity as of January 1, 2018, are shown as follows:


	As of 1 January 2018
	IAS 18/39 Balance		IFRS 9 Adjustments			IFRS 15 Adjustments			IFRS Balance
Retained earnings		589,167		(2,572	)		(49,992	)		536,603

As a result of the evaluation of IFRS 15, an adjustment of S/49.99 million has been made, which corresponds mainly to the reversal of variable considerations that came from customer claims for reimbursement of costs that are currently in the process of arbitration. In relation to the evaluation of IFRS 9, S/2.57 million was adjusted corresponding to the impairment of financial assets with related parties. The adoption of the new standards did not affect the other comprehensive results.

The new accounting policies on revenue recognition are described in note 2.26.

3.2.

Standards and amendments issued to be adopted at a later date

The following standard has been issued and is applicable to the Group for annual periods as of January 1, 2019, and after, its early application is permitted for entities that adopted IFRS 15:

•

IFRS 16, leases, provides a complete model for the identification of lease agreements and their treatment in the financial statements of both tenants and lessors. It will replace IAS 17, leases, and its interpretation guides.

Considerations in the application of IFRS 16:

It is required that IFRS 16 be applied for annual reporting periods as of January 1, 2019. The Group is not adopting IFRS 16 in advance.

IFRS 16 introduces a single-lease accounting model for lessees that will result in the recognition in the balance sheet of most of its leases with few potential exceptions. The Group expects that the adoption of IFRS 16 will result in a substantial increase in its assets and liabilities due to the recognition of assets for the right to use the underlying asset and a lease liability that reflects the present value of the lease payments futures. The depreciation expense of the right-of-use asset and the interest expense of the lease liability will replace the operating lease expenses recognized in IAS 17.

During the year 2018, the Group evaluated the impact of the application of IFRS 16 in its consolidated financial statements. In this way, the Group is reviewing its leasing portfolio and is working on the change of certain internal processes and controls, including the implementation of a new lease management and accounting system. The Group is also evaluating the options of transition and the practical resources available in IFRS 16.

The following amendments to the standards have been issued and are applicable to the Group for its annual periods as of January 1, 2019, and subsequently, its early application is permitted:

•

The functions of a prepayment with negative compensation (amendments to IFRS 9, financial instruments) allow financial assets with a prepayment option that could result in the holder of the option receiving compensation for early termination to meet the single payments of the principal and interest if certain specific criteria are met.

•

Long-term interests in associates and joint ventures (amendments to IAS 28, investments in associates and joint ventures) clarify that an entity applies IFRS 9, including its impairment requirements, to long-term investments in an associate or joint venture which is part of the net investment in the associate or joint venture, but to which the equity participation method is not applied.

•

Amendments to IFRS 3, business combinations, indicate that an entity will reimburse its previously held interest in a joint operation when it obtains control of the business.

•

Amendments to IFRS 11, joint agreements, indicate that an entity will not reimburse its previously held interest in a joint operation when it obtains joint control of the business.

•

Amendments to IAS 12, income tax, clarify that all the consequences of dividend income tax (that is, the distribution of profits) must be recognized in profit or loss, regardless of how the tax arises.

- 32 -

•

Amendments to IAS 23, borrowing costs, clarify that, if a specific loan is still pending after the related asset is ready for its intended use or sale, that loan becomes part of the funds that an entity borrows in general when calculating the capitalization rate on general loans.

•

Modification of the plan, reduction or liquidation (amendments to IAS 19, benefits for employees) specifies how an entity determines pension expenses when changes occur in a defined benefit pension plan. When carried out - a correction, restriction or settlement - IAS 19 requires an entity to set aside its net defined benefit or net asset liability. The amendments require an entity to use the updated assumptions of this remeasurement to determine the current cost of the service and the net interest for the rest of the reporting period after the change in the plan.

It is not expected that other IFRS or IFRIC interpretations that are not yet implemented may have a significant impact on the consolidated financial statements.

4	FINANCIAL RISK MANAGEMENT

Financial risk management is carried out by the Group’s Management. Management oversees the general management of risks in specific areas, such as foreign exchange rate risk, price risk, cash flow, and fair value interest rate risk, credit risk, the use of derivative and non-derivative financial instruments and the investment of excess liquidity as well as financial risks and carries out periodic supervision and monitoring.

4.1

Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures in one of its subsidiaries and considers the use of other derivatives in the event that it identifies risks that may generate an adverse effect for the Group in the short and medium-term.

Market risks

Foreign exchange risk

The Group is exposed to exchange rate risk as a result of the transactions carried out locally in foreign currency and due to its operations abroad. As of December 31, 2017, and 2018 this exposure is mainly concentrated in fluctuations of U.S. dollar, the Chilean and Colombian Pesos. The foreign exchange risk of the investments in Mexico, Bolivia, and Panama are not significant due to the volume of operations.

At December 31, 2018, the consolidated statement of financial position includes the following:


	2017				2018
	S/(000)		USD(000)		S/(000)		USD(000)
Assets		1,851,309		570,511		2,273,132		674,753
Liabilities		1,982,007		610,788		2,042,176		604,383

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The Group’s exchange gains and losses for the Peruvian Sol, the Chilean and Colombian Pesos exposure against the U.S. dollar was:


	2016			2017			2018
Gain		742,930			329,751			382,104
Loss		(755,680	)		(323,927	)		(405,380	)

If at December 31, 2018 the Peruvian Sol, the Chilean and Colombian Pesos had strengthened/weakened by 2% against the U.S. dollar, with all other variables held constant, the pre-tax profit for the year would have increased/decreased by S/0.5 million (S/0.1 million in 2017 and S/0.3 million in 2016).

The consolidated statement of changes in equity comprises a foreign currency translation adjustment originated by its subsidiaries. The statement financial position includes assets and liabilities in functional currency equivalent to:


	2017				2018
	Assets		Liabilities		Assets		Liabilities
CLP		77,199,082		74,447,874		48,129,848		49,728,313
COP		101,300,811		74,319,654		163,560,697		76,978,655

The Group’s foreign exchange translation adjustment for 2018 was positive for S/5.7 million (negative for S/11.3 million in 2017).

ii)

Price risk

Management considers that the exposure of the Group to the price risk of its investments in mutual funds, bonds, and equity securities is low since the invested amounts are not significant. Any fluctuation in their fair value will not have any significant impact on the balances reported in the consolidated financial statements.

iii)

Cash flow and fair value interest rate risk

The Group’s interest rate risk mainly arises from its long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain most of its borrowings at fixed rate instruments; 46.9% of total debt in 2018 (57.8% in 2017) was contracted at fixed rates and 53.1% at variable rates (42.2% in 2017) which consisted of a 27.7% fixed rate plus VAC (adjusted for inflation) and the remaining 25.4% at a variable rate (22.9% fixed rate + VAC and the remaining 19.3% at a variable rate in 2017).

The debt subject to fixed rate plus VAC is related to a bond issued in Peruvian Sol to finance the GyM Ferrovias Project, Metro Line 1 (Note 20). Any increase in the interest rate resulting from higher inflation will have no significant impact on the Group’s profit because these revenues are also adjusted for inflation.

During 2018 and 2017 borrowings at variable rates are denominated in Peruvian Sol, and U.S. dollars and the Group’s policy is to manage their cash flow risk by using interest-rate swaps, which are recognized under hedge accounting. However, regarding the variable rate loans related to GSP (Note 19 a-ii), Management decided to assume the risk since it expects to pre-pay them before due.

If at December 31, 2018, the Libor rate plus three months had increased/decreased by 5%, with all other variables held constant, the pre-tax profit for the year would have increased/decreased by S/0.75 million (S/0.49 million in 2017). In 2018 and 2017 there was no significant ineffectiveness in the cash flow hedge.

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Credit risk

Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as customer credit counterparties, including the outstanding balance of accounts receivable and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted.

Concerning to loans to related parties, the Group has measures in place to ensure the recovery of these loans through the controls maintained by the Corporate Finance Management and the performance evaluation conducted by the Board.

No credit limits were exceeded during the reporting period, and Management does not expect the Group to incur any losses from the performance by these counterparties, except for the ones already recorded at the financial statements.

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate number of sources of committed credit facilities and the capacity to close out positions in the market. Historically, the Group cash flows enabled it to maintain sufficient cash to meet its obligations. However, as of December 31, 2016, the Group started to experienced liquidity risk due to the early termination of the GSP concession agreement and the obligations assumed (Note 16 a-i). As a consequence, the Group started a disinvestment plan to be able to meet the obligations resulting from this scenario (Note 37).

Group Corporate Finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs so that the Group does not breach borrowing limits or covenants, where applicable, on any of its borrowing facilities. Less significant financing transactions are controlled by the Finance Management of each subsidiary.

Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal statement of financial position ratio targets and, if applicable, external regulatory or legal requirements; for example, foreign currency restrictions.

Surplus cash held by the operating entities over the balance required for working capital management is invested in interest-bearing checking accounts or time deposits, selecting instruments with appropriate maturities and sufficient liquidity.

The table below analyzes the Group’s financial liabilities into relevant maturity groupings based on the remaining period from the date of the statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.


	Less than		1-2		2-5		More than
	1 year		years		years		5 years		Total
At December 31, 2017
Other financial liabilities (except for finance leases)		1,003,500		336,913		290,253		—		1,630,666
Finance leases		72,864		41,877		24,022		638		139,401
Bonds		109,746		148,986		353,349		1,272,647		1,884,728
Trade accounts payables		1,453,046		—		—		—		1,453,046
Accounts payables to related parties		55,174		25,954		—		—		81,128
Other accounts payables		153,498		34,527		371,976		—		560,001
Other non-financial liabilities		—		383		—		—		383

		2,847,828		588,640		1,039,600		1,273,285		5,749,353


	Less than		1-2		2-5		More than
	1 year		years		years		5 years		Total
At December 31, 2018
Other financial liabilities (except for finance leases)		816,122		273,079		129,233		41,577		1,260,011
Finance leases		15,151		7,489		14,094		—		36,734
Bonds		111,080		153,287		355,667		1,174,404		1,794,438
Trade accounts payables		1,079,531		—		—		—		1,079,531
Accounts payables to related parties		55,941		21,849		—		—		77,790
Other accounts payables		116,806		17,777		338,627		—		473,210
Other non-financial liabilities		—		61		—		—		61

		2,194,631		473,542		837,621		1,215,981		4,721,775

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4.2

Capital management risk

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In 2017 the situation of the Group had lead Management to monitor deviations that might cause the non-compliance of covenants and may hinder renegotiation of liabilities (Note19-a).

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group monitors capital based on the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings), less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.

As of December 31, 2017, and 2018, the gearing ratio is presented below indicating the Group’s strategy to keep it in a range from 0.10 to 0.70.


	2017			2018
Total financial liabilities and bonds		2,637,630			2,139,714
Less: Cash and cash equivalents		(626,180	)		(801,140	)

Net debt		2,011,450			1,338,574
Total equity		2,589,078			2,489,931

Total capital		4,600,528			3,828,505

Gearing ratio		0.44			0.35

4.3

Fair value estimation

For the classification of the type of valuation used by the Group for its financial instruments at fair value, the following levels of measurement have been established.

•

Level 1: Measurement based on quoted prices in active markets for identical assets or liabilities.

•

Level 2: Measurement based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

•

Level 3: Measurement based on inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs, generally based on internal estimates and assumptions of the Group).

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The table below shows the Group’s assets and liabilities measured at fair value on December 31, 2017, and 2018:


	Level 1		Level 2		Total
At December 31, 2017
Financial assets
Financial assets at fair value through profit or loss		181		—		181
Financial liabilities
Derivatives used for hedging		—		383		383
At December 31, 2018
Financial liabilities
Derivatives used for hedging		—		61		61

There were no transfers between levels 1 and 2 during the year.

5	CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Estimates and judgments used are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

5.1

Critical accounting estimates and assumptions

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

Estimated impairment of goodwill and other intangible assets with an indefinite useful life

Impairment reviews are undertaken annually to determine if goodwill arising from business acquisitions and other intangible assets with indefinite useful life are impaired, in accordance with the policy described in Note 2.15-i). For this purpose, goodwill is allocated to the different CGU to which it relates while other intangible assets with indefinite useful life are assessed individually. The recoverable amounts of the CGU and of other intangible assets with indefinite useful life have been determined based on the higher of their value-in-use and fair value less costs to sell. This evaluation requires the exercise of Management’s professional judgment to analyze any potential indicators of impairment as well as the use of estimates in determining the value in use, including preparing future cash flows, macro-economic forecasts as well as defining the interest rate at which said cash flows will be discounted.

If the Group experiences a significant drop in revenues or a drastic increase in costs or changes in other factors, the fair value of their business units might decrease. If management determines that the factors reducing the fair value of the business are permanent, those economic factors will be taken into consideration to determine the recoverable amount of those business units and therefore, goodwill, as well as other intangible assets with indefinite useful life may be deemed to be impaired, which may cause their write-down.

In accordance with the impairment evaluations carried out by Management, losses due to deterioration of goodwill and trademarks have been recognized; they were generated by the decrease in the expected flows as a reduction of the contracts’ “backlog”.

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At December 31, 2017, and 2018 the Group has performed a sensitivity analysis increasing or decreasing the assumptions of gross margin, discount rate, and revenue and terminal growth rate by a 10%, with all the other variables held constant, as follows:


	Difference between recoverable amount and carrying amounts
	2017					2018
Goodwill
Gross margin		(10	%)	+10	%		(10	%)	+10	%
Engineering and construction		81.31	%	143.63	%		0.51	%	41.12	%
Electromechanical		197.30	%	620.85	%		(9.73	%)	38.89	%
IT equipment and services		0.32	%	38.87	%		42.60	%	101.27	%
Telecommunication services		465.17	%	1339.26	%		—		—

Discount rate:		(10	%)	10	%		(10	%)	10.00	%
Engineering and construction		146.07	%	86.86	%		39.19	%	6.65	%
Electromechanical		478.08	%	354.39	%		29.36	%	2.97	%
IT equipment and services		30.06	%	11.25	%		77.06	%	48.93	%
Telecommunication services		2190.66	%	1967.37	%		—		—

Terminal growth rate:		(10	%)	+10	%		(10	%)	+10	%
Engineering and construction		107.41	%	117.91	%		18.48	%	23.30	%
Electromechanical		402.19	%	416.25	%		12.90	%	16.34	%
IT equipment and services		18.54	%	20.52	%		59.73	%	62.91	%
Telecommunication services		2232.86	%	2394.81	%		—		—


	Difference between recoverable amount and carrying amounts
	2017					2018
Trademarks
Revenue growth rate:		(10	%)	+10	%		(10	%)	+10	%
Morelco		16.37	%	(4.79	%)		75.00	%	116.27	%
Vial y Vives - DSD		(40.72	%)	(63.32	%)		27.40	%	55.71	%
Adexus		22.10	%	(0.10	%)		21.40	%	48.38	%

Discount rate:		(10	%)	+10	%		(10	%)	+10	%
Morelco		(7.21	%)	22.92	%		126.00	%	72.33	%
Vial y Vives - DSD		(58.56	%)	(45.65	%)		29.54	%	55.99	%
Adexus		(2.13	%)	28.02	%		56.26	%	18.49	%
Terminal growth rate:		(10	%)	+10	%		(10	%)	+10	%

Morelco		8.61	%	3.17	%		91.70	%	99.82	%
Vial y Vives - DSD		(51.36	%)	(54.47	%)		38.99	%	44.26	%
Adexus		13.27	%	8.86	%		31.90	%	48.38	%

In 2018, if the discount rate or terminal growth rate had been 10% below or 10% above Management’s estimates, the Group would not have recognized a provision for impairment of goodwill; however, at the same variation, the Group would have to recognized a provision for impairment of the Electromechanical GMA (in 2017 would nor have recognized a provision for impairment).

In 2018, if the revenue growth rate, terminal growth rate or the discount rate had been 10% or had been 10% above Management’s estimates, the Group would have not recognized a provision for impairment in trademarks (in 2017, would have recognized a provision for impairment of trademark in Morelco, Vial y Vives-DSD and Adexus).

At December 31, 2017, as a result of these evaluations, an impairment was identified and recorded in the Engineering and Construction CGU, trademark impairment in Vial y Vives-DSD and goodwill impairment in Morelco (Note 18).

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Income taxes

Determination of the tax obligations and expenses requires interpretations of the applicable tax laws and regulations. The Group seeks legal and tax counsel before making any decision on tax matters.

Deferred tax assets and liabilities are calculated on the temporary differences arising between the tax basis of assets and liabilities and the amounts stated in the financial statement of each entity that makes up the Group, using the tax rates in effect in each of the years in which the difference is expected to reverse. Any change in tax rates will affect the deferred income tax assets and liabilities. This change will be recognized in the income statement in the period in which the change takes effect.

Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which deductible temporary differences and tax loss carryforwards can be utilized. For this purpose, the Group takes into consideration all available evidence, including factors such as historical data, projected income, current operations, and tax planning strategies. A tax benefit related to a tax position is only recognized if it is more likely than not that the benefit will ultimately be realized.

The Group’s maximum exposure to tax contingencies amounts to S/15.7 million.

Percentage of completion revenue recognition

As of December 31, 2016, 2017 and 2018, a sensitivity analysis was performed considering a 10% increase/decrease in the Group’s gross margins, as follows:


	2016			2017			2018
Revenues		2,713,013			2,214,108			1,961,100
Gross profit		29,310			106,902			32,685
%		1.08			4.83			1.67
Plus 10%		1.19			5.31			1.84

Increase in profit before income tax		2,975			10,667			3,399

		32,285			117,569			36,084

Less 10%		0.97			4.35			1.50

Decrease in profit before income tax		(2,975	)		(10,667	)		(3,399	)

		26,335			96,235			29,286

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Provision for well closure costs

At December 31, 2018, the present value of the estimated provision for the closure of 158 wells located in Talara amounted to S/20.3 million (S/16.8 million as of December 31, 2017, for the closure of 144 wells). The well closure liability is adjusted to reflect the changes that resulted from the passage of time and from reviews of either the date of occurrence or the amount of the present value of the originally estimated obligations (Note 18-d).

The Group estimates the present value of its future obligation for well closure costs, or well closure liability, and increases the carrying amount of the asset that will be withdrawn in the future and that is shown under the heading of intangibles in the consolidated statement of financial position.

The pre-tax discount rate used for the present value calculation was 2.46% for Block I and 2.51% for Block V (2.09% for block I and 2.27% for block V for the year 2017), and 2.98% for Blocks III and IV, (2.72% for the year 2017) based on 3, 5 and 30-year rate used on U.S. bonds effective at December 31, 2018.

If on December 31, 2017, and 2018, the estimated rate had increased or decreased by 10%, with all variables held constant, the impact on pre-tax profit would not have been significant.

Impairment of investment in Gasoducto Sur Peruano

Based on the termination of the concession agreement, on which Gasoducto Sur Peruano S.A. (GSP) acts as concessionaire (Note 16 a-i), the Group identified potential impairment indicators affecting the recoverability of its investment. Consequently, the Group has applied the rules stated in IAS 36 “Impairment of assets” to determine the recoverable amount of this investment.

In that process, the Group has applied judgment to weight the various uncertainties surrounding the amount that can be recovered from this investment. Management has determined the recoverable amount assuming two key factors: (i) the amount that GSP will recover as a result of the public auction, and (ii) the validity of its right to subordinate the Odebrecht Group’s debts in GSP.

With relation to the amount to be recovered by GSP, the Group is assuming recovery of the minimum amount established in the concession agreement, which is equivalent to 72.25% of the Net Carrying Amount (NCA) of the Concession assets. This amount, in substance, represents a minimum payment to be obtained by GSP based on a public auction (liquidation) to be set up for the adequate transfer of the Concession’s assets to a new Concessionaire within a year, under the relevant contractual terms and conditions.

With relation to the validity of its right to subordinate the Odebrecht Group’s liabilities in GSP, Management´s assessment, in consultation with its legal advisors, is that although some uncertainties exist, these do not represent a material risk for exercising this right.

The concession agreement also established two additional tranches of 85% or 100% of the NCA to be recovered as a result of a public auction, depending on several factors. In any of these scenarios, the Group would be able to recover its total investment, and no additional impairment would be necessary to be recognized.

The calculation of the impairment estimate assumes a GSP settlement process in accordance with Peruvian legislation, whereby the value of the asset to be recovered is applied first to the payments of liabilities in the different categories of creditors and the remainder, if the case, to the payment of the shareholders, taking into account the existing subordination agreements.

Impairment of the joint operation in Consorcio Constructor Ductos del Sur (CCDS)

CCDS was mainly engaged in performing the engineering, procurement and construction work for Gasoducto Sur Peruano S.A. (GSP). Due to the early termination of GSP, the Group applied the rules stated in IAS 36 “Impairment of assets” and IAS 37 “Provisions” to determine the recoverable amounts of the assets and

- 40 -

liabilities to be recorded, respectively. As of December 31, 2016, adjustments were made to the audited financial statements of CCDS; as a result, the following adjustments were included in the financial statements of our subsidiary GyM S.A., resulting in a loss of S/15.2 million:


	S/000
Income for debt forgiveness (i)		431,484
Indemnification income		33,600
Work in progress impairment (ii)		(410,199	)
Other provisions		(24,915	)
Inventories impairment (iii)		(33,824	)
Financial expenses		(7,004	)
Property, plant and equipment impairment		(4,143	)
Others (liability) asset, net		(164	)

		(15,165	)

(i)	The extinguished trade accounts payable relates to the recognition of the project estimated margin recorded as a liability (Note 2.17).

(ii)	The recoverable of work in progress relates to the minimum secured payment to be obtained from GSP.

(iii)

Inventories are assets specific in nature and cannot be traded in an active market.

5.2

Critical judgments in applying the accounting policies

Consolidation of entities in which the Group holds less than 50%

The Group owns some direct and indirect subsidiaries of which the Group has control even though it has less than 50% of the voting rights. These subsidiaries mainly comprise indirect subsidiaries in the real estate business owned through Viva GyM S.A., having the power to affect the relevant activities that impact the subsidiaries’ returns, even though the Group holds interest between 30% and 50%. Additionally, the Group has control de facto by a contractual agreement with the majority investor over Promotora Larcomar S.A. of which it owns 46.55% of the equity interest.

Consolidation of entities in which the Group does not have joint control but holds rights and obligations over the assets and liabilities

The Group assesses, on an ongoing basis, the nature of the contracts signed with one or more parties. If no control or joint control is determined to be held by the Group, but it has rights over assets and obligations for liabilities under the arrangement, then the Group recognizes its assets, liabilities, revenue and expenses and its share of any jointly controlled assets or liabilities and any revenue or expense arising under the arrangement as a joint operation in accordance with IFRS 11 - Joint arrangements (Note 2.2-d).

6.	INTERESTS IN OTHER ENTITIES

The consolidated financial statements include the accounts of the Group and its subsidiaries. Additionally, the consolidated financial statements of the Group include its interest in joint operations in which the Company or certain subsidiaries have joint control with their partners (Note 2.2-d).

- 41 -

Main subsidiaries

The following table shows the principal direct and indirect subsidiaries classified by operating segment (Note 7):


Name	Country	Economic activity
Engineering and Construction:

GyM S.A.	Peru, and Colombia	Civil construction, electro-mechanic assembly, buildings management and implementing housing development projects and other related services.

GyM Chile S.p.A.	Chile	Electromechanical assemblies and services to energy, oil, gas and mining sector.

Vial y Vives - DSD S.A.	Chile	Electromechanical assemblies and services. Develop activities related to the construction of engineering projects, civil construction projects and electromechanical assemblies, as well as architectural design and installations in general. Construction and assemblies and electromechanical services in the sectors of energy, oil, gas and mining.

GMI S.A.	Peru, Mexico, and Bolivia	Advisory and consultancy services in engineering, carrying out studies and projects, managing projects and supervision of works.

Morelco S.A.S	Colombia and Ecuador	Providing construction and assembly services, supplying equipment and material to design, build, assemble, operate and maintain all types of mechanical engineering, instrumentation, and civil work.

Infrastructure:

GMP S.A.	Peru	Oil and oil by-products extraction services, as well as providing storage and fuel dispatch services.

Oiltanking Andina Services S.A.	Peru	Operation of the gas processing plant of Pisco - Camisea.

Transportadora de Gas Natural Comprimido Andino S.A.C.	Peru	Supply, process and market natural gas and its derivative products.

Concar S.A.	Peru	Highway and roads concessions operation and maintenance.

GyM Ferrovias S.A.	Peru	Concession for the operation of the public transportation system of the Line 1 of the Lima Metro (Metro de Lima Metropolitana).

Survial S.A.	Peru	Concession for constructing, operating and maintaining Section 1 of the “Southern Inter-oceanic” highway.

Norvial S.A.	Peru	Concession for restoring, operating and maintaining the “Ancon - Huacho - Pativilca” section of the Panamericana Norte road.

- 42 -


Name	Country	Economic activity
Concesion Canchaque S.A.C.	Peru	Concession for operating and maintaining of the Buenos Aires - Canchaque highway.

Concesionaria Via Expresa Sur S.A.	Peru	Concession for designing, constructing, operating and maintaining the Via Expresa - Paseo de la Republica in Lima.

Real estate:

VIVA GyM S.A.	Peru	Developing and managing real estate projects directly or together with other partners.

Parent company operation:

Adexus S.A.	Chile, Peru, Colombia and Ecuador	IT solutions services.

CAM Holding S.p.A.	Chile	Electric and technological services for the power industry.

Generadora Arabesco S.A.	Peru	Implementing projects related to electric power-generating activities.

Larcomar S.A.	Peru	Exploiting land right to use the Larcomar Shopping Center.

Promotora Larcomar S.A.	Peru	Building a hotel complex on a plot of land located in the district of Miraflores.

Promotores Asociados de Inmobiliarias S.A.	Peru	Operating in the real-estate industry and engaged in the development and sale of office premises in Peru.

Negocios del Gas S.A.	Peru	Construction, operation, and maintenance of the pipeline system to transport natural gas and liquids.

Inversiones en Autopistas S.A.	Peru	Holding company of shares, participation or any other credit instrument or investment document.

- 43 -

The following table shows the Group’s subsidiaries and related interest as of December 31, 2018:


	Percentage of common shares directly held by Parent (%)			Percentage of common shares held by Subsidiaries (%)			Percentage of common shares held by the group (%)			Percentage of common shares held by non- controlling interests (%)
Engineering and Construction:
GyM S.A.		98.24	%		—			98.24	%		1.76	%
- Morelco S.A.S.		—			70.00	%		70.00	%		30.00	%
GyM Chile SpA		—			94.49	%		99.99	%		0.01	%
- V y V – DSD S.A.		—			94.49	%		94.49	%		5.51	%
GMI S.A.		89.41	%		—			89.41	%		10.59	%
- Ecotec		—			99.99	%		99.99	%		0.01	%
- Gm Ingenieria y Construcción de CV		—			99.00	%		99.00	%		1.00	%
- Gm Ingeniería Bolivia S.R.L.		—			99.00	%		99.00	%		1.00	%
- Consorcio Vial La Concordia		—			88.00	%		88.00	%		12.00	%

Infrastructure:
GMP S.A.		95.00	%		—			95.00	%		5.00	%
- Oiltanking Andina Services S.A.		—			50.00	%		50.00	%		50.00	%
- Transportadora de Gas Natural Comprimido Andino S.A.C.		—			99.93	%		99.93	%		0.07	%
Concar S.A.		99.99	%		—			99.99	%		0.01	%
GyM Ferrovias S.A.		75.00	%		—			75.00	%		25.00	%
Survial S.A.		99.99	%		—			99.99	%		0.01	%
Norvial S.A.		67.00	%		—			67.00	%		33.00	%
Concesión Canchaque S.A.		99.96	%		—			99.96	%		0.04	%
Concesionaria Vía Expresa Sur S.A.		99.98	%		0.02	%		100.00	%		—


	Percentage of common shares directly held by Parent (%)			Percentage of common shares held by Subsidiaries (%)			Percentage of common shares held by the group (%)			Percentage of common shares held by non- controlling interests (%)
Real Estate:
Viva GyM S.A.		63.44	%		36.10	%		99.54	%		0.46	%

Parent company operations:
Generadora Arabesco S.A.		99.00	%		—			99.00	%		1.00	%
Larcomar S.A.		79.66	%		—			79.66	%		20.34	%
Promotora Larcomar S.A.		46.55	%		—			46.55	%		53.45	%
Promotores Asociados de Inmobiliarias S.A.		99.99	%		—			99.99	%		0.01	%
Negocios del Gas S.A.		99.99	%		0.01	%		100.00	%		—
Agenera S.A.		99.00	%		1.00	%		100.00	%		—
Inversiones en Autopistas S.A.		100.00	%		—			—			—
Cam Holding S.p.A.		100.00	%		—			100.00	%		—
Adexus S.A.		99.99	%		0.01	%		100.00	%		—

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The following table shows the Group’s subsidiaries and related interest as of December 31, 2017:


	Percentage of common shares directly held by Parent (%)			Percentage of common shares held by Subsidiaries (%)			Percentage of common shares held by the group (%)			Percentage of common shares held by non- controlling interests (%)
Engineering and Construction:
GyM S.A.		98.23	%		—			98.23	%		1.77	%
Stracon GyM S.A.		—			87.59	%		87.59	%		12.41	%
GyM Chile SpA		—			99.99	%		99.99	%		0.01	%
V y V – DSD S.A.		—			94.49	%		94.49	%		5.51	%
Morelco S.A.S.		—			70.00	%		70.00	%		30.00	%
GMI S.A.		89.41	%		—			89.41	%		10.59	%

Infrastructure:
GMP S.A.		95.00	%		—			95.00	%		5.00	%
Oiltanking Andina Services S.A.		—			50.00	%		50.00	%		50.00	%
Transportadora de Gas Natural
Comprimido Andino S.A.C.		—			99.93	%		99.93	%		0.07	%
Concar S.A.		99.75	%		—			99.75	%		0.25	%
GyM Ferrovias S.A.		75.00	%		—			75.00	%		25.00	%
Survial S.A.		99.99	%		—			99.99	%		0.01	%
Norvial S.A.		67.00	%		—			67.00	%		33.00	%
Concesión Canchaque S.A.		99.96	%		—			99.96	%		0.04	%

Real Estate:
Viva GyM S.A.		63.44	%		36.10	%		99.54	%		0.46	%

Parent company operations:
Cam Holding S.p.A.		100.00	%		—			100.00	%		—
Coasin Instalaciones Ltda.		—			100.00	%		100.00	%		—
CAM Servicios del Perú S.A.		73.16	%		—			73.16	%		26.84	%
Adexus S.A.		99.99	%		0.01	%		100.00	%		—
Generadora Arabesco S.A.		99.00	%		—			99.00	%		1.00	%
Larcomar S.A.		79.66	%		—			79.66	%		20.34	%
Promotora Larcomar S.A.		46.55	%		—			46.55	%		53.45	%
Promotores Asociados de Inmobiliarias S.A.		99.99	%		—			99.99	%		0.01	%
Negocios del Gas S.A.		99.99	%		0.01	%		100.00	%		—
Agenera S.A.		99.00	%		1.00	%		100.00	%		—
Inversiones en Autopistas S.A.		99.99	%		0.01	%		100.00	%		—

In June 2018, the Company increased its interest in the shares of Adexus S.A. to 100% (Note 33-a). All investments in subsidiaries have been included in the consolidation. The percentage of voting rights in those subsidiaries is directly held by the Parent Company and do not significantly differ from the percentage of shares held.

In 2017, the Group sold GMD S.A. and, in 2018, the subsidiary Cam Servicios del Peru S.A. was sold as well as the following indirect subsidiaries: i) Stracon GyM S.A. through GyM S.A. and ii) Cam Chile SpA, through Cam Holding SpA. These investments were deconsolidated from the Company, and their operations are shown in Note 37.

In August 2016, the Company had acquired additional interest in the share capital of Adexus S.A. to obtain control (Note 33-a).

- 45 -

The following table shows the Group’s subsidiaries non-controlling interests as of December 31, 2018:


Non-controlling participation		2017			2018

Viva GyM S.A. and subsidiaries		225,921			168,612
GyM S.A. and subsidiaries		103,170			67,639
Norvial S.A.		68,419			65,918
CAM Holding S.p.A.		(6,417	)		—
GMP S.A.		22,263			23,424
GyM Ferrovias S.A.		35,419			55,986
Promotora Larcomar S.A.		13,395			13,121
Other		3,578			6,871

	465,748			401,571

Summarized financial information of subsidiaries with material non-controlling interests

Set out below is the summarized financial information for each subsidiary that has non-controlling interests that are material to the Group.

Summarized statement of financial position


	Viva GyM S.A. and subsidiaries						GyM S.A. and subsidiaries						Norvial S.A.
	At December 31,						At December 31,						At December 31,
	2017			2018			2017			2018			2017			2018
Current:
Assets		884,591			720,976			1,875,231			1,262,588			88,077			109,778
Liabilities		(352,125	)		(310,132	)		(2,142,618	)		(1,467,953	)		(45,613	)		(66,506	)

Current net assets (liabilities)		532,466			410,844			(267,387	)		(205,365	)		42,464			43,272

Non-current:
Assets		78,457			98,504			1,368,460			980,653			492,803			462,739
Liabilities		(44,068	)		(37,154	)		(546,342	)		(413,026	)		(327,936	)		(306,261	)

Current net assets		34,389			61,350			822,118			567,627			164,867			156,478

Net assets		566,855			472,194			554,731			362,262			207,331			199,750

- 46 -

Summarized income statement


	Viva GyM S.A. and subsidiaries						GyM S.A. and subsidiaries						Norvial S.A.
	At December 31,						At December 31,						At December 31,
	2017			2018			2017			2018			2017			2018
Revenue		647,535			630,130			2,163,543			1,704,998			149,467			163,117

Profit (loss) before income tax		153,602			226,945			(75,977	)		(154,452	)		68,104			21,104
Income tax		(35,900	)		(69,166	)		4,486			18,559			(18,678	)		(3,885	)

Profit (loss) for the period		117,702			157,779			(71,491	)		(135,893	)		49,426			17,219
Discontinued operations		—			—			76,837			44,096			—			—
Other comprehensive Income		—			—			(2,641	)		(14,061	)		—			—

Total comprehensive income/loss for the period		117,702			157,779			2,705			(105,858	)		49,426			17,219

Dividends paid to non-controlling interest Note (36-d)		21,165			84,870			4,056			4,241			9,240			8,184

Summarized statement of cash flows


	Viva GYM S.A. and subsidiaries						GyM S.A. and subsidiaries						Norvial S.A.
	For the year ended						For the year ended						For the year ended
	2017			2018			2017			2018			2017			2018
Cash flows from operating activities provided by, net		163,304			259,992			211,315			148,754			25,041			70,939

Cash flows from investing activities provided by (applied to), net		79,471			(8,460	)		72,438			233,150			—			(2	)

Cash flows from financing activities applied to, net		(203,958	)		(255,979	)		(183,092	)		(388,836	)		(48,010	)		(43,536	)

Increase (decrease) in cash and cash equivalents, net		38,817			(4,447	)		100,661			(6,932	)		(22,969	)		27,401

Cash and cash equivalents at the beginning of the year		58,892			97,709			78,899			179,560			95,418			72,449

Cash and cash equivalents at the end of the year		97,709			93,262			179,560			172,628			72,449			99,850

The information above is the amount before inter-company eliminations.

Public services concessions

The Group operates various public service concessions. When applicable, revenue attributable to the construction or restoration of infrastructure has been accounted for by applying the models set forth in Note 2.5 (financial asset, intangible asset; and bifurcated models).

The subsidiary Transportadora de Gas Natural Comprimido Andino S.A.C. (hereinafter TGNCA) held a concession to design, finance, construct, maintain and operate the compressed natural gas supply system to be implemented in certain cities. In September 2016 the Concession Agreement was terminated. As of December 14, 2018; the Ministry of Energy and Mines paid the remaining balance related to trade accounts receivable for S/17.3 million.

Under all of the Group concessions, the infrastructure is returned to the grantor at the end of the concession agreement.

- 47 -

The concessions held by the Group are as follows as of December 31, 2018:

Name of

Concession

Description

Estimated

investment

Consideration

Ordinary
shares held

Concession
termination

Accounting
model

Survial S.A.

This company operates and maintains a 750 km road from the San Juan de Marcona port to Urcos, Peru, which is connected to an interoceanic road. The road has five toll stations and three weigh stations.

US$98.9 million

Transaction secured by the Peruvian Government involving from annual payments for the maintenance and operation of the road, which is in charge of the Peruvian Ministry of Transport and Communications (MTC).

99.90%

2032

Financial asset

Canchaque S.A.C.

This company operates and periodically maintains a 78 km road which connects the towns of Buenos Aires and Canchaque, in Peru The road has one toll station.

US$29 million

Transaction secured by the Peruvian Government regardless the traffic volume.

Revenue is secured by an annual minimum amount of US$ 0.3 million.

99.96%

2025

Financial asset

Concesionaria. La Chira S.A.

Designing, financing, constructing, operating and maintaining project called “Planta de Tratamiento de Aguas Residuales y Emisario Submarino La Chira”. The Project will treat approximately 25% of wastewaters in Lima.

S/250 million

Transaction secured by the Peruvian Government consisting of monthly and quarterly payments settled by Sedapal’s collection trust.

50.00%

2036

Financial asset

GyM Ferrovias S.A.

Concession for the operation of Line 1 of the Lima Metro, Peru’s only urban railway system in Lima city, which includes (i) operation and maintenance of the five existing trains, (ii) operation and maintenance and the acquisition of 19 trains on behalf of the Peruvian Government and (iii) design and construction of the repair yard and maintenance of railway.

S/549.8 million

Transaction secured by the Peruvian Government involving a quarterly payment received from MTC based on km travelled per train.

75.00%

2041

Financial asset

- 48 -

Name of

Concession

Description

Estimated

investment

Consideration

Ordinary
shares held

Concession
termination

Accounting
model

Norvial S.A.

The Company operates and maintains part of the only 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.

US$152 million

From users (self-financed concession; revenue is derived from collection of tolls).

67.00%

2028

Intangible

Via Expresa Sur S.A.

The Company obtained the concession for designing, financing, building, operating and maintaining the infrastructure associated with the Vía Expresa Sur Project.

This project involves the second stage expansion of the Via Expresa - Paseo de la Republica, between Av. Republica de Panama and and Panamericana highway.

US$196.8 million

The contract gives the right of collection from users; however the Peruvian Government shall pay the difference when the operating revenue obtained is below US$18 million during the first two years and below US$19.7 million from the third year to the fifteenth year of the effective period of the financing, with a ceiling of US$10 million. In June 2017, the contract was suspended temporarily for one year by agreement between the Concessionaire and the grantor. The suspension was extended for an additional year.

99.98%

2053

Bifurcated

Recaudo Trujillo S.A.C.

Design, implementation, operation, technological maintenance and renewal (estimate) of the single system of electronic collection.

Design, implementation, operation and maintenance of the Clearing house Implementation of the Fleet Control Center, as well as training to personnel.

US$40.2 million

Economic consideration resulting from applying the “price for validation” considering daily validations input on the system to be managed through a trust.

95.00%

2036

Intangible

- 49 -

Main joint operations

At December 31, 2018, the Group is a partner to 46 Joint Operations with third parties (64 at December 31, 2017, and 69 at December 31, 2016). The table below lists the Group’s major Joint Operations.


	Percentage of interest
Joint operations	2016			2017			2018
Graña y Montero S.A.A.
- Concesionaria la Chira S.A.		50.00	%		50.00	%		50.00	%

GyM S.A.
- Consorcio Constructor Alto Cayma		50.00	%		50.00	%		50.00	%
- Consorcio Alto Cayma		49.00	%		49.00	%		49.00	%
- Consorcio Lima Actividades Comerciales		50.00	%		50.00	%		50.00	%
- Consorcio Norte Pachacutec		49.00	%		49.00	%		49.00	%
- Consorcio La Chira		50.00	%		50.00	%		50.00	%
- Consorcio Río Urubamba		50.00	%		50.00	%		50.00	%
- Consorcio Vial Quinua		46.00	%		46.00	%		46.00	%
- Consorcio Rio Mantaro		50.00	%		50.00	%		50.00	%
- Consorcio GyM – CONCIVILES		66.70	%		66.70	%		66.70	%
- Consorcio Construcciones y Montajes CCM		25.00	%		25.00	%		25.00	%
- Consorcio HV GyM		50.00	%		50.00	%		50.00	%
- Consorcio Stracon Motta Engil JV		50.00	%		50.00	%		—
- Consorcio Huacho Pativilca		67.00	%		67.00	%		67.00	%
- Consorcio Constructor Chavimochic		26.50	%		26.50	%		26.50	%
- Consorcio Constructor Ductos del Sur		29.00	%		29.00	%		29.00	%
- Consorcio Italo Peruano		48.00	%		48.00	%		48.00	%
- Consorcio Menegua		50.00	%		50.00	%		50.00	%
- Consorcio Energia y Vapor		50.00	%		50.00	%		50.00	%
- Consorcio Ermitaño		50.00	%		50.00	%		50.00	%
- Consorcio para la Atención y Mantenimiento de Ductos		50.00	%		50.00	%		50.00	%
- Consorcio Lima Actividades Comerciales Sur		50.00	%		50.00	%		50.00	%
- Consorcio CDEM		—			85.00	%		85.00	%
- Consorcio Chicama - Ascope		—			50.00	%		50.00	%
- Consorcio TNT Vial y Vives - DSD Chile LTDA		—			50.00	%		50.00	%
- Consorcio La Gloria		49.00	%		49.00	%		49.00	%
- Consorcio GyM Sade Skanska		50.00	%		50.00	%		50.00	%
- Constructora Incolur DSD Limitada		50.00	%		50.00	%		50.00	%
- Consorcio Chiquintirca		—			40.00	%		40.00	%
- Consorcio Vial ICAPAL		—			10.00	%		10.00	%

GMP S.A.
- Consorcio Terminales		50.00	%		50.00	%		50.00	%
- Terminales del Peru		50.00	%		50.00	%		50.00	%

GMD S.A.
- Consorcio Cosapi-Data - GMD S.A.		70.00	%		—			—
- Consorcio The Louis Berger Group Inc. - GMD		66.45	%		—			—
- Consorcio Procesos Digitales		43.65	%		—			—
- Consorcio GMD S.A. - Indra S.A.		50.00	%		—			—
- Consorcio Fabrica de Software		50.00	%		—			—
- Consorcio Gestion de Procesos Electorales (ONPE)		50.00	%		—			—
- Consorcio Lima Actividades Sur		50.00	%		—			—
- Consorcio Latino de Actiuvidades Comerciales de Clientes Especiales		50.00	%		—			—
- Consorcio Latino de Actividades Comerciales de		75.00	%		—			—
- Consorcio Gestion de Procesos Junta de Gobernadores		45.00	%		—			—
- Consorcio Soluciones Digitales		38.00	%		—			—
- Consorcio de Gestion de la Informacion		56.00	%		—			—
- Consorcio de la disponibilidad PKI		70.00	%		—			—

- 50 -


	Percentage of interest
Joint operations	2016			2017			2018
CONCAR S.A.
- Consorcio Ancón-Pativilca		67.00	%		67.00	%		67.00	%
- Consorcio Peruano de Conservación		50.00	%		50.00	%		50.00	%
- Consorcio Manperán		67.00	%		67.00	%		67.00	%
- Consorcio Vial Sierra		50.00	%		50.00	%		100.00	%
- Consorcio Vial Ayahuaylas		—			99.00	%		99.00	%
- Consorcio Vial Sullana		—			99.00	%		99.00	%
-Consorcio Vial del Sur		—			99.00	%		99.00	%

Viva GyM S.A.
- Consorcio Panorama		35.00	%		35.00	%		—

CAM HOLDING S.p.A
- Consorcio Mecam		50.00	%		50.00	%		—
- Consorcio Seringel		50.00	%		50.00	%		—

GMI S.A.
- Consorcio Poyry-GMI		—			40.00	%		40.00	%
- Consorcio Internacional Supervisión Valle Sagrado		—			33.00	%		33.00	%
- Consorcio Supervisor Ilo		—			55.00	%		55.00	%

All of the joint arrangements listed above operate in Peru, Chile, and Colombia.

The table below provides a description of the main activities carried out by these joint operations:


Joint Operations in		Economic activity
Graña y Montero S.A.A.		Construction, operation and maintenance of La Chira wastewater treatment plant in the south of Lima. The project is aimed to solve Lima’s environmental problems caused by sewage discharged directly into the sea.

GyM S.A.		Theses joint operations are carried out through the four divisions of the engineering and construction segment (Note 7).

GMP S.A.		Consorcio Terminales and Terminales del Peru provide services for receiving, storing, shipping and transporting liquid hydrocarbons, such as gasoline, jet fuel, diesel fuel and residual among others.

CONCAR S.A.		Concar’s joint operations provides rehabilitation service, routine and periodic maintenance of the road; and road conservation and preservation services.

The consolidated financial statements do not include any other type of entities in addition to those mentioned above, such as trust funds or special purpose entities.

7	SEGMENT REPORTING

Operating segments are reported consistently with the internal reports that are reviewed by the Group’s chief decision-maker; that is, the Executive Committee, which is led by the Corporate General Manager. This Committee acts as the maximum authority in operations decision making and is responsible for allocating resources and evaluating the performance of each operating segment.

- 51 -

The Group’s operating segments are assessed by the activities of the following business units: (i) engineering and construction, (ii) infrastructure, and (iii) real estate.

As set forth under IFRS 8, reportable segments based on the level of revenue is: ‘engineering and construction’. However, the Group has voluntarily decided to report on all its operating segments as detailed in this Note.

The revenues derived from foreign operations (Chile, Colombia, Bolivia, and Guyana) comprise 14.2% of the Group’s total revenue reported in 2018 (10.6% in 2017 and 13.2% in 2016).

Sales between segments are carried out at arm’s length, are not material, and are eliminated on consolidation. The revenue from external parties is measured in a manner consistent with that in the income statement. Sale of goods relate to the real estate segment. Revenue from services relate to all other segments.

Group sales and receivables are not concentrated in a few customers. There is no external customer that represents 10% or more of the Group’s revenue.

The principal activities of the Group in each operating segments are as follows:

Engineering and construction: This segment includes from traditional engineering services such as structural, civil and design engineering, and architectural planning to advanced specialties including process design, simulation, and environmental services at three divisions; i) civil works, such as the construction of hydroelectric power stations and other large infrastructure facilities; (ii) electro-mechanic construction, such as concentrator plants, oil, and natural gas pipelines, and transmission lines; iii) building construction, such as office buildings, residential buildings, hotels, affordable housing projects, shopping centers, and industrial facilities.

Infrastructure: The Group has long-term concessions or similar contractual arrangements in Peru for three toll roads, the Lima Metro, a wastewater treatment plant in Lima, four producing oil fields, a gas processing plant and operation and maintenance services for infrastructure assets.

Real Estate: The Group develops and sells homes targeted to low and middle-income population sectors which are experiencing a significant increase in disposable income, as well as, office and commercial space to a lesser extent.

Parent Company Operation corresponds to the services which the Holding company provides, management, logistics and accounting services, among others.

The Executive Committee uses adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) to assess the performance of operating segments.

Profit before income tax reconciles to EBITDA as follows:


	2016			2017		2018
	(as restated)
(Loss)/profit before income tax		(708,134	)		45,112		133,948
Discontinued operations		104,354			210,431		36,785
Financial cost, net		179,829			137,035		197,057
Depreciation		118,832			109,342		86,335
Amortization		64,572			70,383		103,174

*EBITDA ()**		(240,546	)		572,303		557,299

- 52 -

EBITDA for each segment is as follows:


	2016			2017			2018
Engineering and construction		19,255			119,987			19,242
Infrastructure		237,752			300,935			411,502
Real state		121,420			177,286			240,991
Parent company operations		(1,025,197	)		125,938			(27,802	)
Intercompany eliminations		406,546			(151,843	)		(86,634	)

Total EBITDA		(240,546	)		572,303			557,299

Backlog refers to the expected future revenue under signed contracts and legally binding letters of intent. The breakdown by operating segments as of December 31, 2018, and the dates in which they are estimated to be realized is shown in the following table:


				Annual Backlog
	2018			2019			2020			2021+
Engineering and construction		2,644,386			1,755,890			725,351			163,145
Infrastructure		1,759,849			600,630			570,114			589,108
Real state		195,566			—			177,135			18,431
Intercompany eliminations		(351,865	)		(115,748	)		(119,221	)		(116,897	)

		4,247,936			2,240,772			1,353,379			653,787

- 53 -

The following table shows the Group’s financial statements by operating segments:


			Infrastructure
	Engineering and construction		Energy		Toll roads		Transportation		Water treatment			Real estate		Parent Company Operations		Eliminations			Consolidated
As of December 31, 2017
Assets.-
Cash and cash equivalent		184,401		43,878		121,901		161,073		4,204			85,187		25,536		—			626,180
Financial asset at fair value through profit or loss		181		—		—		—		—			—		—		—			181
Trade accounts receivables		891,252		64,364		128,124		108,706		604			45,897		274,522		2,204			1,515,673
Work in progress		55,774		—		—		—		—			—		6,030		—			61,804
Accounts receivable from related parties		230,607		2,746		62,525		3,072		8,852			69,382		76,006		(352,438	)		100,752
Other accounts receivable		518,123		55,959		66,765		31,381		1,922			40,026		51,269		—			765,445
Inventories		46,499		15,093		8,685		19,457		—			643,882		45,702		(8,607	)		770,711
Prepaid expenses		4,470		1,168		2,354		10,312		164			216		14,794		—			33,478

		1,931,307		183,208		390,354		334,001		15,746			884,590		493,859		(358,841	)		3,874,224
Non-current assets classified as held for sale		17,722		—		—		—		—			—		—		—			17,722

Total current assets		1,949,029		183,208		390,354		334,001		15,746			884,590		493,859		(358,841	)		3,891,946

Long-term trade accounts receivable		58,997		—		14,747		793,991		—			—		39,852		—			907,587
Long-term work in progress		—		—		28,413		—		—			—		—		—			28,413
Long-term accounts receivable from related parties		258,479		—		27,660		—		—			—		637,415		(149,624	)		773,930
Prepaid expenses		—		—		24,585		13,115		892			—		—		(510	)		38,082
Other long-term accounts receivable		75,030		53,917		11,159		255,179		7,348			9,811		58,408		—			470,852
Investments in associates and joint ventures		111,513		7,344		—		—		—			1		2,216,343		(2,066,530	)		268,671
Investment property		—		—		—		—		—			45,687		—		—			45,687
Property, plant and equipment		509,700		171,226		18,572		580		60			11,621		171,563		(17,587	)		865,735
Intangible assets		203,390		160,288		492,424		323		—			1,022		71,363		11,260			940,070
Deferred income tax asset		165,227		5,507		11,057		—		—			10,316		238,560		6,030			436,697

Total non-current assets		1,382,336		398,282		628,617		1,063,188		8,300			78,458		3,433,504		(2,216,961	)		4,775,724

Total assets		3,331,365		581,490		1,018,971		1,397,189		24,046			963,048		3,927,363		(2,575,802	)		8,667,670

Liabilities.-
Borrowings		591,987		46,924		2,589		—		—			162,031		253,233		—			1,056,764
Bonds		—		—		24,361		12,294		—			—		—		—			36,655
Trade accounts payable		955,015		62,659		85,329		81,161		132			43,724		225,966		(940	)		1,453,046
Accounts payable to related parties		114,198		3,664		60,857		83,841		14			37,396		102,976		(347,772	)		55,174
Current income tax		29,379		1,282		1,122		—		161			45,299		8,300		—			85,543
Other accounts payable		492,362		12,487		68,994		27,058		49			63,654		183,895		1			848,500
Provisions		6,682		5,204		—		—		—			20		1,597		—			13,503

Total current liabilities		2,189,623		132,220		243,252		204,354		356			352,124		775,967		(348,711	)		3,549,185

Borrowings		127,773		101,549		1,945		—		—			12,010		390,022		—			633,299
Long-term bonds		—		—		319,549		591,363		—			—		—		—			910,912
Other long-term accounts payable		379,043		—		52,349		349,987		158			32,058		38,878		—			852,473
Long-term accounts payable to related parties		4,306		—		836		89,023		23,445			—		62,841		(154,497	)		25,954
Provisions		8,587		16,707		—		—		—			—		8,620		—			33,914
Derivative financial instruments		—		383		—		—		—			—		—		—			383
Deferred income tax liability		26,633		8,957		8,606		20,789		210			—		7,277		—			72,472

Total non-current liabilities		546,342		127,596		383,285		1,051,162		23,813			44,068		507,638		(154,497	)		2,529,407

Total liabilities		2,735,965		259,816		626,537		1,255,516		24,169			396,192		1,283,605		(503,208	)		6,078,592

Equity attributable to controlling interest in the Company		487,923		299,411		323,987		106,256		(123	)		217,290		2,629,428		(1,940,842	)		2,123,330
Non-controlling interest		107,477		22,263		68,447		35,417		—			349,566		14,330		(131,752	)		465,748

Total liabilities and equity		3,331,365		581,490		1,018,971		1,397,189		24,046			963,048		3,927,363		(2,575,802	)		8,667,670

- 54 -

Operating segments financial position

Segment reporting


			Infrastructure
	Engineering and construction		Energy		Toll roads		Transportation		Water treatment		Real estate		Parent Company Operations		Eliminations			Consolidated
As of December 31, 2018
Assets.-
Cash and cash equivalent		177,455		34,816		168,460		191,178		6,700		93,262		129,269		—			801,140
Financial asset at fair value through profit or loss		—		—		—		—		—		—		—		—			—
Trade accounts receivables		583,842		54,350		78,013		226,919		598		63,038		1,068		—			1,007,828
Work in progress		24,962		—		—		—		—		—		3,576		—			28,538
Accounts receivable from related parties		203,583		492		40,820		758		9,930		60,759		98,308		(379,747	)		34,903
Other accounts receivable		386,467		37,611		28,492		31,012		199		55,508		49,160		2			588,451
Inventories		27,852		18,823		9,206		25,282		—		448,328		—		(15,444	)		514,047
Prepaid expenses		3,825		1,345		3,068		874		135		81		1,221		—			10,549

		1,407,986		147,437		328,059		476,023		17,562		720,976		282,602		(395,189	)		2,985,456
Non-current assets classified as held for sale		—		—		—		—		—		—		247,798		—			247,798

Total current assets		1,407,986		147,437		328,059		476,023		17,562		720,976		530,400		(395,189	)		3,233,254

Long-term trade accounts receivable		14,455		—		33,380		966,202		—		6,030		—		—			1,020,067
Long-term work in progress		—		—		32,212		—		—		—		—		—			32,212
Long-term accounts receivable from related parties		254,660		—		39,341		—		—		—		744,655		(260,430	)		778,226
Prepaid expenses		—		—		28,214		5,152		840		—		—		(509	)		33,697
Other long-term accounts receivable		77,028		63,797		7,058		64,817		7,346		30,268		52,645		(2	)		302,957
Investments in associates and joint ventures		114,676		7,230		—		—		—		5,604		2,213,023		(2,082,768	)		257,765
Investment property		—		—		—		—		—		29,133		—		—			29,133
Property, plant and equipment		205,678		171,430		14,585		1,586		109		9,237		69,088		(1,159	)		470,554
Intangible assets		160,088		183,614		466,153		749		—		1,105		23,514		11,872			847,095
Deferred income tax asset		166,624		5,025		11,876		—		620		17,127		218,201		5,963			425,436

Total non-current assets		993,209		431,096		632,819		1,038,506		8,915		98,504		3,321,126		(2,327,033	)		4,197,142

Total assets		2,401,195		578,533		960,878		1,514,529		26,477		819,480		3,851,526		(2,722,222	)		7,430,396

Liabilities.-
Borrowings		232,409		26,621		15,384		209,463		—		133,105		209,492		—			826,474
Bonds		—		—		25,745		13,422		—		—		—		—			39,167
Trade accounts payable		777,130		49,254		61,233		104,652		121		31,173		55,968		—			1,079,531
Accounts payable to related parties		179,351		1,933		46,099		65,256		58		35,085		91,754		(363,595	)		55,941
Current income tax		5,898		2,797		1,398		9,888		226		4,219		1,381		—			25,807
Other accounts payable		389,896		13,147		72,823		11,677		631		106,286		38,209		—			632,669
Provisions		521		5,412		—		—		—		264		—		—			6,197
Non-current liabilities classified as held for sale		—		—		—		—		—		—		225,828		—			225,828

Total current liabilities		1,585,205		99,164		222,682		414,358		1,036		310,132		622,632		(363,595	)		2,891,614

Borrowings		9,314		87,166		556		—		—		10,684		268,478		—			376,198
Long-term bonds		—		—		299,637		598,238		—		—		—		—			897,875
Other long-term accounts payable		357,146		—		31,477		154,756		1,656		26,470		2,605		—			574,110
Long-term accounts payable to related parties		8,880		—		1,167		81,207		23,445		—		183,826		(276,676	)		21,849
Provisions		32,122		20,234		—		—		—		—		51,055		—			103,411
Derivative financial instruments		—		61		—		—		—		—		—		—			61
Deferred income tax liability		5,564		24,541		7,010		37,178		—		—		1,054		—			75,347

Total non-current liabilities		413,026		132,002		339,847		871,379		25,101		37,154		507,018		(276,676	)		2,048,851

Total liabilities		1,998,231		231,166		562,529		1,285,737		26,137		347,286		1,129,650		(640,271	)		4,940,465

Equity attributable to controlling interest in the Company		331,178		323,943		332,406		171,594		340		193,483		2,708,803		(1,973,387	)		2,088,360
Non-controlling interest		71,786		23,424		65,943		57,198		—		278,711		13,073		(108,564	)		401,571

Total liabilities and equity		2,401,195		578,533		960,878		1,514,529		26,477		819,480		3,851,526		(2,722,222	)		7,430,396

- 55 -

Operating segment performance

Segment Reporting


				Infrastructure
	Engineering																		Parent
	and												Water			Real			Company
	construction			Energy			Toll roads			Electric Train			treatment			estate			operations			Eliminations			Consolidated
Year 2016 -
Revenue		2,936,831			382,211			527,104			247,040			18,459			411,518			62,070			(447,924	)		4,137,309
Gross profit (loss)		60,191			42,129			121,114			42,474			5,698			136,539			(171	)		(91,885	)		316,089
Administrative expenses		(212,048	)		(17,260	)		(35,084	)		(12,951	)		(787	)		(28,429	)		(35,967	)		64,223			(278,303	)
Other income and expenses		(14,246	)		542			262			9			—			835			(5,842	)		(3,920	)		(22,360	)
Gain from the sale of investments		—			—			—			—			—			—			46,336			—			46,336

Operating (loss) profit		(166,103	)		25,411			86,292			29,532			4,911			108,945			4,356			(31,582	)		61,762
Financial expenses		(60,806	)		(10,801	)		(7,390	)		(2,810	)		(37	)		(14,388	)		(116,554	)		14,731			(198,055	)
Financial income		9,987			1,040			2,225			8,037			86			2,817			20,924			(26,891	)		18,225
Share of the profit or loss in associates and joint ventures		16,505			1,615			—			—			—			6,850			(1,036,888	)		421,852			(590,066	)

(Loss) profit before income tax		(200,417	)		17,265			81,127			34,759			4,960			104,224			(1,128,162	)		378,110			(708,134	)
Income tax		19,731			(5,308	)		(22,213	)		(10,904	)		(1,433	)		(27,054	)		192,131			7,232			152,182

(Loss) profit from continuing operations		(180,686	)		11,957			58,914			23,855			3,527			77,170			(936,031	)		385,342			(555,952	)
Profit from discontinued operations		87,239			—			—			—			—			—			1,423			15,692			104,354

(Loss) profit for the year		(93,447	)		11,957			58,914			23,855			3,527			77,170			(934,608	)		401,034			(451,598	)

(Loss) profit attributable to:
Owners of the Company		(87,710	)		9,369			43,656			17,892			3,527			22,105			(932,961	)		414,423			(509,699	)
Non-controlling interest		(5,737	)		2,588			15,258			5,963			—			55,065			(1,647	)		(13,389	)		58,101

		(93,447	)		11,957			58,914			23,855			3,527			77,170			(934,608	)		401,034			(451,598	)

- 56 -

Operating segment performance

Segment Reporting


				Infrastructure
	Engineering																		Parent
	and												Water			Real			Company
	construction			Energy			Toll roads			Transportation			treatment			estate			operations			Eliminations			Consolidated (as restated)
Year 2017 -
Revenue		2,331,907			436,876			642,127			365,771			3,152			647,535			70,050			(483,405	)		4,014,013
Gross profit (loss)		176,473			71,825			139,196			48,696			445			147,383			(37,771	)		(43,795	)		502,452
Administrative expenses		(188,162	)		(15,854	)		(32,453	)		(15,279	)		(317	)		(21,189	)		(100,968	)		51,768			(322,454	)
Other income and expenses		(46,445	)		5,138			1,061			5			—			(3,700	)		10,512			560			(32,869	)
Gain from the sale of investments		—			—			—			—			—			49,002			(18,672	)		4,215			34,545

Operating (loss) profit		(58,134	)		61,109			107,804			33,422			128			171,496			(146,899	)		12,748			181,674
Financial expenses		(46,655	)		(13,423	)		(6,892	)		(8,000	)		(50	)		(21,918	)		(81,310	)		27,471			(150,777	)
Financial income		8,491			1,965			3,257			3,606			26			3,569			35,431			(42,603	)		13,742
Share of the profit or loss in associates and joint ventures		30,982			1,584			—			—			—			456			142,595			(175,144	)		473

Profit (loss) before income tax		(65,316	)		51,235			104,169			29,028			104			153,603			(50,183	)		(177,528	)		45,112
Income tax		877			(13,151	)		(32,290	)		(9,544	)		(228	)		(35,900	)		44,032			(101	)		(46,305	)

Profit (loss) from continuing operations		(64,439	)		38,084			71,879			19,484			(124	)		117,703			(6,151	)		(177,629	)		(1,193	)
Profit from discontinued operations		76,837			—			—			—			—			—			123,603			9,991			210,431

Profit (loss) for the period		12,398			38,084			71,879			19,484			(124	)		117,703			117,452			(167,638	)		209,238

Profit (loss) attributable to:
Owners of the Company		12,078			33,714			55,620			14,613			(124	)		48,647			125,182			(140,992	)		148,738
Non-controlling interest		320			4,370			16,259			4,871			—			69,056			(7,730	)		(26,646	)		60,500

		12,398			38,084			71,879			19,484			(124	)		117,703			117,452			(167,638	)		209,238

- 57 -

Operating segment performance

Segment Reporting


				Infrastructure
	Engineering and construction			Energy			Toll roads			Transportation			Water treatment			Real estate			Parent Company operations			Eliminations			Consolidated
Year 2018 -
Revenue		1,960,863			560,506			733,148			586,329			3,270			630,130			62,098			(636,882	)		3,899,462
Gross profit (loss)		62,095			120,360			107,092			122,567			592			287,959			(10,564	)		(15,612	)		674,489
Administrative expenses		(136,066	)		(20,898	)		(35,626	)		(12,007	)		(295	)		(50,730	)		(62,891	)		40,080			(278,433	)
Other income and expenses		(13,509	)		1,243			(11	)		31			—			(1,971	)		(47,778	)		660			(61,335	)
Gain from the sale of investments		(7	)		—			—			—			—			—			—			—			(7	)

Operating profit (loss)		(87,487	)		100,705			71,455			110,591			297			235,258			(121,233	)		25,128			334,714
Financial expenses		(82,861	)		(15,631	)		(28,762	)		(20,604	)		—			(14,700	)		(121,938	)		36,514			(247,982	)
Financial income		15,122			4,593			4,631			35,147			559			6,397			38,614			(54,138	)		50,925
Dividends		—			—			—			—			—			—			8,344			(8,344	)		—
Share of the profit or loss in associates and joint ventures		11,366			1,608			—			—			—			(10	)		84,138			(100,811	)		(3,709	)

(Loss)/profit before income tax		(143,860	)		91,275			47,324			125,134			856			226,945			(112,075	)		(101,651	)		133,948
Income tax		14,361			(26,275	)		(15,737	)		(38,018	)		(517	)		(69,166	)		22,866			(832	)		(113,318	)

(Loss) profit from continuing operations		(129,499	)		65,000			31,587			87,116			339			157,779			(89,209	)		(102,483	)		20,630
Profit from discontinued operations		44,096			—			—			—			—			—			(3,708	)		(3,603	)		36,785

(Loss) profit for the period		(85,403	)		65,000			31,587			87,116			339			157,779			(92,917	)		(106,086	)		57,415

Profit (loss) attributable to:
Owners of the Company		(86,857	)		59,866			26,731			65,337			339			28,921			(85,715	)		(91,810	)		(83,188	)
Non-controlling interest		1,454			5,134			4,856			21,779			—			128,858			(7,202	)		(14,276	)		140,603

		(85,403	)		65,000			31,587			87,116			339			157,779			(92,917	)		(106,086	)		57,415

- 58 -

Segments by geographical area


	2016		2017		2018
Revenues:
- Peru		3,590,772		3,589,048		3,347,540
- Chile		163,990		371,986		226,891
- Colombia		363,311		50,829		325,031
- Guyana		717		—		—
- Ecuador		3,682		—		—
- Bolivia		14,837		2,150		—

		4,137,309		4,014,013		3,899,462

Non-current assets:
- Peru		3,995,453		4,164,342		3,896,920
- Chile		446,998		407,152		142,383
- Colombia		260,732		203,203		157,839
- Bolivia		13,043		149		—
- Ecuador		888		—		—
- Guyana		862		878		—

		4,717,976		4,775,724		4,197,142

8	FINANCIAL INSTRUMENTS

8.1

Financial instruments by category

The classification of financial assets and liabilities by category is as follows:


	At December 31
	2017		2018
Assets according to the statement of financial position
Loans and accounts receivable at amortized cost:
- Cash and cash equivalents		626,180		801,140
- Trade accounts receivable and other accounts receivable (excluding financial assets)		2,029,575		1,302,358
- Work in progress		90,217		60,750
- Financial assets related to concession agreements		952,780		1,227,994
- Accounts receivable from related parties		874,682		813,129

		4,573,434		4,205,371

Financial asset at fair value through profit or loss
- Other financial asset		181		—

		181		—

Financial assets related to concession agreements are recorded in the consolidated statement of financial position as the line items short-term trade accounts receivable and long-term trade accounts receivable.

- 59 -


	At December 31
	2017		2018
Financial liabilities according to the statement of financial position
Other financial liabilities at amortized cost
- Other financial liabilities		1,561,754		1,169,184
- Finance leases		128,309		33,488
- Bonds		947,567		937,042
- Trade and other accounts payable (excluding non-financial liabilities)		2,054,217		1,552,741
- Accounts payable to related parties		81,128		77,790

		4,772,975		3,770,245

Hedging derivatives:
- Derivative financial instruments		383		61

8.2

Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external risk ratings (if available) or historical information about counterparty default rates.

- 60 -

At December 31 the credit quality of financial assets is shown as follows:


	At December 31,
	2017		2018
*Cash and cash equivalents ()**
Banco de Credito del Peru (A+)		224,834		350,403
Citibank (A)		110,846		134,990
Banco Continental (A+)		100,882		114,067
Banco Scotiabank (A+)		71,608		73,039
Fondo de Inversion Alianza		—		39,051
Banco de la Nacion (A)		17,776		23,766
Banco Bogota (A)		25,609		16,782
Banco Interbank (A)		14,937		14,075
Banco Santander - Peru (A)		—		12,221
Banco de Credito e Inversiones - Chile (AA+)		1,105		5,909
Banco Santander - Chile (AAA)		22,041		3,325
Banco de Chile (AAA)		4,337		49
Banco Interamericano de Finanzas (A)		5,551		126
Banco Scotiabank de Guyana (A)		—		121
Others		7,388		8,273

		606,914		796,197

The ratings in the table above “A” and “AAA” represent high-quality credit ratings. For banks located in Peru, the ratings are derived from risk rating agencies authorized by the Peruvian banking and insurance regulator “Superintendencia de Banca, Seguros y AFP” (SBS). For banks located in Chile, the ratings are derived from risk rating agencies authorized by the Chilean Securities and Insurance Supervisor “Superintendencia de Valores y Seguros” (SVS).

(*)	The difference between the balances shown above with the balances shown in the statement of financial position corresponds to cash on hand and in-transit remittances (Note 9).

The credit quality of customers is assessed in three categories (internal classification):

New customers/related parties (less than six months),

Existing customers/related parties (with more than six months of trade relationship) with no previous default history; and

- 61 -

Existing customers/related parties (with more than six months of trade relationship) with previous default history.


	2017		2018
Trade accounts receivable (Note 11 and Note 12)
Counterparties with no external risk rating
A		6,042		140,594
B		2,313,187		1,762,557
C		194,248		185,494

		2,513,477		2,088,645

Receivable from related parties and joint operators (Note 13)
B		874,682		813,129

The total balance of trade accounts receivable and receivable from related parties is in compliance with contract terms and conditions; none have been re-negotiated.

9	CASH AND CASH EQUIVALENTS

At December 31 this account comprises:


	2017		2018
Cash on hand		16,468		1,377
Cash in-transit		2,798		3,566
Bank accounts (a)		493,666		647,832
Time deposits (b)		113,248		148,365

		626,180		801,140

(a)

The Group maintains deposits in local and foreign banks, are available and earn interest at market rates. This includes reserve funds for bond payments issued by subsidiaries GyM Ferrovias S.A. and Norvial S.A.; for the year 2018 S/133 million and S/13 million, respectively (for the year 2017 S/108 million and S/16 million, respectively).

(b)	Time deposits have maturities less than 90 days and may be renewed upon maturity. These deposits earn interest that fluctuates between 2.5% and 3.5%.

As of December 31, 2017, and 2018, time deposits are mainly from subsidiaries:


	2017		2018
Graña y Montero S.A.A.		—		110,281
GyM Ferrovias S.A.		36,757		32,000
GyM S.A.		30,497		1,906
Concesionaria la Chira S.A.		—		4,170
GMP S.A.		3,238		7
Viva GyM S.A.		17,879		1
Concar S.A.		13,611		—
Concesion Canchaque		11,000		—
Other minors		266		—

		113,248		148,365

Reconciliation to the cash flow statement

- 62 -

The above figures reconcile to the amount of cash shown in the statement of cash flows at the end of the financial year as follows:


	2016			2017			2018
Cash and cash equivalent on Consolidated statement of financial position		606,950			626,180			801,140
Bank overdrafts (Note 19)		(8,396	)		(120	)		(119	)

Balances per consolidated statement of cash flows		598,554			626,060			801,021

10	OTHER FINANCIAL ASSETS

On April 2016, the Company sold their 1.64% of interest held in Transportadora de Gas del Peru S.A. (TGP) for S/107.3 million, resulting in a net profit of S/46.3 million, as shown in the income statement, within “Profit (loss) on sale of investments”. The balance of its investment at the date of sale was S/117.1 million.

The cumulative amount of fair values at the date of sale amounting to S/41.5 million (S/56 million of gain on fair value and S/14.6 million of income tax), as recognized in the statement of comprehensive income was transferred to profits for the period.

11	TRADE ACCOUNTS RECEIVABLES, NET

At December 31 this account comprises:


	2017					2018
	Current			Non-current		Current			Non-current
Invoice receivables		459,722			819,699		907,007			469,510
Unbilled receivables		1,069,299			87,888		113,464			550,557

		1,529,021			907,587		1,020,471			1,020,067
(-) Impairment of account receivables		(13,348	)		—		(12,643	)		—

		1,515,673			907,587		1,007,828			1,020,067

The fair value of current receivables is similar to their carrying amount since their average collection turnover is less than 60 days. These current receivables do not bear interest and have no specific guarantees.

The non-current portion of the trade accounts receivable is related to the financial asset model (Note 2.5) of subsidiary GyM Ferrovias S.A.

At December 31, 2018, the fair value of non-current accounts receivable amounted to S/1,060 million (S/835 million at December 31, 2017), which was calculated under the discounted cash flows method, using rates of 7.33% (6.33% at December 31, 2017).

Unbilled receivables are documents related to estimates for services rendered that were not billed by the Engineering and Construction segment related to estimates of the completion advance percentage. Until such revenues are billed, they are recorded in the unbilled receivables account. As of December 31, 2018, the carrying value of non-current unbilled receivables is similar to their fair value, as they were recorded using the discounted cash flow method, using a rate of 1.71%.

Rights for concessions in progress correspond to future collection rights for public service concessions that are still in the pre-operational stage.

- 63 -

At December 31, 2018, current and non-current unbilled receivables mainly from the following subsidiaries are as follows:


Unbilled receivables	2017		2018
GyM S.A.		581,946		14,455
GyM Ferrovias		354,763		558,179
Concar S.A.		52,508		38,770
Survial S.A.		30,647		19,138
GMI S.A.		19,699		26,622
Norvial S.A.		7,057		2,885
Cam Holding SPA		85,366		—
Others		25,201		3,972

		1,157,187		664,021

Aging of trade accounts receivable is as follows:


	2017		2018
Current		2,157,656		1,866,913
Past due up to 30 days		118,158		37,750
Past due from 31 days up to 180 days		141,120		25,854
Past due from 181 days up to 360 days		1,962		17,660
Past due over 360 days		17,712		92,361

		2,436,608		2,040,538

The Group has recognized impairment amounting to S/3.1 million (S/0.7 million in 2017 and S/3.1 in 2016) in the consolidated statement of income (Note 27). The maximum exposure to credit risk at the reporting date is the carrying amount of the accounts receivable and unbilled work in progress (Note 12).

12	WORK IN PROGRESS, NET

At December 31 this account comprises:


	2017				2018
	Current		Non-current		Current		Non-current
Unbilled receivable concessions in progress		—		28,413		—		32,212
Work in Progress		61,804		—		28,538		—

		61,804		28,413		28,538		32,212

Concession rights in progress correspond to future collection rights for public service in Concesionaria Via Expresa Sur S.A. that is in the pre-operational stage and has been suspended until July 2019 (Note 6-b).

- 64 -

Work in progress include all expenses incurred by the Group comprising future activities to be carried out under construction contracts currently effective. The Group estimates that all incurred cost will be billed and collected.

At December 31, 2018 and 2017 work in progress that remained to be billed are shown net of any advances received from customers for S/13.5 million and S/15.3 million, respectively, under the terms and conditions set forth in each specific agreement. These advances are mostly related to subsidiary GyM S.A.

13	TRANSACTIONS WITH RELATED PARTIES AND JOINT OPERATORS

Transactions with related parties

Major transactions between the Company and its related parties are summarized as follows:


	2016		2017		2018
Revenue from sales of goods and services:
- Associates		—		3,367		1,704
- Joint operations		36,901		18,138		56,560

		36,901		21,505		58,264

Purchase of goods and services:
- Associates		739		2,776		2,130
- Joint operations		3,228		14,191		601

		3,967		16,967		2,731

Inter-company transactions are based on prevailing price lists and terms and conditions that would be agreed with third parties.

Key management compensation

Key management includes directors (executive and non-executive), members of the Executive Committee and Internal Audit Management. The compensation paid or payable to key management in 2018 amounted to S/58 million (S/90.5 million in 2017, which includes S/25.6 million to discontinued operations, S/106.9 million in 2016, which includes S/82 million to discontinued operations) and only relates to short-term benefits.

- 65 -

Balances at the end of the year were:


	At December 31,				At December 31,
	2017				2018
	Receivable		Payable		Receivable		Payable
Current portion:
Joint operations
Consorcio Rio Urubamba		8,964		—		9,122		—
Consorcio Peruano de Conservacion		7,417		—		6,417		—
Consorcio Italo Peruano		14,536		18,849		3,322		4,996
Consorcio Constructor Chavimochic		1,959		5,817		2,138		6,199
Consorcio GyM Conciviles		43,435		—		1,855		—
Consorcio La Gloria		1,688		1,358		1,369		1,006
Consorcio Ermitaño		1,067		6		781		624
Terminales del Perú		3,290		—		459		—
Consorcio TNT Vial y Vives - DSD Chile Ltda		—		—		—		11,804
Consorcio Rio Mantaro		1,134		763		—		6,655
Consorcio Vial Quinua		—		2,162		—		1,970
Consorcio Huacho Pativilca		—		2,377		—		475
Consorcio Vial Sierra		2,355		1,854		—		—
Consorcio para la Atencion y Mantenimiento de Ductos		—		12,074		—		—
Other minors		12,221		7,045		9,215		11,323

		98,066		52,305		34,678		45,052


	At December 31,				At December 31,
	2017				2018
	Receivable		Payable		Receivable		Payable
Other related parties
Ferrovias Argentina		—		2,684		—		10,242
Peru Piping Spools S.A.C.		279		185		225		—
Gasoducto Sur Peruano S.A		2,407		—		—		—
Other minors		—		—		—		647

Current portion		100,752		55,174		34,903		55,941

Non-current portion:
Gasoducto Sur Peruano S.A		773,930		—		773,927		—
Ferrovias Participaciones		—		21,648		—		21,849
Other minors		—		4,306		4,299		—

Non-current		773,930		25,954		778,226		21,849

Receivables and payables are mainly of short-term and do not have specific guarantees, except for the receivable account from GSP. Accounts receivable from related parties have maturity periods of 60 days and arise from sales of goods and services. These short-term balances are non-interest-bearing. As of December 31, 2018, an impairment was recognized for S/31 million in the financial statements of Consorcio GyM Conciviles (S/18 million as of December 31, 2017).

The non-current balance corresponds to the obligations arising from the early termination of the GSP project (Note 16 a-i). As of December 31, 2018, the book value of the non-current account receivables recorded by the Group totaling S/773.9 million (S/524.9 million in the Company and S/249 in GyM S.A.). The amount of S/524.9 million is similar to its fair value as it was recorded using the discounted cash flow method, at an annual rate of 3.46% that originated a discount value of S/17.8 million (equivalent to S/8.1 million in 2017) (Note 28).

Additionally, as a consequence of the early termination of the GSP, and the related facts, the subsidiary GyM S.A. reclassified as of December 31, 2017, the balances of the Consorcio Constructor Ductos del Sur to which adjustments for impairment had previously been applied (Note 5.1-f) and which, up to 2016, was included in the consolidation under the proportional share method. The value of accounts receivable from CCDS corresponds mainly to collection rights to GSP for S/249 million.

Accounts payable to related parties have maturity periods of 60 days and arise from engineering, construction, maintenance, and other services received. These balances are not interest-bearing due to their short-term maturities.

Transactions with non-controlling interest are disclosed in Note 36.

- 66 -

14	OTHER ACCOUNTS RECEIVABLE

At December 31 this account comprises:


	2017					2018
	Current			Non-current		Current			Non-current
Advances to suppliers (a)		149,464			255,181		81,719			64,817
Income tax on-account payments (b)		125,176			2,607		91,353			—
VAT credit (c)		81,732			30,680		79,076			26,162
Guarantee deposits (d)		113,429			—		167,769			12,241
Claims to third parties (e )		109,491			11,808		62,163			—
Petroleos del Peru S.A.- Petroperu S.A.		3,619			53,918		11,953			63,797
Taxes receivable		66,083			33,428		20,246			25,644
Restricted funds (f)		61,993			44,770		39,394			28,578
Rental and sale of equipment		27,970			—		34,768			—
Accounts receivable from personnel		8,868			—		3,479			—
Consorcio Constructor Ductos del Sur (g)		—			29,264		—			52,114
Consorcio Panorama		—			—		5,306			21,826
Other minors		19,018			9,196		16,059			7,778

		766,843			470,852		613,285			302,957
(-) Impairment		(1,398	)		—		(24,834	)		—

		765,445			470,852		588,451			302,957

Other non-current accounts receivable have maturities between two and five years.

The fair value of the short-term receivables approximates their carrying amount due to their short-term maturities. The non-current portion mainly comprises non-financial assets such as advances to suppliers and fiscal credits.

The maximum exposure to credit risk at the reporting date is the carrying amounts of each class of above-mentioned other receivables. The Group does not demand guarantees.

The following paragraph contains a description of major accounts receivable:

(a)

Advances to suppliers

The balance mainly comprises advances to:


	2017				2018
	Current		Non-current		Current		Non-current
Alsthom Transporte - Linea 1		9,985		223,387		1,578		64,817
Electromechanical works Refineria Talara		29,814		—		4,582		—
Infrastructure Linea Amarilla		40,669		—		5,545		—
Bombardier - Linea 1		—		29,142		—		—
Advances - joint operations vendors		—		—		21,647		—
Other		68,996		2,652		48,367		—

		149,464		255,181		81,719		64,817

- 67 -

(b)

Income tax on-account payments

This balance mainly consists of income tax payments and credits in the following subsidiaries:


	2017				2018
	Current		Non-current		Current		Non-current
GyM S.A.		84,923		—		55,377		—
GMI S.A.		542		—		3,877		—
GMP S.A.		19,318		—		8,511		—
CONCAR S.A.		4,565		—		8,563		—
VIVA GyM S.A.		6,121		—		8,114		—
Graña y Montero S.A.A.		—		—		6,463		—
GyM Ferrovías S.A.		3,606		—		—		—
Others		6,101		2,607		448		—

		125,176		2,607		91,353		—

(c)

Tax credit related to VAT on the following subsidiaries:


	2017				2018
	Current		Non-current		Current		Non-current
GyM S.A.		50,326		530		38,653		530
VIVA GyM S.A.		10,894		9,983		511		6,744
GyM Ferrovías S.A.		8,653		—		25,453		—
Negocios del gas S.A.		—		8,411		—		8,411
Concesionaria Vesur S.A.		—		5,319		1,015		5,059
Graña y Montero S.A.A.		1,571		—		9,821		—
GMP S.A.		3,992		—		456		—
CONCAR S.A.		1,551		—		2,382		—
NORVIAL S.A.		—		3,209		—		1,997
Others		4,745		3,228		785		3,421

		81,732		30,680		79,076		26,162

Management considers that this VAT-fiscal credit will be recovered in the normal course of future operations of these subsidiaries.

(d)

Guarantee deposits

Guarantee deposits are the funds retained by customers for work contracts assumed basically by the subsidiary GyM S.A. These deposits are retained by the customers to secure the Subsidiary’s compliance with its obligations under the contracts. The amounts retained will be recovered once the contracted work is completed.

(e)

Third-Party Claims

Includes mainly an amount of S/27.2 million related to the claim from the resolution of the Sale and Purchase Contract for the Development of the Large Scale Real Estate Project for Social Housing Construction “Ciudad Alameda de Ancon” subscribed by the subsidiary Viva GyM together with the Ministry of Housing, and Fondo Mi Vivienda.

This Sale and Purchase Contract was rightfully terminated due to the impossibility of executing its terms and conditions since it became impossible to install proper potable water and sewerage services for the housing units that were to be developed within the term limit established in the Contract. As a consequence, and in accordance with the provisions of Civil Code 1372, the parties are obliged to fully reimburse the executed benefits to date, which results in the reimbursement of S/22 million by the Ministry of Housing and S/5.2 million by the Fondo Mi Vivienda to Viva GyM.

- 68 -

(f)

Restricted Funds

Includes guarantee accounts for the credit agreement subscribed between the Company and Credit Suisse AG amounting to S/28 million, as reserve for the payment of interest; and S/11 million from Viva GyM S.A. for bank guarantee.

(g)

Consorcio Constructor Ductos del Sur

In 2018, it refers to the recognition of debts to subcontractors for S/21.6 million and rights for the collection of a penalty for termination of the contract for S/30.6 million.

15	INVENTORIES

At December 31 this account comprises:


	2017			2018
Land		317,337			230,689
Work in progress - real estate		150,537			135,376
Finished properties		203,209			76,027
Construction materials		51,131			27,852
Merchandise and supplies		90,504			53,310

		812,718			523,254
(-) Impairment of inventories		(42,007	)		(9,207	)

		770,711			514,047

- 69 -

Land

Land comprises properties, net of impairment, for the implementation of projects of the subsidiary Viva GyM. As of December 2018, the impairment provision amounts to S/9.2 million (nil at 2017):


	2017		2018
Lurin (a)		103,574		72,080
San Isidro (b)		58,441		49,664
San Miguel (c)		44,126		28,811
Nuevo Chimbote (d)		17,201		17,262
Barranco (e)		11,413		13,585
Huancayo (f)		13,572		8,282
Ancon (g)		37,823		—
Canta Callao		12,978		—
Piura		—		8,105
Carabayllo II		—		14,941
Others		18,209		8,752

		317,337		221,482

(a)	Plot of land of 318 hectares located in the district of Lurin, province of Lima, for industrial development and public housing.

(b)	A plot of land in the district of San Isidro in which a 15-story building will be built with 24 apartments and 124 parking spaces.

(c)	Land located in San Miguel of 1 hectare for the development of a multi-family housing project of 248 apartments and 185 parking lots.

(d)	Land located in Chimbote, 11.5 hectares, for the development of a social housing project

(e)	Land located in Paul Harris St. N°332 and N°336 in Barranco district, for the development of a residential building project.

(f)	Land located in Huancayo, 8.5 hectares for the development of a land sale project.

(g)	In Ancon, a large scale housing-project was terminated and the subsidiary Viva GyM reclassified to accounts receivable from Ministry of Housing.

Land properties correspond to assets maintained since 2015, for which construction has not yet begun. Variance in these balances over 2018 is mainly due to engineering, license paperwork, and other smaller costs. Construction in these land properties is expected to begin in late 2019 and the second half of 2020.

Real estate - work in progress

At December 31, real state work in progress comprises the following projects:


	2017		2018
Los Parques de Comas		70,647		69,743
Los Parques del Callao		53,441		46,697
Villa El Salvador 2		2,141		—
Others		24,308		18,936

		150,537		135,376

During 2018 the Group has capitalized financing costs of these construction projects (Note 2.20) amounting to S/7.9 million at annual interest rates between 7.0% and 12.0% (S/5.9 million in 2017 at interest rates between 7.0% and 11.22%).

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Finished properties

At December 31, the balance of finished properties consists of the following investment properties:


	2017		2018
El Rancho		82,796		19,314
Panorama		18,481		—
Los Parques de San Martín de Porres		16,687		4,029
Los Parques de Callao		486		389
Rivera Navarrete		7,870		4,053
Los Parques de Carabayllo 2da etapa		3,134		942
Los Parques de Comas		16,058		18,785
Los Parques de Villa El Salvador II		9,313		4,277
Klimt		44,103		5,911
Real 2		3,877		556
Huancayo		—		15,546
Others		404		2,225

		203,209		76,027

Construction materials

At December 31, 2018, construction materials correspond mainly to different projects of the subsidiary GyM S.A. for S/27.8 million (Stracon GyM S.A., Morelco S.A., and GyM S.A. for S/50 million at December 31, 2017).

16	INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

At December 31 this account comprises:


	2017		2018
Associates		250,053		250,282
Joint ventures		18,618		7,483

		268,671		257,765

The amounts recognized in the income statement are as follows:


	2017			2018
Associates		(5,566	)		(5,308	)
Joint ventures		6,039			1,599

		473			(3,709	)

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Investment in associates

Set out in the table below are the associates of the Group at December 31, 2017, and 2018. The associates listed below have share capital solely consisting of common shares, which are held directly by the Group. None of the associates are listed companies; therefore, there is no quoted market price available for their shares.


							Carrying amount
	Class		Interest in capital				At December 31,
Entity	of share		2017		2018		2017		2018
			%		%
Gasoducto Sur Peruano S.A.		Common		21.49		21.49		218,276		218,276
Concesionaria Chavimochic S.A.C.		Common		26.50		26.50		22,091		20,524
Betchel Vial y Vives Servicios Complementarios Ltda.		Common		40.00		40.00		102		94
Others								9,584		11,388

								250,053		250,282

The most significant associates are described as follows:

Gasoducto Sur Peruano S.A.

In November 2015, the group acquired a 20% interest in Gasoducto Sur Peruano (hereafter “GSP”) and obtained a 29% interest in Consorcio Constructor Ductos del Sur (CCDS) through its subsidiary GyM S.A. GSP signed on July 22, 2014, a concession contract with the Peruvian Government (Grantor) to build, operate and maintain the pipelines transportation system of natural gas to meet the demand of cities in the Peruvian southern region. Additionally, GSP signed an engineering, procurement, and construction (EPC) contract with CCDS. The Group made an investment of US$242.5 million (S/819 million) and was required to assume 20% of the performance guarantee established in the concession contract for US$262.5 million (equivalent to S/887 million) and 21.49% of the guarantee for a bridge loan obtained by GSP of US$600 million (equivalent to S/2,027 million).

Early termination of the Concession Agreement

On January 24, 2017 the Ministry of Energy and Mining (MEM) notified the early termination of the Concession Contract based on the provisions of clause 6.7 of the concession agreement “Improvements to the country’s energy security and development of the South Peru Gas Pipeline”, as GSP failed to certify the financial closing within the established contractual deadline and proceeded to the immediate execution of the performance guarantee. This situation generated the execution of the collaterals offered by the Group for US$52.5 million (S/177.4 million nominal value) and US$129 million (S/435.9 million nominal value) for the corporate guarantee of the bridge loan granted to GSP. Under the concession agreement, guarantees were paid on behalf of GSP, therefore the Company recognized a right to collect of US$181.5 million (S/613.3 million nominal value) and it was recorded in 2016 as accounts receivable from related parties. (Note 13)

On October 11, 2017, the delivery of the assets of GSP was formalized by agreement with MEM. As stated in the agreement, in December 2017, GSP substantially finalized the process of delivery of the concession’s assets to the administrator designated by the MEM for its custody and conservation. The assets include all the works, equipment and facilities provided for the execution of the project, as well as the engineering studies that were prepared by the concessionaire.

After the termination of the contract, the Peruvian Government had the obligation to apply Clause 20 of the contract, having to appoint a recognized international audit firm to calculate the Net Book Value (“VCN” for its Spanish definition “Valor Contable Neto”) of the concession assets and the subsequent call for up to three public auctions, being the base amount for the first of them 100% of the VCN, guaranteeing in any case that after the third auction, in case the concession has not been awarded, the payment to GSP would be at least 72.25% of the VCN. Having elapsed more than a year since the termination of the contract, the Peruvian Government has not taken any action to calculate the VCN or call for auctions. In the opinion of the external and internal legal advisors, since the previous procedure had not been completed within the established deadlines, the Peruvian Government would be obliged to pay GSP 100% of the VCN. Regarding the amount of the VCN, there is a previous calculation commissioned by GSP and reviewed by an independent audit firm as of December 31, 2016, determining a VCN of US$2,602 million.

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As of December 4, 2017, GSP entered into a bankruptcy proceeding that will be carried out by the National Institute for the Defense of Competition and Intellectual Protection of Peru (hereinafter, INDECOPI). The Group registered a claim for accounts receivable for US$0.4 million (S/1.4 million) and the fiduciary as administrator of the accounts receivable for US$169.3 million (S/572.1 million). The process is in the debt recognition stage to determine the Creditors’ Meeting.

The fair value of the investment in GSP is based on the amount of the VCN, taking into consideration the payments anticipated in the insolvency proceedings, the subordination contracts and the loan cession agreements between the Group and GSP partners. Based on management’s estimate of such payments, an impairment of the investment was determined for US$175.5 million (S/593.0 million). In addition, according to the conclusions of internal and external legal advisors, international arbitration will be required to receive the payment from the Government. The estimated time frame for international arbitration is five years. Therefore, management has applied a discount in 2016 to the long-term account receivable from GSP of US$22.8 million (S/77 million). These two effects amounted US$199.3 million (S/670 million) before taxes recorded in the income statement for the year ended December 31, 2016.

In addition, on December 31, 2016, the Group evaluated the impairment of the assets of CCDS. As a result, a net loss before taxes of S/15.2 million was determined (Note 5.1-f).

In the opinion of our internal and external legal advisors, the obligation of the Peruvian Government to GSP equivalent to the VCN of the concession’s assets is not within the scope of the retention provided for in Law 30737 since this payment does not include a net profit margin, nor does it correspond to the sale of assets.

On December 21, 2018, Graña y Montero S.A.A. submitted to the Peruvian Government a request for direct negotiations towards the payment of the VCN in favor of GSP. This request is based on the right that any creditor has to initiate the actions that its debtor does not take in order to collect a credit that would allow it to pay its debt, by virtue of article 1219 of the Peruvian Civil Code. After the term of six months since the beginning of direct negotiations, Graña y Montero S.A.A. under the same title may demand the payment from the Peruvian Government through arbitration to the CIADI (Centro Internacional de Arreglo de Diferencias Relativas a Inversiones).

ii)

Concesionaria Chavimochic S.A.C.

The entity was awarded the implementation of the Chavimochic irrigation project, including a) design and construction of the work required for the third-phase of the Chavimochic irrigation project in the province of La Libertad; b) operation and maintenance of works; and c) water supply to the Project users. Construction activities started in 2015; the effective concession period is 25 years, and the total investment amounts US$647 million.

The civil works of the third stage of the Chavimochic Irrigation Project were structured in two phases. To date, the works of the first phase (Palo Redondo Dam) are 70% complete. However, at the beginning of 2017, the procedure for early termination of the Concession Contract was initiated due to the breach of contract by the Grantor, and all activities were suspended in December 2017. Not having reached an agreement, the arbitration process was initiated before the CNUDI, and the Arbitral Tribunal was installed.

Moreover, during 2018, the Grantor initiated the procedure of negotiation and commencement of the modification of the Concession Contract, in order to determine a mechanism that would allow restarting the execution of the project, without satisfactory resolution to date.

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The following table shows the financial information of the principal associates:

Summarized financial information for associates –


	Gasoducto Sur Peruano S.A.			Concesionaria Chavimochic S.A.C.
	At December, 31			At December, 31
Entity	2017			2017			2018
	Liquidation Base
Current
Assets		6,813,938			73,004			66,052
Liabilities		(5,028,381	)		(1,111	)		(2,183	)

Non-current
Assets		—			11,809			13,580
Liabilities		—			(342	)		—

Net assets		1,785,557			83,360			77,449


Entity	Gasoducto Sur Peruano S.A.			Concesionaria Chavimochic S.A.C.
	2017			2017			2018
Revenues					—			—
Loss from continuing operations					(43,340	)		(8,455	)
Income tax		—			3,185			2,543

Loss from continuing operations after income tax		—			(40,155	)		(5,912	)

Other comprehensive loss		—			—			—

Total comprehensive loss		—			(40,155	)		(5,912	)

The movement of the investments in associates is as follows:


	2016			2017			2018
Opening balance		490,702			286,403			250,053
Contributions received		390,506			2,116			5,616
Impairment of GSP		(593,101	)		—			—
Dividends received		(10,149	)		(259	)		—
Equity interest in results		8,304			(5,566	)		(5,308	)
Decrease in capital		(166	)		(111	)		(30	)
Disposal of Investment		—			(32,223	)		—
Conversion adjustment		311			42			(49	)
Discontinued operations		(4	)		(349	)		—

Final balance		286,403			250,053			250,282

In 2017, the sale of investments referred to the purchase-sale contract subscribed by the subsidiary VIVA GyM S.A. for the total of shares (representing 22.5%) of the associate Promocion Inmobiliaria del Sur S.A. The sale price was agreed in US$25 million (equivalent to S/81 million), which was fully paid.

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During 2016, cash contributions were mainly made to Gasoducto Sur Peruano S.A. and Concesionaria Chavimochic amounting to S/373.9 million and S/15.7 million, respectively.

In 2016 the Group obtained dividends mainly from Bechtel Vial y Vives and Promocion Inmobiliaria del Sur S.A. amounting to S/6.3 million and S/3.8 million, respectively.

In 2016, the Group included an impairment provision of GSP for S/593.1 million (US$176.49 million).

Investment in Joint Ventures

Set out below are the joint ventures of the Group as of December 31:


							Carrying amount
	Class		Interest in capital				At December 31,
Entity	of share		2017		2018		2017		2018
			%		%
Sistemas SEC		Common		49.00		—		10,112		—
Logistica Químicos del Sur S.A.C.		Common		50.00		50.00		7,343		7,230
G.S.J.V. SCC		Common		50.00		50.00		878		—
Constructora SK-VyV Ltda.		Common		50.00		50.00		49		34
Others				—		—		236		219

								18,618		7,483

Tecgas N.V.

This entity provides operation and maintenance services for hydrocarbon pipelines and related activities, it concentrates its activities substantially in fulfilling the obligations arising from the operation and maintenance of the pipeline gas transport system related to the concession contract for Gas Concession Peru S.A.A. (TGP, its main client). In April 2017, the Company entered into a purchase-sale contract for all of its shares (representing 51%) in the investment in a joint venture with Compañia Operadora del Gas del Amazonas S.A.C. (COGA). The sale price was agreed at US$21.5 million (equivalent to S/69.8), which is fully paid.

ii)

Sistemas SEC

The company’s activities include the renovation and automation of the electrical system and signaling of railways and communications within the Santiago - Chillan - Bulnes - Caravans and Conception areas. The contract was awarded in 2005 for a period of 16 years. In December 2018, the SEC contract was transferred to Engie S.A. as part of the CAM Group investment sale (Note 37).

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The following table shows the financial information of the principal joint ventures:

Summarized financial information for joint ventures


	Logistica Quimicos del Sur S.A.C.
	At December, 31
Entity	2017			2018
Current
Cash and cash equivalents		2,076			1,520
Other current assets		1,652			1,549

Total current assets		3,728			3,069

Other current liabilities		(3,104	)		(3,513	)

Total current liabilities		(3,104	)		(3,513	)

Non-current
Total non-current assets		39,327			37,349

Net assets		14,267			14,904


Revenues		10,750			11,399
Depreciation and amortization		(2,039	)		(2,313	)
Interest expense		(675	)		(668	)

Profit from continuing operations		4,988			4,698
Income tax expense		(1,614	)		(1,482	)

Profit from continuing operations after income tax		3,374			3,216

Other comprehensive income		—			—

Total comprehensive income		3,374			3,216

The movement of the investments in joint ventures was as follows:


	2016			2,017			2,018
Opening balance		146,303			103,356			18,618
Equity interest in results		(5,269	)		6,039			1,599
Debt capitalization		8,308			—			—
Contributions received		6,889			—			—
Transfer to Adexus from acquisition of control		(35,870	)		—			—
Disposal of Investment		—			(88,556	)		(10,112	)
Dividends received		(17,843	)		(3,758	)		(1,823	)
Conversion adjustment		2,276			334			79
Write-off of Investment		(1,798	)		—			(878	)
Discontinued operations		360			1,203			—

Final balance		103,356			18,618			7,483

In 2018, 2017 and 2016 the following significant movements were carried out:

•

The Group obtained dividends in 2018 from Logistica Quimicos del Sur S.A. for S/1.8 million (from Consorcio Sistemas SEC for S/1 million and from Logistica Quimicos del Sur S.A. for S/2.8 million in 2017 and S/13.1 million and S/3.3 million from G.S.J.V. in 2016).

•

On April 24, 2017, the Company signed a purchase-sale agreement for their total capital stock (representing 51%) held in their joint venture with Compañia Operadora de Gas del Amazonas S.A.C. (COGA). The selling price was agreed at US$21.5 million (equivalent to S/69.8 million), which was fully paid.

•

In February 2016 the Group acquired 8% of additional interest by capitalizing debt for S/8.3 million. In August 2016, the Group obtained control over Adexus S.A. The balance of the investment at that date was transferred to investments in subsidiaries for S/35.9 million. From that date, the Company consolidated the financial statements of Adexus S.A. (Note 33-a).

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17	PROPERTY, PLANT AND EQUIPMENT, NET

The movement in property, plant and equipment accounts and its related accumulated depreciation for the year ended December 31, 2016, 2017 and 2018 is as follows:


	Land			Buildings			Machinery			Vehicles			Furniture and fixtures			Other equipment			Replacement units			In-transit units			Work in progress			Total
At January 1, 2016
Cost		28,409			231,029			1,074,195			443,239			52,225			191,238			15,448			1,817			13,044			2,050,644
Accumulated depreciation and impairment		—			(41,464	)		(509,510	)		(222,353	)		(31,048	)		(134,508	)		(4	)		—			—			(938,887	)

Net carrying amount		28,409			189,565			564,685			220,886			21,177			56,730			15,444			1,817			13,044			1,111,757

Net initial carrying amount		28,409			189,565			564,685			220,886			21,177			56,730			15,444			1,817			13,044			1,111,757
Additions		6,238			12,126			81,378			50,574			4,423			24,870			553			19,312			13,594			213,068
Adquisition of subsidiaries - Adexus (Note 33 a)		—			13,913			—			420			1,525			26,130			—			—			—			41,988
Reclassifications		—			(281	)		4,423			(1,639	)		4,547			14,338			2,583			(17,349	)		(6,622	)		—
Transfers to inventories		2,941			—			—			—			—			—			—			—			—			2,941
Transfers to intangibles (Note 18)		—			—			—			—			—			—			—			—			(1,257	)		(1,257	)
Deduction for sale of assets		(5,256	)		(14,333	)		(60,374	)		(48,521	)		(1,724	)		(5,766	)		—			—			—			(135,974	)
Disposals, net		—			(1,232	)		(15,149	)		(1,354	)		(1,579	)		(4,364	)		(661	)		(2	)		—			(24,341	)
Depreciation charge		—			(14,842	)		(104,638	)		(48,041	)		(7,548	)		(28,127	)		(5	)		—			—			(203,201	)
Impairment loss		—			(73	)		(5,190	)		(317	)		(3,301	)		(382	)		—			—			—			(9,263	)
Depreciation for sale deductions		—			8,113			48,266			29,536			1,026			1,907			—			—			—			88,848
Disposals - accumulated depreciation		—			2,010			14,165			1,353			1,449			2,809			—			—			—			21,786
Translations adjustments		282			130			5,987			922			176			(344	)		—			—			94			7,247

Net final carrying amount		32,614			195,096			533,553			203,819			20,171			87,801			17,914			3,778			18,853			1,113,599

At December 31, 2016
Cost		32,614			241,352			1,090,460			443,641			59,593			246,102			17,923			3,778			18,853			2,154,316
Accumulated depreciation and impairment		—			(46,256	)		(556,907	)		(239,822	)		(39,422	)		(158,301	)		(9	)		—			—			(1,040,717	)

Net carrying amount		32,614			195,096			533,553			203,819			20,171			87,801			17,914			3,778			18,853			1,113,599

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	Land			Buildings			Machinery			Vehicles			Furniture and fixtures			Other equipment			Replacement units			In-transit units			Work in progress			Total
At January 1, 2017
Cost		32,614			241,352			1,090,460			443,641			59,593			246,102			17,923			3,778			18,853			2,154,316
Accumulated depreciation and impairment		—			(46,256	)		(556,907	)		(239,822	)		(39,422	)		(158,301	)		(9	)		—			—			(1,040,717	)

Net carrying amount		32,614			195,096			533,553			203,819			20,171			87,801			17,914			3,778			18,853			1,113,599

Net initial carrying amount		32,614			195,096			533,553			203,819			20,171			87,801			17,914			3,778			18,853			1,113,599
Additions		157			2,724			48,207			36,594			11,607			36,179			925			22,877			13,178			172,448
Deconsolidation, net		(3,713	)		(26,109	)		—			(1,527	)		(2,153	)		(46,032	)		—			(3,903	)		(4	)		(83,441	)
Reclassifications, net		—			1,969			12,459			2,888			609			6,579			4,076			(21,600	)		(6,980	)		—
Transfers to intangibles (Note 18)		—			—			2,119			724			—			—			—			(964	)		(2,048	)		(169	)
Deduction for sale of assets		(5,616	)		(51,736	)		(149,202	)		(92,079	)		(4,200	)		(5,270	)		—			—			—			(308,103	)
Disposals, net		—			(245	)		(4,032	)		(7,507	)		(422	)		(9,413	)		—			(230	)		(3,606	)		(25,455	)
Depreciation charge		—			(12,469	)		(100,976	)		(45,457	)		(11,654	)		(26,928	)		—			—			—			(197,484	)
Impairment loss		—			—			(14,328	)		—			—			—			—			—			(352	)		(14,680	)
Depreciation for sale deductions		—			3,579			115,864			84,145			1,049			3,128			—			—			—			207,765
Translations adjustments		236			152			606			(350	)		(23	)		980			—			—			(346	)		1,255

Net final carrying amount		23,678			112,961			444,270			181,250			14,984			47,024			22,915			(42	)		18,695			865,735

At December 31, 2017
Cost		23,678			157,949			998,207			380,724			62,435			180,409			22,924			(42	)		19,047			1,845,331
Accumulated depreciation and impairment		—			(44,988	)		(553,937	)		(199,474	)		(47,451	)		(133,385	)		(9	)		—			(352	)		(979,596	)

Net carrying amount		23,678			112,961			444,270			181,250			14,984			47,024			22,915			(42	)		18,695			865,735

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	Land			Buildings			Machinery			Vehicles			Furniture and fixtures			Other equipment			Replacement units			In-transit units			Work in progress			Total
At January 1, 2018
Cost		23,678			157,949			998,207			380,724			62,435			180,409			22,924			(42	)		19,047			1,845,331
Accumulated depreciation and impairment		—			(44,988	)		(553,937	)		(199,474	)		(47,451	)		(133,385	)		(9	)		—			(352	)		(979,596	)

Net carrying amount		23,678			112,961			444,270			181,250			14,984			47,024			22,915			(42	)		18,695			865,735

Net initial carrying amount		23,678			112,961			444,270			181,250			14,984			47,024			22,915			(42	)		18,695			865,735
Additions		—			13,216			11,318			9,377			2,145			14,122			—			5,577			27,431			83,186
Deconsolidation, net		(3,183	)		(33,989	)		(108,993	)		(110,859	)		(1,539	)		(32,878	)		—			—			(715	)		(292,156	)
Reclassifications		—			17,129			16,626			(1,415	)		(1,430	)		75			(5,257	)		(5,320	)		(20,408	)		—
Deduction for sale of assets		—			(3,527	)		(55,567	)		(32,399	)		(2,164	)		(2,200	)		(124	)		—			—			(95,981	)
Disposals, net		—			(9,723	)		(2,607	)		(1,418	)		(292	)		(461	)		—			—			(118	)		(14,619	)
Depreciation charge		—			(14,257	)		(67,430	)		(19,391	)		(3,954	)		(18,068	)		—			—			—			(123,100	)
Impairment loss		—			—			(5,664	)		—			—			—			—			—			—			(5,664	)
Depreciation for sale deductions		—			1,189			37,452			14,868			1,813			1,702			—			—			—			57,024
Translations adjustments		(286	)		3,383			(3,310	)		(788	)		(134	)		(2,415	)		—			—			(321	)		(3,871	)

Net final carrying amount		20,209			86,382			266,095			39,225			9,429			6,901			17,534			215			24,564			470,554

At December 31, 2018
Cost		20,209			112,548			694,284			83,345			57,222			106,068			17,543			215			24,916			1,116,350
Accumulated depreciation and impairment		—			(26,166	)		(428,189	)		(44,120	)		(47,793	)		(99,167	)		(9	)		—			(352	)		(645,796	)

Net carrying amount		20,209			86,382			266,095			39,225			9,429			6,901			17,534			215			24,564			470,554

- 79 -

In 2016, 2017 and 2018, additions to cost correspond to acquisitions of fixed assets made under financial leases or direct purchases.

The balance of work in progress as of December 31, 2018, is related to investments made by the subsidiary GMP S.A. for S/17.3 million (S/11.0 million as of December 31, 2017, and S/19.0 million as of December 31, 2016) for drilling activities to increase the exploitation of oil and gas. Additionally, the balance includes the construction works of the Larcomar Hotel Project for S/15.8 million (S/15.6 million in 2017 and S/14.4 million in 2016).

In 2018 the sale of fixed assets amounted to S/31.9 million (S/127.2 million in 2017 and S/70.5 million in 2016), generating a loss of S/7.1 million (gain of S/26.9 million in 2017 and gain of S/18.41 million in 2016), which is shown in the statement of income under the caption “other income and expenses, net” (Note 29). The difference of income from the sale of fixed assets and the gain generated are presented under the caption “income from construction activities” and in “gross profit”, respectively.

In September 2017, the Company signed a sale contract for the corporate building located in Miraflores with Volcomcapital Petit Thouars S.A.C. The sale was made in October 2017, the amount of the purchase-sale amount to US$20.5 million. This operation includes a 5-year lease period that can be extended up to 10 years as well as a purchase option on the building. The sale of the mentioned property generates a profit of US$3.5 million.

Depreciation of property, plant and equipment and investment property is distributed in the income statement as follows:


	2016			2017			2018
Cost of services and goods		111,404			103,566			81,199
Administrative expenses		7,428			5,776			5,135
(+) Depreciation discontinued operations		86,690			90,452			39,085

Total depreciation related to property, plant and equipment and investment property		205,522			199,794			125,419
(-) Depreciation related to investment property		(2,321	)		(2,310	)		(2,319	)

Total depreciation of property, plant and equipment		203,201			197,484			123,100

At 31 December 2018, the Group had fully depreciated assets in use of S/424 million (S/154 million in 2017 and S/151.6 million in 2016).

The net carrying amount of machinery and equipment, vehicles and furniture and fixtures acquired under finance lease contracts is broken down as follows:


							At December 31,
	2016			2017			2018
Cost of acquisition		800,927			650,301			589,269
Accumulated depreciation		(386,411	)		(351,447	)		(329,613	)

Net carrying amount		414,516			298,854			259,656

Other financial liabilities are secured by property, plant and equipment for S/321.1 million (S/368.1 million in 2017 and S/617.9 million in 2016).

Operating lease commitments:

In connection with the lease agreement for the sale of the corporate building located in Miraflores mentioned on the previous page, the Company has outstanding commitments for non-cancellable operating leases, with the following maturities:


	2017		2018
Up to 1 year		8,526		8,933
Within 2 to 5 years		35,161		47,397
Over 5 years		46,451		30,532

		90,138		86,862

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18	INTANGIBLE ASSETS

The movement in intangible assets and the related accumulated amortization as of December 31, 2016, 2017 and 2018 is as follows:


	Goodwill			Trade- marks			Concession rights			Contractual relations with clients			Software and development costs			Costs of development of wells			Development costs			Land use rights		Other assets			Total
At January 1, 2016
Cost		192,227			96,751			716,125			82,134			42,761			326,723			3,623			13,288		15,425			1,489,057
Accumulated amortization and impairment		(21,995	)		(217	)		(298,232	)		(57,940	)		(32,543	)		(192,460	)		(3,623	)		—		(3,761	)		(610,771	)

Net carrying amount		170,232			96,534			417,893			24,194			10,218			134,263			—			13,288		11,664			878,286

Net initial carrying amount		170,232			96,534			417,893			24,194			10,218			134,263			—			13,288		11,664			878,286
Additions		—			—			118,222			—			16,477			17,772			—			—		19,255			171,726
Acquisition of subsidiary – Adexus (Note 33 a)		930			9,088			6,090			12,822			—			—			—			—		4,203			33,133
Transfers from assets under construction (Note 17)		—			—			—			—			—			—			—			—		1,257			1,257
Reclasifications		—			—			5,258			—			345			—			—			—		(5,603	)		—
Disposals – net cost		—			—			(1,395	)		—			—			(2,395	)		—			—		—			(3,790	)
Amortization		—			—			(28,206	)		(4,376	)		(8,043	)		(40,918	)		—			—		(1,200	)		(82,743	)
Impairment loss		(38,680	)		(15,628	)		—			—			—			—			—			—		—			(54,308	)
Translations adjustments		12,038			3,672			(102	)		171			1,024			—			—			—		(78	)		16,725

Net final carrying amount		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286

At December 31, 2016
Cost		205,195			109,511			844,213			95,127			60,607			342,100			3,623			13,288		34,294			1,707,958
Accumulated amortization and impairment		(60,675	)		(15,845	)		(326,453	)		(62,316	)		(40,586	)		(233,378	)		(3,623	)		—		(4,796	)		(747,672	)

Net carrying amount		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286

- 81 -


	Goodwill			Trade- marks			Concession rights			Contractual relations with clients			Software and development costs			Costs of development of wells			Development costs			Land use rights		Other assets			Total
At January 1, 2017
Cost		205,195			109,511			844,213			95,127			60,607			342,100			3,623			13,288		34,294			1,707,958
Accumulated amortization and impairment		(60,675	)		(15,845	)		(326,453	)		(62,316	)		(40,586	)		(233,378	)		(3,623	)		—		(4,796	)		(747,672	)

Net cost		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286

Net initial cost		144,520			93,666			517,760			32,811			20,021			108,722			—			13,288		29,498			960,286
Additions		—			—			38,156			5,274			3,330			49,698			—			—		20,832			117,290
Capitalization of interest		—			—			26,015			—			—			—			—			—		—			26,015
Deconsolidation, net		(3,524	)		—			(17,354	)		—			(21	)		—			—			—		(2,767	)		(23,666	)
Transfers from assets under construction (Note 17)		—			—			(11,217	)		—			2,761			5,008			—			—		3,617			169
Derecognition - cost		—			—			(537	)		—			(1,572	)		—			—			—		(355	)		(2,464	)
Amortization		—			—			(24,609	)		(4,189	)		(8,091	)		(46,695	)		—			—		(2,973	)		(86,557	)
Impairment		(20,068	)		(29,541	)		—			—			—			—			—			—		—			(49,609	)
Translations adjustments		(4,124	)		975			13			369			1,196			—			—			—		177			(1,394	)

Net final cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070

At December 31, 2017
Cost		197,547			110,486			841,229			98,607			59,913			396,806			3,623			13,288		55,701			1,777,200
Accumulated amortization and impairment		(80,743	)		(45,386	)		(313,002	)		(64,342	)		(42,289	)		(280,073	)		(3,623	)		—		(7,672	)		(837,130	)

Net cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070

- 82 -


	Goodwill			Trade- marks			Concession rights			Contractual relations with clients			Software and development costs			Costs of development of wells			Development costs			Land use rights		Other assets			Total
At January 1, 2018
Cost		197,547			110,486			841,229			98,607			59,913			396,806			3,623			13,288		55,701			1,777,200
Accumulated amortization and impairment		(80,743	)		(45,386	)		(313,002	)		(64,342	)		(42,289	)		(280,073	)		(3,623	)		—		(7,672	)		(837,130	)

Net cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070

Net initial cost		116,804			65,100			528,227			34,265			17,624			116,733			—			13,288		48,029			940,070
Additions		—			—			23,803			—			3,267			68,544			—			—		5,067			100,681
Capitalization of interest expenses		—			—			3,361			—			—			—			—			—		—			3,361
Desconsolidation, net		(20,086	)		(8,358	)		(22,758	)		(8,909	)		(10,153	)		—			—			—		(1,863	)		(72,127	)
Transfers from assets under construction (Note 17)		—			—			—			—			199			—			—			—		(199	)		—
Derecognition - cost		—			—			(16	)		—			(1,941	)		(4,126	)		—			—		—			(6,083	)
Amortization		—			—			(50,776	)		(7,996	)		(5,834	)		(41,930	)		—			—		(5,536	)		(112,072	)
Translations adjustments		(3,430	)		(4,301	)		199			(303	)		830			—			—			—		270			(6,735	)

Net final cost		93,288			52,441			482,040			17,057			3,992			139,221			—			13,288		45,768			847,095

At December 31, 2018
Cost		174,031			97,097			836,254			85,482			16,177			461,224			3,623			13,288		54,644			1,741,820
Accumulated amortization and impairment		(80,743	)		(44,656	)		(354,214	)		(68,425	)		(12,185	)		(322,003	)		(3,623	)		—		(8,876	)		(894,725	)

Net cost		93,288			52,441			482,040			17,057			3,992			139,221			—			13,288		45,768			847,095

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Goodwill

Management reviews the results of its businesses on the basis of the type of economic activity carried on. At December 31, the goodwill of the cash-generating units (CGUs) is distributed as follows:


	2016		2017		2018
Engineering and construction		98,587		75,051		71,621
Electromechanical		20,737		20,737		20,737
Mining and construction services		13,366		13,366		—
IT equipment and services		5,102		930		930
Telecommunications services		6,728		6,720		—

		144,520		116,804		93,288

As a result of management’s annual impairment tests on goodwill, the recoverable amount of cash-generating units was determined on the basis of the greater their value in use and fair value less disposal costs. The value in use was determined on the basis of expected future cash flows generated by the evaluation of CGUs.

As a result of these assessments, an impairment was identified in 2016 and 2017 in two CGU’s, Vial y Vives-DSD, and Morelco S.A. and was accounted for as of December 31st, 2016 and 2017, respectively. The impairment loss was generated due to the decrease in the expected cash flows, as a result of the reduction of the contracts linked to the backlog. The amount of the impairment impacted the goodwill for S/20.1 million in 2017 (S/38.7 million in 2016). No impairment was identified during 2018.

The main assumptions used by the Group to determine fair value less disposal costs and value in use are as follows:


	Engineering and construction		Electro- mechanical		IT equipment and services		Telecommu- nication services
	%		%		%		%
2016
Gross margin		9.50% - 12.99%		11.10%		15.00% - 23.19%		11.75%
Terminal growth rate		3.00% - 4.00%		2.00%		2.00% - 3.00%		3.00%
Discount rate		9.66% - 12.72%		11.01%		21.74%		10.02%
2017
Gross margin		9.50%		8.00%		20.83%		4.26%
Terminal growth rate		3.00%		2.00%		2.90%		3.00%
Discount rate		11.18%		11.48%		10.17%		4.02%
2018
Gross margin		12.67%		7.63%		20.00%		—
Terminal growth rate		3.00%		2.00%		2.90%		—
Discount rate		12.55%		11.44%		15.39%		—

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These assumptions have been used for the analysis of each CGUs for a period of 5 years.

Management determines budgeted gross margins based on past results and market development expectations. Average growth rates are consistent with those prevailing in the industry. The discount rates used are pre-tax or post-tax, as applicable, and reflect the specific risks associated with the CGUs evaluated.

Trademarks

This item mainly includes the brands acquired in the business combination processes with Vial y Vives S.A.C. (S/75.4 million) in August 2013, Morelco S.A.S. (S/33.33 million) in December 2014 and Adexus S.A. (S/9.1 million) in August 2016. Management determined that the brands from Vial y Vives, Morelco and Adexus have indefinite useful lives; consequently, annual impairment tests are performed on these intangible assets as explained in paragraph a) above.

As a result of these evaluations, as of December 31, 2017, and 2016, the Vial y Vives - DSD brand partially deteriorated, the amount of the impairment was S/29.5 million and S/15.6 million respectively. It was not necessary to evaluate the impairment of goodwill in Stracon GyM S.A. because in March 2018 the Company sold its interest (87.59%) for a total of US$76.8 million (equivalent to S/248.8 million), generating a profit of S/41.9 million.

The main assumptions used by the Group to determine fair value less cost of sales are as follows:


	Engineering and construction						IT Equipment Services
	Morelco			Vial yVives- DSD			Adexus
	%			%			%
2016
Average revenue growth rate		14.39	%		24.53	%		12.60	%
Terminal growth rate		3.00	%		4.00	%		3.00	%
Discount rate		11.85	%		9.87	%		16.05	%
2017
Average revenue growth rate		9.60	%		25.00	%		9.19	%
Terminal growth rate		3.00	%		4.00	%		3.00	%
Discount rate		11.18	%		14.80	%		16.63	%
2018
Average revenue growth rate		12.25	%		19.58	%		17.93	%
Terminal growth rate		3.00	%		3.00	%		2.90	%
Discount rate		12.55	%		14.00	%		12.40	%

Concessions

The intangibles of Norvial S.A. as of December 31, 2018, mainly comprise: i) the EPC Contract for S/70 million (S/78 million as of December 31, 2017), ii) the construction of the second section of the “Ancon-Huacho-Pativilca” highway and the cost of capitalized indebtedness at effective interest rates between 7.14% and 8.72% for S/19 million and S/3 million, respectively (S/331 million and S/26 million, respectively as of December 31, 2017 at interest rates between 7.14% and 8.72%), iii) road improvement for S/20 million (S/17 million as of December 31, 2017), iv) Implementation for road safety for S/4 million (S/4 million as of December 31, 2017), v) capitalization of the work of the second roadway for S/310 million (there was no movement as of December 31, 2017), (vi) disbursements for land adquisition for S/5 million (S/5 million as of December 31, 2017), (vii) Other intangible assets contracted for the delivery process of the S/5 million Concession (S/4 million as of December 31, 2017). During 2018 debt costs of S/3 million have been capitalized (S/26 million in 2017). See Note 2.20.

- 85 -

Cost of well’s development

Through one of its subsidiaries, GMP S.A., the Group operates and extracts oil from two fields (Lot I and Lot V) located in the province of Talara, in northern Peru. Both fields are operated under long-term service contracts in which the Group provides hydrocarbon extraction services to Perupetro.

On December 10, 2014, the Peruvian State granted the subsidiary GMP S.A. the right to exploit for 30 years the oil lots III and IV (owned by the Peruvian State - Perupetro) located in the Talara basin, Piura, of 230 and 330 wells, respectively. The total expected investment in both lots amounts to US$350 million; operations began in April 2015.

As part of the Group’s obligations under the service contracts, it is necessary to incur certain costs to prepare the wells located in Lots I, III, IV and V. These costs are capitalized as part of the intangible assets with a value of S/68 million during 2018 (S/99 million in 2017 and S/80 million in 2016), which includes the capitalization of the provision for dismantling wells for S/3 million (S/50 million during 2017).

The lots are amortized on the basis of the useful lives of the wells (determined as five years for lots I and V and units produced for lots III and IV), which is less than the total service contract period with Perupetro.

Amortization of intangible assets

Amortization of intangibles is broken down in the income statement as follows:


	2016		2017		2018
Cost of sales and services (Note 27)		59,682		67,381		98,318
Administrative expenses (Note 27)		4,890		3,002		4,856
(+) Amortization discontinued operations		18,171		16,174		8,898

		82,743		86,557		112,072

19	BORROWINGS

As of December 31, this item includes:


	Total				Current				Non-current
	2017		2018		2017		2018		2017		2018
Bank overdrafts		120		119		120		119		—		—
Bank loans		1,561,634		1,023,481		990,467		810,188		571,167		213,293
Finance leases		128,309		33,488		66,177		13,514		62,132		19,974
Other financial entities		—		145,584		—		2,653		—		142,931

		1,690,063		1,202,672		1,056,764		826,474		633,299		376,198

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Bank Loans

As of December 31, 2017, and 2018 includes bank loans in local and foreign currency for working capital. These obligations bear fixed interest rates ranging from 1.6% to 15.8% in 2018 and from 3.3% to 13.9% in 2017.


				Current					Non-current
	Interest	Date of		At December, 31					At December, 31
	rate	maturity		2017		2018			2017		2018
GyM S.A.	1.63% /8.91%		2018 / 2019		551,413		227,770	(iii)		95,376		—
Graña y Montero S.A.A.	Libor USD 3M + from 4.9% to 5.5%		2018 / 2020		113,412		206,836	(ii)		363,564		125,547	(i)
GyM Ferrovías	Libor USD 1M + to 2%		2019		—		209,463			—		—
Viva GyM S.A.	7.00% / 12.00%		2018 / 2020		157,592		129,617			—		2,102
GMP S.A.	4.55% /6.04%		2018 / 2020		42,911		22,587			96,245		85,644
CONCAR S.A.	15.75%		2019		812		13,915			—		—
Adexus S.A.	5.90%		2018 / 2019		46,552		—			3,175		—
CAM Holding S.A.	4.68% / 13.76%		2018		77,775		—			12,807		—

					990,467		810,188			571,167		213,293

Credit Suisse Syndicated Loan

In December 2015, the Company entered into a US$200 million medium-term loan agreement with Credit Suisse AG, Cayman Islands Branch and Credit Suisse Securities (USA) LLC. The loan term is five years with quarterly installments starting on the 18th month. The loan bears interest at a rate of three months Libor plus 4.9% per year (3.8% in 2017). The funds were used to finance the equity participation in GSP. On June 27, 2017, the Company renegotiated the terms of this loan to correct defaults related to the cancellation of the GSP concession.

As of December 31, 2018, the principal balance of the loan amounts to US$37.5 million (equivalent to S/126.7 million). The Company is in compliance with its obligations to do and not to do under the credit agreement.

ii)

GSP Bridge Loan

As of December 31, 2016, the balance of bank loans included US$129 million (S/433 million) of the corporate guarantee issued by the Company to guarantee the bridge loan granted to GSP, which was due as of December 31, 2016. However, on June 27, 2017, the Company reached a refinancing agreement with Natixis, BBVA, SMBC and MUFJ for US$78.7 million (S/256.3 million), this amount was used to repay the GSP bridge loan. The new loan matures in June 2020, with prepayments coming from the sale of assets for 40% in the first year and an additional 30% in the second year.

As of December 31, 2018, the principal balance of the loan was US$63.5 million (equivalent to S/214.5 million). Although as of December 31, 2018, the company had breached some of its obligations under the credit agreement, it has requested a waiver. Due to this default, the loan balance was reclassified as current. This waiver was granted at the closing of this report.

iii)

Financial Stability Framework Agreement

On July 31, 2017, we, and certain of our subsidiaries, GyM, Construyendo Pais 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$1.6 million and S/143.9 million, which may be increased by an additional US$14 million subject to certain conditions; (ii) grant GyM a line of credit of up to US$51.6 million and S/33.6 million; (iii) grant Graña y Montero S.A.A., GyM, Construyendo Pais 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 Graña y Montero S.A.A. and GyM for the issuance of performance bonds up to an amount of US$100 million (which may be increased by an additional US$50 million subject to compliance with certain conditions); and (v) to commit to maintain existing standby letters of credit issued at the request of GyM and Graña y Montero S.A.A., as well as the request of Construyendo Pais S.A., Vial y Vives – DSD and Concesionaria Vía Expresa Sur S.A. In April of 2018, the Group repaid US$72.7 million (equivalent to S/245.8 million) of the facility with the proceeds of the sale of Stracon GyM S.A., and in July of 2018, an additional of US$15.4 million (equivalent to S/52.1 million). As of December 31, 2018, and the date of this annual report, there was US$59.4 million (equivalent to S/200.8 million) outstanding under this agreement.

- 87 -

As of December 31, 2018 and as of the date hereof, our construction subsidiary GyM is under a continuing default under the Financial Stability Framework Agreement with respect to its failure to comply with certain ratios between Tranche A (client invoices (facturas)) and Tranche B (project valuations (valorizaciones)). No event of default has been formally noticed to GyM by the lenders, and our subsidiary has requested a waiver from the lenders, which is pending. If duly noticed to GyM by the lenders, the consequence of this default would be to transfer certain amounts due under Tranche B to Tranche A, for which payment is not due until July 2019. As of December 31, 2018, there was US$43.7 million (S/.147.8 million) outstanding under Tranche A and US$15.7 million (S/.53.0 million) outstanding under Tranche B of the facility, for a total of US$59.4 million (S/200.8 million).

Financial Leases


					Current				Non-current
	Interest		Date of		At December, 31				At December, 31
	rate		maturity		2017		2018		2017		2018
GyM S.A.		0.40% /9.27%		2018 / 2023		40,107		4,523		32,397		9,314
GMP S.A.		0.25% /4.50%		2018 / 2021		4,013		4,034		5,304		1,522
Viva GyM S.A.		7.79% /8.46%		2018 / 2022		4,439		3,488		12,010		8,582
CONCAR S.A.		3.65% /5.05%		2018 / 2020		1,777		1,469		1,945		556
Adexus S.A.		3.36% /12.31%		2018 / 2022		8,567		—		4,363		—
GMI S.A.		5.56% /6.90%		2018		347		—		—		—
CAM Holding S.A.		3.01% /14.76%		2018		6,240		—		5,692		—
CAM Servicios Perú S.A.		6.79% /7.75%		2018		687		—		421		—

						66,177		13,514		62,132		19,974

The minimum payments to be made according to their maturity and the present value of the leasing obligations are as follows:


	At December 31,
	2017			2018
Up to 1 year		72,864			15,151
From 1 to 5 years		65,899			21,583
Over 5 years		638			—

		139,401			36,734
Future financial charges on finance leases		(11,092	)		(3,246	)

Present value of the obligations for finance lease contracts		128,309			33,488

The present value of the finance lease agreements obligations are as follows:


	At December 31,
	2017		2018
Up to 1 year		66,177		13,514
From 1 year to 5 years		61,501		19,974
Over 5 years		631		—

		128,309		33,488

Other financial entities

Monetization of Norvial dividends

On May 29, 2018, an investment agreement was signed between the Company and Inversiones Concesion Vial S.A.C. (“BCI Peru”) - with the intervention of Fondo de Inversion BCI NV (“Fondo BCI”) and BCI Management Administradora General de Fondos S.A. (“BCI Asset Management”) to monetize the future dividends on Norvial S.A. that our Company will receive for a period of seven years. The transaction amount is US$42.3 million (equivalent to S/138 million) and was completed on June 11, 2018.

It has also been agreed that the Company will have call options on 48.8% of the economic rights of Norvial that BCI Peru will maintain through its participation in Inversiones en Autopistas S.A. Such options will be subject to certain conditions such as the maturity of different terms, recovery of the investment made with the funds of the BCI Fund (according to different economic estimates) and/or the occurrence of a change of control.

- 88 -

Fair value of debt

The book value and fair value of financial liabilities are as follows:


	Carrying amount				Fair value
	At December, 31				At December, 31
	2017		2018		2017		2018
Bank overdrafts		120		119		120		119
Bank loans		1,561,634		1,023,481		1,627,000		1,152,885
Finance leases		128,309		33,488		141,040		38,399
Other financial entities		—		145,584		—		145,584

		1,690,063		1,202,672		1,768,160		1,336,987

In 2018, fair values are based on discounted cash flows using debt rates between 2.4% and 8.9% (between 2.4% and 13.8% in 2017) and are within level 2 of the fair value hierarchy.

BONDS

As of December 31, this item includes:


	Total				Current				Non-current
	2017		2018		2017		2018		2017		2018
GyM Ferrovías		603,657		611,660		12,294		13,422		591,363		598,238
Norvial		343,910		325,382		24,361		25,745		319,549		299,637

		947,567		937,042		36,655		39,167		910,912		897,875

GyM Ferrovias S.A.

In February 2015, the subsidiary GyM Ferrovias S.A. completed an international corporate bond issue under “Regulation S” of the United States of America. The issue was made in soles VAC (adjusted by the Constant Update Value) for an amount of S/629 million. Issuance costs amounted to S/22 million. The bonds mature in November 2039 and bear interest at a rate of 4.75% (plus the VAC adjustment), have a risk rating of AA+ (local scale) granted by Apoyo & Asociados Internacionales Clasificadora de Riesgo and a guarantee scheme that includes a mortgage on the concession of which GyM Ferrovias S.A. is the concessionaire, collateral on the shares of GyM Ferrovias S.A., Assignment of the Collection Rights of the Administration Trust, a Flows Trust and Reserve Accounts for the Debt Service, Operation, and Maintenance and the ongoing Capex. At December 31, 2018, S/67.7 million have been amortized (S/57.5 million at December 31, 2017).

As of December 31, 2018, the balance includes accrued interest and VAC adjustments for S/72.0 million (S/60.5 million as of December 31, 2017).

- 89 -

As of December 31, 2017, and 2018, the movement in this account is as follows:


	2017			2018
Balance at January, 1		604,031			603,657
Amortization		(19,141	)		(10,178	)
Accrued interest		49,132			48,130
Interest paid		(30,365	)		(29,949	)

Balance at December, 31		603,657			611,660

As part of the bond structuring process, GyM Ferrovias S.A. undertook to report and verify compliance with the following covenants, measured by its individual financial statements:

•

Debt service coverage ratio not less than 1.2 times;

•

Maintain a minimum balance in the trust equal to one-quarter of operating and maintenance costs (including VAT);

•

Maintain a constant balance in the minimum trust equal to the following two coupons according to the bond schedule.

On August 23, 2017, GyM Ferrovias S.A. and Line One CPAO Purchaser LLC signed the purchase-sale contract and assignment of collection rights for the “Annual Payment for Complementary Investment (PAO Complementary)” derived from the Concession Contract for an amount equivalent to US$316 million.

On August 23, 2017, GyM Ferrovias S.A. as Borrower, Mizuho Bank, Ltd., and Sumitomo Mitsui Banking Corporation as Lenders and Mizuho Bank, Ltd. as Administrative Agent signed a Working Capital loan agreement for an amount equivalent to US$80 million to partially finance the Lima Metro Line 1 Expansion Project. As of December 31, 2018, the balance payable amounts to US$62 million.

Norvial S.A.

Between 2015 and 2016, the subsidiary, Norvial S.A., issued the First Corporate Bond Program on the Lima Stock Exchange for S/365 million. The rating companies Equilibrium Risk and Apoyo & Asociados Internacionales gave the rating of AA to this debt instrument.

The purpose of the awarded funds was to finance the construction works of the Second Stage of the Road Network No. 5 and the financing of the VAT linked to the execution of the expenses of the Project.

- 90 -

As of December 31, 2017, and 2018, the movement in this account is as follows:


	2017			2018
Balance at January, 1		363,684			343,910
Amortization		(20,010	)		(18,736	)
Accrued interest		2,987			24,170
Capitalized interest		26,011			3,361
Interest paid		(28,762	)		(27,323	)

Balance at December, 31		343,910			325,382

As part of the bond structuring process, Norvial S.A. undertook to periodically report and verify compliance with the following covenants:

•

Debt service coverage ratio not less than 1.3 times;

•

Proforma leverage ratio less than 4 times.

The fair value of both obligations at December 31, 2018 amounts to S/1,037 million (at December 31, 2017, amounts to S/1,040 million), and is based on discounted cash flows using rates between 4.09% and 5.45% (between 4.49% and 6.63% at December 31, 2017) corresponding to level 2 of the fair value hierarchy.

As of December 31, 2017, and 2018, the Company has complied with the covenants of both types of bonds.

21	TRADE ACCOUNTS PAYABLE

As of December 31, this item includes:


	2017		2018
Invoices payable		1,250,586		591,619
Unbilled services received		132,514		378,670
Notes payable		69,946		109,242

		1,453,046		1,079,531

The balance of services received but not billed includes the estimate made by management corresponding to the valuation by the degree of completion, which amounted to S/378.7 million at December 31, 2018 (S/132.5 million at December 31, 2017).

- 91 -

22	OTHER ACCOUNTS PAYABLE

As of December 31, this item includes:


	Total				Current				Not current
	2017		2018		2017		2018		2017		2018
Advances received from customers (a)		726,294		496,548		316,891		301,868		409,403		194,680
Consorcio Constructor Ductos del Sur - payable (b)		250,021		234,978		—		—		250,021		234,978
Salaries and other payable		246,916		97,774		246,916		97,774		—		—
Put option liability on Morelco acquisition (Note 33-b)		105,418		103,649		—		—		105,418		103,649
Third-party loans		107,314		11,560		75,256		11,560		32,058		—
Other taxes payable		69,584		90,449		69,584		69,118		—		21,331
VAT payable		48,095		42,326		37,544		42,326		10,551		—
Consorcio Rio Mantaro - payables		35,531		35,531		35,531		35,531		—		—
Acquisition of non-controlling interest (Note 36-a)		22,407		22,963		22,407		22,963		—		—
Supplier funding		14,886		—		—		—		14,886		—
Guarantee deposits		15,580		15,137		15,580		15,137		—		—
Post-retirement benefits		8,914		—		—		—		8,914		—
Other accounts payables		50,013		55,864		28,791		36,392		21,222		19,472

		1,700,973		1,206,779		848,500		632,669		852,473		574,110

(a)	Advances received from customers relate mainly to construction projects, and are discounted from invoicing, in accordance with the terms of the contracts.

(b)	The other accounts payable of Consorcio Constructor Ductos del Sur correspond to payment obligations to suppliers and main subcontractors for S/235 million, as a consequence of the termination of GSP’s operations.

The fair value of short-term accounts approximates their carrying amount due to their short-term maturities. The non-current portion comprises mainly non-financial liabilities such as advances received from customers. The remaining balance is not significant in the financial statements for the periods shown.

23	PROVISIONS

As of December 31, this item includes:


	Total				Current				Not current
	2017		2018		2017		2018		2017		2018
Legal contingencies		23,364		84,728		12,220		6,049		11,144		78,679
Contingent liabilities from the acquisition of Morelco		4,224		4,039		—		—		4,224		4,039
Contingent liabilities from the acquisition of Coasin and Vial yVives - DSD		1,839		459		—		—		1,839		459
Contingent liabilities from the acquisition of Adexus		1,186		—		1,186		—		—		—
Provision for well closure (Note 5.1 d)		16,804		20,382		97		148		16,707		20,234

		47,417		109,608		13,503		6,197		33,914		103,411

As of December 31, 2018, legal contingencies correspond mainly to the present value of the estimated provision of S/73.5 million (approximately US$22.3 million), related to the contingency described in Note 1 c-4). (As of December 31, 2017, they correspond mainly to provisions for labor liabilities and tax claims of S/19.3 million).

Legal contingencies also include proceedings brought against the Group by the Peruvian energy regulator (OSINERGMIN), related to the storage of hydrocarbons and applicable environmental laws and regulations for S/5.3 million (S/5.1 million as of December 31, 2017).

- 92 -

The gross movement of other provisions is as follows:


Other provisions	Legal contingencies			Contingent liabilities resulting from acquisitions			Provision for well closure			Total
At January 1, 2017		15,732			8,125			17,216			41,073
Additions		9,510			—			—			9,510
Reversals of provisions		(235	)		(809	)		(412	)		(1,456	)
Payments		(1,680	)		—			—			(1,680	)
Translation adjustments		37			(67	)		—			(30	)

At December 31, 2017		23,364			7,249			16,804			47,417

At January 1, 2018		23,364			7,249			16,804			47,417
Additions		75,369			—			3,578			78,947
Reversals of provisions		(4,875	)		(1,343	)		—			(6,218	)
Deconsolidation of subsidiaries		(2,340	)		—			—			(2,340	)
Reclasification liabilities classified as held for sale		—			(1,093	)		—			(1,093	)
Payments		(6,615	)		—			—			(6,615	)
Translation adjustments		(175	)		(315	)		—			(490	)

At December 31, 2018		84,728			4,498			20,382			109,608

24	EQUITY

Capital

The General Shareholders’ Meeting held on November 6, 2018, approved a capital increase of up to US$130 million (equivalent to S/434 million, approximately), equivalent to 211,864,065 shares at a price of US$0.6136. As of December 31, 2018, during the first stage of the placement and the conclusion of two preferred subscription rounds, a total of 69,380,402 shares were subscribed. Therefore, the Company’s capital is represented by 729,434,192 shares with a par value of S/1.00 each, out of which 660,053,790 are registered in the Public Registry, and 69,380,402 are in the process of registration. As of December 31, 2017, the issued, authorized, subscribed, and paid-in capital in accordance with the Company’s bylaws and amendments thereto was represented by 660,053,790 common shares. The company will continue its efforts to place the balance or part of the shares pending subscription.

As of December 31, 2017, a total of 259,302,745 shares were represented in ADS, equivalent to 51,860,549 ADSs at the rate of 5 shares per ADS; and 207,931,660 shares were represented in ADSs equivalent to 41,586,332 ADS as of December 31, 2018.

- 93 -

As of December 31, 2018, the Company’s shareholding structure is as follows:


Percentage of individual interest in capital	Number of shareholders		Total percentage of interest
Up to 1.00		1,926		16.37
From 1.01 to 5.00		12		26.54
From 5.01 to 10.00		2		12.47
Over 10		2		44.62

		1,942		100.00

As of December 31, 2018, the Company’s shares had a year-end market price of S/1.99 per share and a trading frequency of 91.6% (S/1.87 per share and a trading frequency of 100% as of December 31, 2017).

Legal reserve

In accordance with the Peruvian General Law of Corporations, the legal reserve of the Company is constituted with the transfer of 10% of the annual profit until reaching an amount equivalent to 20% of the paid-in capital. In the absence of profits or unrestricted reserves, the legal reserve must be applied to the compensation of losses and must be replenished with the profits of subsequent years. This reserve may be capitalized; and its replacement is also mandatory. As of December 31, 2018, the balance of the legal reserve reached the aforementioned limit.

Voluntary reserve

As of December 31, 2017, and 2018, this S/29.97 million reserve is related to the excess of the legal reserve; this reserve is above the requirement to constitute a reserve until it reaches the equivalent of 20% of the paid-in capital.

Share premium

This item includes the excess of total income obtained by shares issued in 2013 compared to their nominal value of S/1,055.5 million and by shares issued in 2018 an amount of S/68.2 million.

In addition, this account recognizes the difference between the nominal value and the transaction value for acquisitions of shares in non-controlling interests.

Retained earnings

Dividends distributed to shareholders other than domiciled legal entities are subject to the rates of 4.1% (earnings until 2014), 6.8% (2015 and 2016 earnings) and 5.00% (2017 and thereafter) for income tax charged to these shareholders; such tax is withheld and settled by the Company. Dividends for fiscal years 2017 and 2018 were not distributed (Note 34).

- 94 -

25	DEFERRED INCOME TAX

Deferred income tax is classified by its estimated reversal term as follows:


	2017			2018
Deferred income tax asset:
Reversal expected in the following 12 months		73,883			48,889
Reversal expected after 12 months		362,814			376,547

Total deferred tax asset		436,697			425,436

Deferred income tax liability:
Reversal expected in the following 12 months		(5,583	)		(9,067	)
Reversal expected after 12 months		(66,889	)		(66,280	)

Total deferred tax liability		(72,472	)		(75,347	)

Deferred income tax asset, net		364,225			350,089

The movement in deferred income tax is as follows:


	2016			2017			2018
Deferred income tax asset, net as of January 1		48,682			353,839			364,225
Credit to income statement (Note 30)		263,806			42,599			25,118
Adjustment for changes in rates of income tax		17,105			1,951			(1,524	)
Credit to other comprehensive income		15,004			—			—
Tax charged to equity		159			—			—
Acquisition of a subsidiary		10,363			(12,160	)		(40,460	)
Acquisition of joint operation		—			(16,804	)		(95	)
Other movements		(1,280	)		(5,200	)		2,825

Total as of December 31		353,839			364,225			350,089

- 95 -

The movement in deferred tax assets and liabilities in the year, without considering the offsetting of balances, is as follows:


Deferred income tax liabilities	Difference in depreciation rates			Deferred income		Fair value gains			Work in Process			Tax receivables		Borrowing costs capitalized			Purchase price allocation			Others			Total
At January 1, 2016		45,155			—		30,684			24,723			25,543		15,178			—			11,810			153,093

(Charge) credit to P&L		16,595			—		13,587			(16,481	)		3,324		6,240			—			2,618			25,883
(Charge) credit to OCI		—			—		(15,348	)		—			—		—			—			—			(15,348	)
Reclassification of previous years		—			—		(28,923	)		—			—		—			30,187			(1,264	)		—
Acquisition of subsidiary		—			—		—			—			—		—			(3,069	)		—			(3,069	)

At December 31, 2016		61,750			—		—			8,242			28,867		21,418			27,118			13,164			160,559

(Charge) credit to P&L		104,101			—		—			(5,712	)		3,322		(1,473	)		(11,780	)		(3,724	)		84,734
Sale of subsidiary		—			—		—			—			—		—			—			(83	)		(83	)

At December 31, 2017		165,851			—		—			2,530			32,189		19,945			15,338			9,357			245,210

(Charge) credit to P&L		(74,679	)		13,574		—			2,926			689		(4,229	)		(11,699	)		7,828			(65,590	)
Sale of subsidiaries		(16,189	)		—		—			—			—		—			(5,201	)		(3,377	)		(24,767	)

At December 31, 2018		74,983			13,574		—			5,456			32,878		15,716			(1,562	)		13,808			154,853


Deferred income tax assets	Provisions			Accelerated tax depreciation			Tax losses			Work in process			Accrual for unpaid vacations			Investments in subsidiaries			Impairment			Tax Goodwill			Others			Total
At January 1, 2016		20,949			14,892			91,313			24,103			14,977			1,476			—			17,522			16,543			201,775

Charge (credit) to P&L		84,571			1,489			51,163			(6,489	)		(2,005	)		(312	)		172,052			3,003			3,322			306,794
Charge (credit) to equity		159			—			—			—			—			—			—			—			—			159
Charge (credit) to ORI		—			—			—			—			—			—			—			—			(343	)		(343	)
Adquisition of subsidiary (Adexus)		—			—			10,607			—			—			—			—			—			(3,313	)		7,294
Others		—			—			—			—			—			(556	)		—			—			(725	)		(1,281	)

At December 31, 2016		105,679			16,381			153,083			17,614			12,972			608			172,052			20,525			15,484			514,398

Charge (credit) to P&L		(12,614	)		79,637			(8,555	)		21,873			2,166			118			28,593			(112	)		18,358			129,464
Charge (credit) to equity		(8,882	)		—			—			—			—			—			(7,493	)		—			(347	)		(16,722	)
Reclassification		(30,901	)		—			—			—			—			(726	)		31,627			—			—			—
Sale of subsidiary (GMD S.A.)		(683	)		(9,367	)		(438	)		—			(1,697	)		—			—			—			(236	)		(12,421	)
Others		(160	)		—			(1	)		—			(1	)		—			1			—			(5,123	)		(5,284	)

At December 31, 2017		52,439			86,651			144,089			39,487			13,440			—			224,780			20,413			28,136			609,435

Charge (credit) to P&L		702			(83,561	)		25,733			(5,482	)		1,784			—			35,289			(2,365	)		(14,096	)		(41,996	)
Charge (credit) to equity		—			—			—			—			—			—			—			—			(95	)		(95	)
Sale of subsidiary		(14,775	)		(2,169	)		(33,512	)		—			(6,215	)		—			(6,462	)		—			(944	)		(64,077	)
Others		—			—			—			—			—			—			—			—			1,675			1,675

At December 31, 2018		38,366			921			136,310			34,005			9,009			—			253,607			18,048			14,676			504,942

- 96 -

As of December 31, 2018, the total tax loss amounts to S/468.8 million and is composed as follows:


Company		Tax loss apli- cation method		Application						Statute of Limitations
Company		Tax loss apli- cation method		2019		2020		Forward		Statute of Limitations
GyM S.A.	277,541		B		8,801		19,417		249,323
Vial y Vives - DSD	76,474		N/A		11,022		13,226		52,226
Graña y Montero S.A.A.	56,906		A		46,278		10,628		—		2022
GMP S.A.	17,225		A		—		5,786		11,438		2020 / 2021
TGNCA	15,989		B		—		—		15,989
Viva GyM S.A.	12,497		B		—		—		12,497
Consorcio Italo Peruano	3,870		A		3,870		—		—		2020
Consorcio Peruano de Conservación	3,791		A		—		3,243		549		2020 / 2021
Consorcio Huacho-Pativilca	1,457		A		1,457		—		—		2022
Others	3,055				1,195		142		1,718

	468,806				72,624		52,442		343,739

According to Peruvian legislation, there are two ways to compensate for tax losses:

System A, it is allowed to offset the tax loss in future years up to the following four (4) years from the date the loss is incurred.

System B. The tax loss may be offset in future years up to 50% of the net rent of each year. This option does not consider a statute of limitations.

The taxable goodwill relates to the tax credit generated in the reorganization of the Chilean subsidiaries in 2014, in accordance with such legislation. In 2016, the arbitration related to the Collahuasi project was closed, and an additional payment to the sellers of the Chilean subsidiary was determined, which originated the increase of this temporary item.

Deferred income corresponds to income that, according to Colombian tax regulations, is not recognized as such for tax purposes until certain requirements are met.

26	WORKERS’ PROFIT SHARING

The distribution of the workers’ profit sharing included in Note 27-i) for the years ended December 31 is shown below:


	2016		2017		2018
Cost of sales of goods and services		8,547		2,215		5,274
Administrative expenses		1,297		7,562		2,588

		9,844		9,777		7,862

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27	EXPENSES BY NATURE

For the years ended December 31, the detail of this item is as follows:


	Cost of goods and services			Administrative expenses
2016
Services provided by third-parties		1,417,412			89,328
Salaries, wages and fringe benefits		875,470			153,927
Purchase of goods		629,765			—
Impairment of accounts receivable (ii)		419,584			—
Other management charges		256,541			21,361
Depreciation		111,404			7,428
Amortization		59,682			4,890
Impairment of inventories		37,454			—
Taxes		6,982			1,369
Impairment of property, plant and equipment		6,926			—

Total report reclassified		3,821,220			278,303

2017
Services provided by third-parties		1,268,665			104,950
Salaries, wages and fringe benefits		919,409			134,695
Purchase of goods		856,745			140
Other management charges		235,102			48,057
Depreciation		103,566			5,776
Amortization		67,381			3,002
Impairment of inventories		40,592			—
Impairment of property, plant and equipment		11,928			20
Taxes		7,470			7,408
Impairment of accounts receivable (ii)		703			18,406

Total report reclassified		3,511,561			322,454

2018
Services provided by third-parties		1,064,687			98,060
Salaries, wages and fringe benefits (i)		817,392			105,505
Purchase of goods		755,209			—
Other management charges		375,308			43,533
Amortization		98,318			4,856
Depreciation		81,199			5,135
Impairment of accounts receivable (ii)		45,658			19,418
Taxes		8,727			1,926
Impairment of property, plant and equipment		5,468			—
Inventory recovery		(26,993	)		—

Total report reclassified		3,224,973			278,433

(i)	For the years ended on December 31, salaries, wages and fringe benefits comprise the following:


	2,016		2,017		2,018
Salaries		773,630		747,195		629,641
Social contributions		87,460		106,797		80,697
Statutory gratification		57,974		76,330		73,297
Employee’s severance indemnities		40,411		43,399		50,852
Others		23,436		37,003		41,327
Vacations		36,642		33,603		39,221
Worker’s profit sharing (Note 26)		9,844		9,777		7,862

		1,029,397		1,054,104		922,897

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(ii)	Detail of impairment of accounts receivable:


Year	Trade accounts receivables		Other accounts receivable		Work in progress, net		Accounts receivable from related parties		Total
2016		3,052		6,333		410,199		—		419,584
2017		724		—		—		18,385		19,109
2018		3,065		44,252		—		17,759		65,076

Total		6,841		50,585		410,199		36,144		503,769

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28	FINANCIAL INCOME AND EXPENSES

For the years ended on December 31, these items include the following:


	2016			2017			2018
Financial income:
Interest on loans to third parties		6,142			577			27,060
Fair value of accounts receivables		—			—			9,786
Interest on short-term bank deposits		7,277			5,123			3,811
Commissions and collaterals		—			12			1,448
Exchange rate gain, net		—			5,603			—
Others		4,806			2,427			8,820

		18,225			13,742			50,925

Financial expenses:
Interest expense:
- Bank loans		88,828			93,238			114,376
- Loans from third parties		264			6,784			31,296
- Commissions and collaterals		9,156			15,537			31,668
- Financial lease		5,943			4,722			2,908
- Bonds		25,352			28,804			3,361
Exchange difference loss, net		12,750			—			23,276
Derivative financial instruments		1,248			739			268
Loss by measurement of financial asset fair value (Note 13)		76,864			8,059			25,796
Other financial expenses		14,481			24,802			23,200
Less; capitalized interest		(36,831	)		(31,908	)		(8,167	)

		198,055			150,777			247,982

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29	OTHER INCOME AND EXPENSES, NET

For the years ended December 31, these items include the following:


	2016			2017			2018
Other income:
Sales of property, plant and equipment		26,034			93,013			26,007
Sale of investments		46			—			13,475
Reversal of legal and tax provisions		14,959			79			20
Present value of the liability from put option		—			—			6,122
Legal indemnities		8,957			—			—
Others		18,033			6,466			12,795

		68,029			99,558			58,419

Other expenses:
Legal contingency - Law 30737 (Note 23)		—			—			73,500
Net cost of property, plant and equipment disposal		22,305			78,378			36,931
Impairment of goodwill and trademarks		54,308			49,608			—
Loss on remeasurement of previously held interest (Note 33-a)		6,832			—			—
Others		6,944			4,441			9,323

		90,389			132,427			119,754

		(22,360	)		(32,869	)		(61,335	)

30	TAX SITUATION

In accordance with the current legislation in Peru, Chile, Colombia, Ecuador, Bolivia, and Panama, each Group Company is individually subject to the applicable taxes. Management considers that it has determined the taxable amount of income tax in accordance with the tax legislation in force in each country.

Amendments to the Peruvian income tax law

By means of legislative decree No. 1261, enacted on December 10, 2016, amendments have been made to the income tax Law, effective from 2017 onwards. This amendment establishes the third category income tax rate at 29.5%. Likewise, the aforementioned decree establishes the dividend tax rate for natural persons and legal persons not domiciled at 5% for dividends from 2017 onwards. The accumulated profits until December 31, 2016, remained affected at the rate of 6.8%, independent of the date when the distribution is agreed or occurs in subsequent periods.

Amendments to the Chilean Income Tax Law

On February 1, 2016, law No. 20899 was enacted, which simplifies and clarifies the application of the tax reform defined in the aforementioned law. With respect to income tax, two systems have been established:

Attributable income system: This system gradually increases the first category tax rate, 21% in 2014, 22.5% in 2015, 24% in 2016, to 25% in 2017. Their choice is restricted to companies whose partners are natural persons domiciled or resident in Chile or natural or legal persons without domicile or residence in Chile. This system imposes taxes on the partners of Chilean entities on an annual basis regardless of any effective distribution of the local entity’s profits, with the right to use the tax paid in full as a tax credit.

ii.

Partially integrated system: The first category tax rate is gradually increased by 21% in 2014, 22.5% in 2015, 24% in 2016, 25.5% in 2017, to 27% in 2018. Corporations, open or closed, and companies in which at least one of their owners is not a natural person (domiciled or not) or a legal person not domiciled are subject to this system. This system burdens the shareholders of Chilean entities that distribute dividends and entitles them to use said distribution as a tax credit in 65% of the total taxes paid. This limit does not apply to investors with whom Chile has signed double taxation avoidance agreements, as is the case with Peru.

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Amendments to the Colombian income tax legislation

In December 2016, law No. 1819 was published modifying the tax Code, effective from 2017. The main modifications are as follows:

•

The income tax rates in force until 2016 (income tax + cree + surcharge) have been simplified to a single income tax rate of 34% and a temporary surcharge of 6% by 2017 and an income tax rate of 33% and a temporary surcharge of 4% by 2018 on a taxable income greater than S/895 thousand (equivalent to COP800 million).

•

The presumptive income, applicable when there are tax losses or when it is greater than ordinary income, will have as its taxable base 3.5% of liquid equity (formerly 3%) and may be compensated with future taxable income.

•

Tax losses may be offset in the following twelve (12) years from their generation.

•

The special rate for dividends and participations received by foreign companies will be 5%.

•

The VAT rate changes from 16% to 19%.

•

As of tax year 2017, the term of the firmness of the declarations will be three (3) years. However, some terms may be longer, as is the case of companies that are obliged to transfer prices whose firmness of the declarations will be six (6) years. For the declarations that generate tax losses the term of firmness will be from twelve (12) to fifteen (15) years.

In December 2018, law No. 1943 was published modifying the tax statute, whose application or validity begins in 2019. The main modifications are as follows:

•

Presumptive rent rate reduced to 1.5% for taxable years 2019 and 2020, and to 0% beginning with the taxable year 2021

•

The general income tax rate applicable to national companies shall be reduced as follows: 33% by 2019, 32% by 2020, 31% by 2021 and 30% by 2022.

The income tax expense shown in the consolidated statement of income comprises


	2016			2017			2018
	(as restated)
Current income tax		169,428			168,143			150,020
Deferred income tax (Note 25)		(280,911	)		(44,550	)		(23,594	)
PPUA		(7,789	)		613			—

		(119,272	)		124,206			126,426
(-) Discontinued operations		(32,910	)		(77,901	)		(13,108	)

Income tax		(152,182	)		46,305			113,318

Under Chilean legislation, when a company has tax losses, it may request a refund of first category taxes paid in prior years, up to the amount of tax calculable on the tax loss and provided that it has not distributed dividends on the income associated with the refund. The amount returned by the Chilean tax administration in this respect is called the provisional payment on absorbed earnings (PPUA). The company recognizes income tax income and an account receivable when requesting this refund.

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The Group’s income tax differs from the notional amount that would result from applying the group companies weighted average rate of income tax applicable to consolidated pre-tax income, as follows:


	2016			2017			2018
(Loss) profit before income tax		(708,134	)		45,112			133,948

Income tax by applying local applicable tax rates on profit generated in the respective countries		(191,225	)		13,811			40,507
Tax effect on:
- Non-taxable income		(1,534	)		(4	)		(1,691	)
- Equity method (profit) loss		3,673			394			(1,094	)
- Non-deductible expenses		56,805			30,472			70,052
- Unrecognized deferred tax asset income (expense)		(4,099	)		1,562			8,592
- Adjustment for changes in rates of income tax		(18,676	)		27			1,524
- PPUA adjustment for changes in tax rates		4,871			(611	)		—
- Change in prior years estimations		(4,471	)		9,005			3,235
- Others, net		2,474			(8,351	)		(7,807	)

Income tax		(152,182	)		46,305			113,318

The theoretical tax disclosed is the result of applying the income tax rate in accordance with the tax legislation of the country where each company that is part of the Group is domiciled. In this sense, companies domiciled in Peru, Chile, and Colombia applied in 2018 income tax rates of 29.5%, 27% and 37% respectively (29.5%, 25.5% and 40% for 2017). Norvial, GyM Ferrovias, Vesur and GMP (Blocks III and IV) have legal stability contracts signed with the Peruvian Government in force during the term of the associated concessions. Therefore, the consolidated theoretical amount is obtained from the weighting of the profit or loss before income tax and the applicable income tax rate.

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Country	Local tax rate			(Loss) Profit before income tax			Income tax
	(A)			(B)			*(A)(B)**
2016
Peru		28.00	%		(1,544,221	)		(432,382	)
Peru - Norvial S.A.		27.00	%		63,583			17,167
Peru - GyM Ferrovías S.A.		30.00	%		34,760			10,428
Peru - Vesur S.A.		30.00	%		888			267
Peru - GMP S.A.		30.00	%		8,602			2,581
Chile		24.00	%		(81,119	)		(19,468	)
Colombia		40.00	%		(27,511	)		(11,004	)
Bolivia		25.00	%		(703	)		(176	)
Unrealized gains					837,587			241,362

Total					(708,134	)		(191,225	)


2017
Peru		28.00	%		420,421			124,024
Peru – Norvial S.A.		27.00	%		68,104			18,388
Peru – GyM Ferrovias S.A.		30.00	%		29,028			8,708
Peru – Vesur S.A.		30.00	%		779			234
Peru – GMP S.A.		30.00	%		20,941			6,073
Chile		24.00	%		(93,031	)		(23,723	)
Colombia		40.00	%		(27,970	)		(11,188	)
Bolivia		25.00	%		(2,897	)		(724	)
Unrealized gains					(370,263	)		(107,981	)

Total					45,112			13,811


2018
Peru		29.50	%		151,627			44,730
Peru – Norvial S.A.		27.00	%		21,104			5,698
Peru – GyM Ferrovias S.A.		30.00	%		125,136			37,541
Peru – Vesur		30.00	%		2,951			885
Peru – GMP S.A.		29.00	%		35,421			10,272
Chile		27.00	%		(20,768	)		(5,607	)
Colombia – Morelco S.A.		37.00	%		11,851			4,385
Colombia – GyM S.A. Branch		33.00	%		1,984			655
Bolivia		25.00	%		(137	)		(34	)
Unrealized gains					(195,221	)		(58,018	)

Total					133,948			40,507

A company located in Colombia does not exceed the taxable income of COP 800 million, therefore applies the rate of 33%. (Note 30-d)

The Peruvian tax administration has the power to review and, if applicable, correct the calculation of the income tax determined by the Company in the last four years, starting on January 1 of the year following the filing of the corresponding tax return (years open for review). Years 2014 to 2018 are open for review. Management believes that no significant liabilities will arise as a result of these tax

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audits. In addition, the Chilean tax administration has not yet audited the income tax returns for 2016, 2017 and 2018, and the Chilean tax administration has the authority to carry out such audits within three years from the filing date of the respective tax returns. Also, in Colombia, years 2016, 2017 and 2018 are pending audit by the Colombian tax administration, which has the power to perform audits in the two years following the filing of the tax return.

In accordance with current legislation, for the purposes of determining income tax and general sales tax, the transfer prices of transactions with related companies and with companies’ resident in low or nil tax territories must be considered. For this purpose, documentation and information must be available to support the valuation methods used and the criteria considered for their determination (transfer pricing rules). The Tax Administration is empowered to request this information from the taxpayer. Based on the analysis of the Company’s operations, management and its legal advisors estimate that transfer prices of transactions with related companies are based on market conditions, similar to those agreed with third parties, as of December 31, 2018.

Temporary tax on net assets (ITAN)

Taxes third category income generators in Peru subject to the general Income Tax regime. Beginning in 2012, the tax rate is 0.4% applicable to the amount of net assets exceeding S/1 million.

The amount effectively paid may be used as a tax credit against payments on account of income tax under the general regime, or against payment of the provisional income tax for the corresponding year.

The unrecognized deferred income tax asset amounts to S/10.8 million for 2018 and is mainly related to the tax loss carryforwards generated in Consorcio Ermitaño, Consorcio Conciviles and Consorcio Mantaro for which there is no expectation of recovery in the future.

The current income tax payable, after applying the corresponding tax credits and whose due date is up to the first week of April of the following year, includes mainly:


–	Proyectos Inmobiliarios Consultores S.A.	S/22 million in 2017
–	Viva GyM S.A.	S/22 million in 2017
–	Graña y Montero S.A.A.	S/7 million in 2017
–	GyM Ferrovias S.A.	S/20 million in 2018
–	Inversiones Almonte S.A.	S/10 million in 2018

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31	OTHER COMPREHENSIVE INCOME

The analysis of this account is reflected below:


	Cash flow hedge			Foreign currency translations adjustment			Increase in fair value of available-for sale assets			Exchange difference from net investment in a foreign operation			Total
At January 31, 2016		(926	)		(64,441	)		51,142			(17,740	)		(31,965	)
Credit (charge) for the year		1,190			9,885			(3,149	)		10,965			18,891
Tax effects		(351	)		—			929			(3,243	)		(2,665	)
Transfer to profit or loss (Note 10)		—			—			(41,461	)		1,563			(39,898	)

Other comprehensive income of the year		839			9,885			(43,681	)		9,285			(23,672	)

At December 31, 2016		(87	)		(54,556	)		7,461			(8,455	)		(55,637	)

Credit (charge) for the year		650			(9,166	)		—			9,222			706
Tax effects		(192	)		—			—			(2,729	)		(2,921	)

Other comprehensive income of the year		458			(9,166	)		—			6,493			(2,215	)

At December 31, 2017		371			(63,722	)		7,461			(1,962	)		(57,852	)

Credit (charge) for the year		160			(7,875	)		—			(10,800	)		(18,515	)
Tax effects		(47	)		—			—			2,808			2,761
Transfer to profit or loss (*)		—			14,805			—			—			14,805

Other comprehensive income of the year		113			6,930			—			(7,992	)		(949	)

At December 31, 2018		484			(56,792	)		7,461			(9,954	)		(58,801	)

(*)	The amount of S/14.8 million corresponds to the recognition of the translation adjustment from CAM Chile S.A., an indirect subsidiary sold in December 2018.

The amounts in the above table only represent amounts attributable to the Company’s controlling interest, net of tax. The table below shows the movement in other comprehensive income per year:


	2016			2017			2018
Controlling interest		(23,672	)		(2,215	)		(949	)
Non-controlling interest		4,194			(3,117	)		(1,346	)
Adjustment for actuarial gains and losses, net of tax		(1,121	)		(2,948	)		16,589

Total value in OCI		(20,599	)		(8,280	)		14,294

32	CONTINGENCIES, COMMITMENTS, AND WARRANTIES

In the opinion of management and its legal advisors, the provisions recorded primarily for labor and tax claims are sufficient to cover the results of these probable contingencies. (Note 23)

Tax contingencies

•

Since the fiscal year 2016, there has been an appeal process before the Tax Court and another contentious-administrative process before the Judicial Branch regarding the results of VAT and Income Tax audits from 1999 to 2002. The maximum exposure amount is S/6.9 million.

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•

In our subsidiary GyM S.A., as a result of the audit processes corresponding to 1999, 2001 and 2010, SUNAT has issued determination and fine resolutions that together amount to approximately S/19.1 million.

•

In the fiscal year 2017, the tax litigation related to the fiscal year 2001 was resolved, in which the Tax Court ordered SUNAT to recalculate its observations, determining an amount lower than that initially claimed. Our subsidiary has decided to accept the conclusions of this resolution and submitted requests for installment payment of the debt amounting S/14.1 million.

•

Also, at the end of the fiscal year 2017, the contentious-administrative process related to the fiscal year 1999 was resolved through which the Judicial Branch rejected our arguments and confirmed what SUNAT had stated. With respect to this process, there is already a contingency provision of S/5 million accounted for.

•

The administrative tax process related to the fiscal year 2010 is still ongoing; however, its resolution will not imply an economic loss since it corresponds to a greater return of the balance in favor in 2011 already audited by the Tax Administration.

•

On the other hand, the Consortiums in which the subsidiary GyM S.A. participates initiated claims before SUNAT for the results of audits with a maximum exposure amount as of December 31, 2018, of S/2.6 million (as of December 31, 2017, S/3 million).

•

In the fiscal year 2017, Viva GyM challenged the results of the audit process corresponding to the fiscal year 2009, whose determination and fine resolutions as a whole generate a maximum exposure amount as of December 31, 2017, of S/1.5 million. In April 2018, the tax administration declared unfounded the claim for which an appeal has been filed before the Tax Court.

Management estimates that all of the above processes will be favorable considering their characteristics and the evaluation of their legal advisors.

Other contingencies

Civil lawsuits, mainly related to damages, termination of contracts and claims for work accidents amounting to S/. 0.92 million (S/0.86 million correspond to GyM, and S/0.06 million correspond to Morelco).

ii)

Contentious-administrative proceedings amounting to S/13.59 million (S/9.64 million correspond to Consorcio Terminales and GMP; S/2.85 million correspond to GyM; S/1.08 million correspond to GyM Ferrovias, and the remaining S/0.02 million correspond to Las Lomas - Inmobiliaria).

iii)

Administrative processes amounting to S/14.96 million (S/9.88 million correspond to GyM S.A. mainly due to Consorcio Constructor Ductos del Sur; S/1.25 million correspond to Graña y Montero S.A.A.; S/2.13 million correspond to GyM Ferrovias; S/0.85 million correspond to Viva GyM; and, the remaining S/0.85 million correspond to GMP, Terminales del Peru, Consorcio Toromocho, and Concesion Canchaque).

iv)

Labor processes amounting to S/17.25 million (S/14.93 million correspond to GyM, its subsidiaries, and consortia; S/0.69 million correspond to GMP; S/0.33 million correspond to Vial and Vives - DSD; S/0.22 million correspond to Morelco; S/0.50 million correspond to Consorcio Huacho-Pativilca); and, S/0.58 million correspond to Servisel.

Two securities class action lawsuits have been filed against the company and certain current and former officers in New York (“Eastern District of New York”) during the first quarter of 2017. Both actions allege that false and misleading statements were filed during the period. In particular, it is alleged that the defendant failed to disclose, among other things, that: a) the Company knew that its partner Odebrecht was involved in illegal activities; and that, b) the Company profited from such activities in violation of its own corporate governance rules. On March 6, 2018, the Court appointed Treasure Finance Holding Corp. to represent the plaintiffs. The company filed an exception requesting that the Court dismiss the lawsuit because even assuming that the facts alleged in the lawsuit were true, the plaintiffs would not be entitled to sue on the basis that: (a) the failure by the plaintiffs to register alleged unlawful payments would not have a material impact on the company’s financial statements even if they existed; (b) the evidence provided by the plaintiffs should be dismissed by the Court; and (c) the plaintiffs have not alleged that the defendants acted with intent to deceive and to benefit. The court has not yet ruled on that motion, but has granted plaintiffs leave to file a further amended complaint. The procedural issue is expected to be resolved during 2019. After that, the Court may dismiss the lawsuit or admit it. Legal counsel cannot predict the outcome of this class action or how it may impact the Company.

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Letters of Credit and Guarantees

As of December 31, 2018, the Group has letters of credit and guarantees in force in various financial entities guaranteeing operations for US$471.6 and US$13.9 million, respectively (US$959.7 and US$202.2 million, respectively, as of December 31, 2017), equivalent to S/1,593.5 million and S/46.9 million (S/3,114.2 million and S/656.1 million, respectively, as of December 31, 2017).

33	BUSINESS COMBINATIONS

Adexus S.A. acquisition

In June 2015, the Company acquired 44% of the shares of the Chilean entity Adexus S.A., whose principal economic activity is the provision of information technology solutions. At December 31, 2015, the Company concluded that joint control existed and that the type of joint agreement qualified as a joint venture; therefore, the investment was accounted for using the equity method in the Group’s consolidated financial statements (Note 16-b).

In January 2016, the Group acquired an additional shareholding of 8%, reaching a 52% shareholding; the agreed consideration of S/8.3 million was contributed through debt capitalization. The increase in participation did not change the classification of the investment as a joint venture. Subsequently, in August 2016, the Group obtained an additional stake of 39.03%, reaching 91.03% of its capital and obtaining control. The agreed consideration of S/14 million was initially disbursed as debt and then capitalized in the same period.

Losses arising from the re-measurement at fair value of the previously held interest amounted to S/6.8 million, which was recognized in the statement of income within “Other income and expenses, net”, at the date of acquisition of that additional interest in 2016 (Note 29).

Upon obtaining control, the Company has applied the acquisition method set forth in IFRS 3 “Business Combinations” to determine the goodwill acquired. In June 2018, the company acquired an additional 8.96% interest and obtained 99.99%. The consideration was S/14 million, which arises from a debt capitalization.

Morelco S.A.S. acquisition

On December 23, 2014, the Company acquired control of Morelco S.A.S. (Morelco) through it’s subsidiary GyM S.A., with the purchase of 70% of its shares representing the capital stock. Morelco is an entity domiciled in Colombia, whose principal economic activity is the provision of construction and assembly services. This acquisition forms part of the Group’s expansion plans in markets with high growth potential such as Colombia and in attractive industries such as mining and energy.

At December 31, 2014, the Company determined goodwill on this acquisition based on an estimated purchase price of US$93.7 million (equivalent to S/277.1 million) which included cash payments made of US$78.5 million (S/237.5 million, approximately) and estimated payables of US$15.1 million (equivalent to S/45.7 million), which according to what was agreed between the parties, would be defined after the review of the balance sheet of the acquired entity mainly referring to working capital, cash and financial debt and the determination of the definitive value of the contracted works pending to execute (backlog) of the acquired business. The estimated purchase price was distributed among the provisional fair values of the assets acquired, and liabilities assumed.

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As a result of this distribution, a goodwill of US$36.1 million (equivalent to S/105.8 million) was determined.

Non-controlling interest put and call options

In accordance with the shareholders’ agreement entered into for the purchase of Morelco, the subsidiary GyM entered into a put and call option contract on 30% of the shares of Morelco held by the non-controlling shareholders. Through this contract, the non-controlling shareholders obtain a right to sell their shares within the term and amount established in the contract (put options). The period for exercising the option begins on completion of the second year of the purchase and expires in the tenth year. The exercise price is based on a multiple of EBITDA less net financial debt and until the months 51 and 63 from the date of the agreement, a minimum value is set based on the price per share that GyM paid to acquire 70% of Morelco shares.

The subsidiary GyM obtains the right to purchase the same shares for a period of 10 years and at a determined price similar to that of the aforementioned put options, except that the minimum value applies to the entire term of the option (call options).

Under IFRS, the put option represents an obligation for the Company to purchase shares of the non-controlling interest and, consequently, the Group recognizes a liability measured by the fair value of that option. Because the Group concluded that as a result of this contract, did not acquire the significant risks and rewards inherent to the stock option package, the initial recognition of this liability was charged to an equity account of the controlling stockholders, under the heading of other reserves.

The value of the liability for the put option was estimated by the present value of the expected redemption amounts based on the weighted estimates of Morelco’s financial results and the exercise dates of the option. The Company expects the put options to be exercised on the day following the transfer date of the option. The expected redemption of the non-controlling interest is as follows: 66.67% in the second year, 33.33% in the fourth year and the remaining shares will be sold in the fifth year from the date of grant of the option. The discount rate used to calculate the present value of the expected redemption amounts reflects the risk-free rate of market participants comparable to the Company and reflects the fact that the Group expects to pay the minimum price of the agreement. As of December 31, 2018, the value of the liability amounts to S/103.7 million applying a discount rate of 2.57% for the first year, 2.55% for the second year and 2.53% for the third year (as of December 31, 2017, the value was S/105.4 million applying a discount rate of 1.79% for the first year, 2.03% for the second year and 2.12% for the third year). In 2018, changes in the fair value of the put option for S/1.77 million had been recognized in the income statement, included in “Other income and expenses, net” and in “financial income and expenses”.

34	DIVIDENDS

In compliance with certain covenants, the company will not pay dividends for the years 2017 and 2018, except for transactions with non-controlling interests described in Note 36-d).

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35	EARNINGS (LOSS) PER SHARE

Basic earnings per common share have been calculated by dividing the profit for the year attributable to the Group’s common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per common share have not been calculated because there are no common shares or potential dilutive investment shares (i.e., financial instruments or agreements giving the right to obtain common or investment shares); therefore, it is the same as basic earnings per share. The basic gain (loss) per common share results as follows:


	2016			2017 (as Restated)			2018
(Loss) earnings per share attributable to owners of the Company during the year		(509,699	)		148,738			(83,188	)

Weighted average number of shares in issue at S/1.00 each, at December 31,		660,053,790			660,053,790			729,434,192

Basic (loss) earnings per share (in S/) (*)		(0.772	)		0.225			(0.125	)


	2016			2017 (as Restated)			2018
(Loss) earnings per share from continuing operations attributable to owners of the Company during the year		(604,361	)		(66,577	)		(102,486	)

Weighted average number of shares in issue at S/1.00 each, at December 31,		660,053,790			660,053,790			729,434,192

Basic (loss) earnings per share (in S/) (*)		(0.916	)		(0.101	)		(0.154	)

(*)

The group does not have common shares with dilutive effects at December 31, 2016, 2017 and 2018.

36	TRANSACTIONS WITH NON-CONTROLLING INTERESTS

Acquisition of additional non-controlling interest

In May, November and December 2016, GyM Chile SPA acquired 5.43%, 6.77%, and 1.49%, respectively of additional shares in Vial y Vives - DSD S.A. at a total purchase price of S/21.6 million, S/25.7 million and S/3.8 million, respectively. The carrying values of the non-controlling interest at the acquisition dates were S/13.9 million, S/17.9 million and S/3.9 million. The Group ceased to recognize the corresponding non-controlling interest, recording a decrease in equity attributable to the owners of the Company of S/15.4 million. At December 31, 2018, the outstanding balance was S/23 million (S/22 million in 2017) (Note 22).

Contributions (returns) from non-controlling shareholders

Corresponds to the contributions and returns made by the partners of the subsidiary Viva GyM S.A. for the realization of real estate projects. As of December 31, balances comprise:


	2017			2018
Viva GyM S.A.
Contributions received		8,654			3,399
Returns of contributions		(45,053	)		(87,856	)

		(36,399	)		(84,457	)

Plus (less):
Contributions from other subsidiaries		3,202			15,120

Decrease in equity of non controlling parties		(33,197	)		(69,337	)

In 2018, the contributions correspond mainly to the project Los Parques de Callao for S/3.3 million. Returns correspond mainly to the Klimt projects for S/25.3 million, Los parques de Comas for S/13.4 million, Los parques de San Martin for S/7.5 million, Los Parques de Villa El Salvador for S/4.3 million, liquidation of Los Parques de Piura project for S/8.6 million, Los Parques del Mar for S/11 million, Los Parques de Chiclayo for S/6.2 million and Los Parques de Carabayllo 3 for S/8.2 million (returns in 2017 mainly include “Los Parques de Comas” for S/6.8 million, “Asociacion Parques de Mar” for S/27.8 million and “Klimt” for S/8 million).

Deconsolidation of non-controlling interest

Correspond to the deconsolidation of the non-controlling interest due to the sale of subsidiaries Stracon GyM S/29.4 million and Grupo Cam S/18.2 million.

- 110 -

Dividends

As of December 31, 2016, 2017 and 2018, dividends of S/25.5 million, S/59.7 million and S/102.8 million, respectively, were distributed to the non-controlling interest.

37	DISCONTINUED OPERATIONS AND NON-CURRENT ASSET CLASSIFIED AS HELD FOR SALE

As part of the non-strategic asset divestment process initiated by the Company in 2017 with the sale of GMD S.A., in 2018, CAM Servicios del Peru S.A. and CAM Chile S.A., and Stracon GyM S.A. were sold (“completed”).

Additionally, information is presented on Adexus S.A., a subsidiary that has been reclassified as a non-current asset available for sale (“planned”) as of December 31, 2018 (Note 38-b).

Discontinued operations

i) CAM Servicios del Peru S.A. and CAM Chile S.A.

On December 4, 2018, the Company entered into a purchase and sale agreement for all of its shares (representing 73.16%) of CAM Servicios del Peru S.A. and CAM Chile S.A. The Group received for its participation in CAM Chile S.A. and CAM Servicios del Peru S.A. the sum of (i) US$15.78 million (equivalent to S/51.7 million) for the shares of CAM Chile S.A. and (ii) US$3.0 million (equivalent to S/10.4 million) for the shares of CAM Servicios del Peru S.A., respectively. The net gain on the sale of both subsidiaries amounted to S/31.7 million.

ii) STRACON GyM S.A.

On March 28, 2018, the Company entered into a purchase and sale agreement for all of its shares (representing 87.59%) in STRACON GyM S.A. The sale price was agreed in US$76.8 million (equivalent to S/248.8 million), which is fully paid. The net gain on the sale amounted to S/41.9 million.

iii) GMD S.A.

On June 6, 2017, the Company entered into a sales contract for all of its shares (representing 89.19%) in GMD S.A. The sales price was agreed at US$84.7 million (equivalent to S/269.9 million), which is fully paid. The net gain on the sale amounted to S/218.3 million (US$64.6 million approximately).

Non-current asset classified as held for sale

At December 31, 2018, non-current assets and liabilities held for sale correspond to investments in the company Adexus S.A., whose main activity is to provide information technology solutions mainly in Chile and Peru. Account balances are classified as assets held for sale taking into account that the Group has a sales plan defined within the next 12 months.


	At December 31, 2018 Adexus S.A.
	(planned)
Assets
Cash and cash equivalents		6,074
Trade accounts receivables, net		157,351
Inventories, net		3,999
Other accounts receivable		80,374

Total assets		247,798

Liabilities
Other accounts payable		71,810
Accounts payable		148,817
Deferred income tax liabilities		5,201

Total liabilities		225,828

Total net assets		21,970

As of December 31, 2017, this item includes Red Eagle Mining Corporation investment representing 6.18% of shares. In January and March 2018, the Company sold the total of its shares. The sale price was agreed at US$3.99 million (equivalent to S/16.24 million), which were paid in full.

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Consolidated statement of income and consolidated cash flow

The Company reclassified financial results and present cash flow of discontinued operations, GMD S.A., Stracon GyM S.A., CAM Servicios del Peru S.A., CAM Chile S.A. (completed) and Adexus S.A. (planned) for 2016 and 2017 as follows:


	Reclassification
	2016			discontinued operations						2016
	Audited			Completed			Planned			Reclassified
Revenues		6,190,317			(1,939,983	)		(113,025	)		4,137,309
Operating costs		(5,633,022	)		1,714,498			97,304			(3,821,220	)

Gross profit (loss)		557,295			(225,485	)		(15,721	)		316,089

Administrative expenses		(382,393	)		87,855			16,235			(278,303	)
Other (expenses) income, net		(13,374	)		(9,162	)		176			(22,360	)
Gain from the sale of investments		46,336			—			—			46,336

Operating profit (loss)		207,864			(146,792	)		690			61,762

Financial expenses		(221,664	)		18,384			5,225			(198,055	)
Financial income		20,645			(2,420	)		—			18,225

Share of the profit or loss in associates and joint ventures		(589,710	)		(356	)		—			(590,066	)

(Loss) profit before income tax		(582,865	)		(131,184	)		5,915			(708,134	)
Income tax		119,272			34,772			(1,862	)		152,182

(Loss) profit from continuing operations		(463,593	)		(96,412	)		4,053			(555,952	)

Profit (loss) from discontinued operations		11,995			96,412			(4,053	)		104,354

Loss of the year		(451,598	)								(451,598	)

(Loss) earnings per share from continuing operations attributable to owners of the company during the year		(0.790	)								(0.916	)


	Discontinued operations
	Completed			Planned
Cash flows relating to the discontinued operations are as follows:

Operating cash flows		125,048			39,318
Investing cash flows		(73,127	)		17,639
Financing cash flows		(111,303	)		66,886

Net increase generated in subsidiary		(59,382	)		123,843


	Reclassification
	2017			discontinued operations						2017
	Restated (i)			Completed			Planned			Reclassified
Revenues		6,080,142			(1,782,105	)		(284,024	)		4,014,013
Operating costs		(5,407,355	)		1,656,114			239,680			(3,511,561	)

Gross profit (loss)		672,787			(125,991	)		(44,344	)		502,452

Administrative expenses		(429,181	)		73,966			32,761			(322,454	)
Other (expenses) income, net		(20,545	)		(13,159	)		835			(32,869	)
Gain (loss) from the sale of investments		56,099			(21,554	)		—			34,545

Operating profit (loss)		279,160			(86,738	)		(10,748	)		181,674

Financial expenses		(185,445	)		23,913			10,755			(150,777	)
Financial income		15,407			(1,401	)		(264	)		13,742

Share of the profit or loss in associates and joint ventures		1,327			(854	)		—			473

Profit (loss) before income tax		110,449			(65,080	)		(257	)		45,112
Income tax		(59,097	)		12,939			(147	)		(46,305	)

Profit (loss) from continuing operations		51,352			(52,141	)		(404	)		(1,193	)

Profit from discontinued operations		157,886			52,141			404			210,431

Profit of the year		209,238									209,238

(Loss) earnings per share from continuing operations attributable to owners of the company during the year		(0.014	)								(0.101	)

(i)	See Nota 2.31


	Discontinued operations
	Completed			Planned
Cash flows relating to the discontinued operations are as follows:

Operating cash flows		149,687			6,083
Investing cash flows		(10,377	)		(19,570	)
Financing cash flows		(136,165	)		14,059

Net increase generated in subsidiary		3,145			572

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Discontinued operations as at December 31, 2018 are as follows:


	Discontinued operations
	Grupo CAM and Stracon GyM			Adexus S.A.
	(Completed)			(Planned)
Revenues		1,010,739			302,936
Operating costs		(968,375	)		(263,455	)

Gross profit		42,364			39,481

Administrative expenses		(56,950	)		(32,730	)
Other (expenses) income, net		860			(4,519	)

Operating (loss) profit		(13,726	)		2,232

Financial expenses		(19,971	)		(12,786	)
Financial income		6,253			611

Loss before income tax		(27,444	)		(9,943	)
Income tax		7,112			2,325

Loss from discontinued operations		(20,332	)		(7,618	)


Cash flows relating to the discontinued operations are as follows:

Operating cash flows		6,967			36,450
Investing cash flows		(11,474	)		(18,141	)
Financing cash flows		526			(21,422	)

Net increase generated in subsidiary		(3,981	)		(3,113	)

38	EVENTS AFTER THE DATE OF THE STATEMENT OF FINANCIAL POSITION

On April 2, 2019, the Company concluded the capital increase process by completing the subscription of 142,483,663 new common shares. In the private offer completed, 55,291,877 shares were paid in full, and 87,191,786 shares were paid by 50%, both at a price per share of US$0.6136.

On March 15, 2019, the Company communicated that Adexus S.A., subsidiary of Graña y Montero S.A.A., is again available for sale to potential parties interested in its acquisition. Negotiations with Advent International S.A.C., and the obligations assumed within the framework of the potential transaction have been terminated by mutual agreement, without responsibility for the parties. The Company ratifies its intention to continue with the sale plan of Adexus S.A., in order to find the best possible offer for the interests of the Company and its investors.

On March 13, 2019, the Peruvian Tax Court delivered its decision to confirm SUNAT’s rejection to our appeal to SUNAT’s payment orders regarding 2007 and 2008. SUNAT and the Peruvian Tax Court objected to the deduction of the loss of the investment because both consider there is not enough evidence that OPQ S.A. is not an “on-going business”. The Company is currently working on the preparation of a contentious administrative claim. However, according to Peruvian legal framework, SUNAT is entitle to start a coercive collection processes. The Company and its legal counsel believe there are solid legal grounds to consider the contingency remote and obtain a favorable ruling.

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Supplementary Data (Unaudited)

Oil and Gas Producing Activities

In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 932, “Extractive Activities-Oil and Gas,” and regulations of the U.S. Securities and Exchange Commission (SEC), our company has included certain supplemental disclosures about its oil and gas exploration and production operations.

All information in the following supplemental disclosures related to Blocks I, III, IV and V. Information with respect to Blocks III and IV has been included from April 5, 2015, when our company began operating these blocks.

A.	Reserve Quantity Information

Graña y Montero Petrolera S.A. net proved reserves in the fields in which they operate and changes in those reserves for operations are disclosed below. The net proved reserves represent our company’s best estimate of proved oil and natural gas reserves. For 2017 and 2018 reserve estimates have been evaluated by its technical staff (reservoir engineers and geoscience professionals) and submitted to its Reserve Development Committee. The estimates for all years presented conform to the definitions found in FASB ASC paragraph 932-10-65-1 and Rule 4-10(a) of Regulation S-X.

Proved oil reserves are those quantities of oil, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible, based on prices used to estimate reserves, from a given date forward from known reservoirs, and under existing economic conditions, operating methods, and government regulation prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain.

The term “reasonable certainty” implies a high degree of confidence that the quantities of oil actually recovered will equal or exceed the estimate. To achieve reasonable certainty, our company’s engineers and independent petroleum consultants relied on technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and economic data used to estimate our company’s proved reserves include, but are not limited to, well logs, geologic maps, seismic data, well test data, production data, historical price and cost information and property ownership interests.

PROVED RESERVES⁽¹⁾


	Total						Peru
	Oil (MBBL)			Gas (MMcf)			Oil (MBBL)			Gas (MMcf)
Proved developed and undeveloped reserves, December 31, 2016		25,191			10,521			25,191			10,521
Revisions of previous estimates		2,451			1,494			2,451			1,494
Enhanced oil recovery		—			—			—			—
Purchases		—			—			—			—
Production (a)		(1,146	)		(2,661	)		(1,146	)		(2,661	)
Sales in place		—			—			—			—
Proved developed and undeveloped reserves, December 31, 2017		26,496			9,354			26,496			9,354
Revisions of previous estimates⁽²⁾		2,332			26,481			2,332			26,481
Enhanced oil recovery		0			0			0			0
Purchases		0			0			0			0
Production		(1,334	)		(2,229	)		(1,334	)		(2,229	)
Sales in place		0			0			0			0
Proved developed and undeveloped reserves, December 31, 2018⁽³⁾⁽⁴⁾		27,494			33,606			27,494			33,606

(1)

Proved reserves estimated in oil and gas properties located in Blocks I, III, IV and V (Talara and Paita) under two service contracts and two license contracts with Perupetro. The rights to produce hydrocarbons expire in December 2021 for Block I, April 2045 for Blocks III and IV, and October 2023 for Block V. The proved reserves estimated in this report constitute all of the proved reserves under contracts by Graña y Montero Petrolera S.A.

(2)	Recategorized from resources to reserves due to the development of a project to transport gas from Block IV to our gas processing plant, which remains ongoing. This includes 12,078 MMcf as proved developed and 13,767 MMcf as proved undeveloped reserves.

(3)	The revisions in reserve estimates are based on new information obtained as a result of drilling activities and workovers. During 2017 and 2018, proved developed reserves of crude oil increased due to drilling activities in Block IV and the impact of the higher price in reserve estimations.

(4)	As of December 31, 2017, the associated gas reserves were 9,354 MMCF. As of December 31, 2018, the associated gas reserves were 33,606 MMCF.

S-1

RESERVE QUANTITY INFORMATION

FOR THE YEAR ENDED DECEMBER 31, 2016


	Total				Peru
	Oil (MBBL)		Gas (MMCF)		Oil (MBBL)		Gas (MMCF)
Proved developed reserves
Beginning of year		9,168		23,384		9,168		23,384
End of year		8,521		10,521		8,521		10,521
Proved undeveloped reserves
Beginning of year		14,562		26,719		14,562		26,719
End of year		16,670		—		16,670		—

*RESERVE QUANTITY INFORMATION* *FOR THE YEAR ENDED DECEMBER 31, 2017*

	Total				Peru
	Oil (MBBL)		Gas (MMCF)		Oil (MBBL)		Gas (MMCF)
Proved developed reserves
Beginning of year		8,521		10,521		8,521		10,521
End of year		8,664		9,354		8,663		9,354
Proved undeveloped reserves
Beginning of year		16,670		—		16,670		—
End of year		17,833		—		17,833		—

*RESERVE QUANTITY INFORMATION* *FOR THE YEAR ENDED DECEMBER 31, 2018*

	Total				Peru
	Oil (MBBL)		Gas (MMCF)		Oil (MBBL)		Gas (MMCF)
Proved developed reserves
Beginning of year		8,664		9,354		8,664		9,354
End of year		9,912		19,839		9,912		19,839
Proved undeveloped reserves
Beginning of year		17,833		—		17,833		—
End of year		17,582		13,767		17,582		13,767

B. Capitalized Costs Relating to Oil and Gas Producing Activities

The following table sets forth the capitalized costs relating to our company’s crude oil and natural gas producing activities for the years indicated:


	2014			2015			2016			2017			2018
	(in US$ thousands)
Proved properties
Concessions
Mineral property, wells and related equipment		47,267			54,582			39,069			84,960			99,129
Drilling and Works in progress and Replacement Units		11,290			5,682			6,188			10,767			11,920

Total Proved Properties		58,557			60,264			45,257			95,727			111,049
Unproved properties		0			0			0			0

Total Property, Plant and Equipment		58,557			60,264			45,257			95,727			111,049
Accumulated depreciation, depletion, and amortization, and valuation allowances		(13,735	)		(17,875	)		(17,774	)		(36,672	)		(45,426	)

Net capitalized costs		44,822			42,389			27,482			59,054			65,624

S-2

C. Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities

The following table sets forth costs incurred related to our company’s oil and natural gas activities for the years indicated:


	2014			2015			2016			2017			2018
	(in US$ thousands)
Acquisition costs of properties⁽¹⁾
Proved		—			—			—			—			—
Unproved		—			—			—			—			—
Total acquisition costs
Exploration costs		—			—			—			—			(1,121	)
Development costs		(13,126	)		(17,179	)		(19,161	)		(22,905	)		(25,192	)

Total		(13,126	)		(17,179	)		(19,161	)		(22,905	)		(26,313	)

(1)	Our company has not incurred in any cost related to Oil and Gas property acquisition for all years presented.

D.	Results of Operations for Oil and Natural Gas Producing Activities

The results of operations for oil and natural gas producing activities, excluding overhead costs and interest expenses, are as follows for the years indicated:


	Total Peru
	2014			2015			2016			2017			2018
	(in US$ thousands)
Revenues
Additional Revenues of Gas Extraction Services		59,233			57,938			50,556			67,049			96,543

Total Revenues⁽¹⁾		59,233			57,938			50,556			67,949			96,543
Production Costs		(16,257	)		(25,976	)		(24,645	)		(28,097	)		(31,431	)
Costs of Labor		(1,602	)		(1,660	)		(1,767	)		(2,008	)		(2,099	)
Repairs and Maintenance		(958	)		(1,828	)		(1,563	)		(2,076	)		(2,421	)
Materials, supplies and fuel consumed and supplies utilized		(6,486	)		10,775	)		(9,540	)		(20,253	)		(9,704	)
External services, insurances, security and others		(3,605	)		(6,938	)		(6,388	)		(6,634	)		(7,979	)
Operation office and staff expenses		(3,607	)		(4,776	)		(5,388	)		(7,126	)		(9,228	)
Additional Natural Gas supply costs after price adjustment Royalties					(7,982	)		(7,402	)		(15,016	)		(30,892	)
DD&A Expenses		(13,672	)		(16,931	)		(17,223	)		(19,851	)		(17,690	)
Income (loss) before income taxes		29,304			7,048			1,286			4,984			16,530
Income tax expense⁽²⁾		(8,791	)		(1,974	)		(373	)		(1,470	)		(4,876	)
Results of operations from producing activities		20,513			5,075			913			3,514			11,654

(1)	Income after deductions for Graña y Montero Petrolera S.A.’s share of government royalties according to contract obligations. There are no sales or transfers to our company’s other operations.

(2)	In 2014, the legal tax rate was 30%. In 2015, the legal tax rate was 28%, and during 2016, the legal tax rate was 27%. In 2017, the Peruvian government increased the legal tax rate to 29.5%. In 2018, the Peruvian government retained the legal tax rate at 29.5%.

S-3

E.	Standardized Measure of Discounted Future Net Cash Flows

The standardized measure of discounted future net cash flows, related to the proved reserves is based on estimates of net proved reserves and the period during which they are expected to be produced. Future cash inflows are computed by applying the twelve month period unweighted arithmetic average of the price as of the first day of each month within that twelve month period, unless prices are defined by contractual arrangements, after royalty share of estimated annual future production from proved oil and gas reserves.

Future production and development costs to be incurred in producing and further developing the proved reserves are based on year end cost indicators. Future income taxes are computed by applying year end statutory tax rates.

The following chart shows standardized measures of discounted future net cash flows for the periods indicated:


	2014			2015			2016			2017			2018
	(in US$ thousands)
Future Cash inflows		251,695			1,461,565			1,106,849			1,436101			2,041,128
Future production costs		(72,857	)		(507,212	)		(285,608	)		(776,847	)		(1,446,949	)
Future development costs		(37,423	)		(368,873	)		(463,224	)		(221,557	)		(232,432	)
Future production and development costs		(110,280	)		(876,085	)		(748,832	)		(998,404	)		(1,679,381	)
Future income tax expenses		(37,264	)		(153,178	)		(105,615	)		(129,121	)		(106,715	)
Future Net cash flows		104,151			432,301			252,402			308,577			255,031
10% annual discount for estimates timing of cash flows		(29,483	)		(209,039	)		(115,028	)		(168,224	)		(115,518	)
Standardized measure of discounted Future Net Cash Flow s		74,668			223,262			137,374			140,353			139,514

(1)

For oil volumes, per barrel prices after deductions of Graña y Montero Petrolera S.A.’s share government royalties used in determining future cash inflows for the years ended December 31, 2014, 2015, 2016, 2017 and 2018 were US$77.33, US$45.59, US$38.54, US$49.82, and US$64.72, respectively. For gas volumes, gas price is linked to the oil price according to the gas purchase contract.

(2)	Production costs and developments costs relating to future production of proved reserves are based on the continuation of existing economic conditions. Future estimated decommissioning costs are included.

(3)	Taxation is computed using the appropriate year-end statutory corporate income tax rates.

(4)	Future net cash flows from oil production are discounted at 10% regardless of assessment of the risk associated with its production activities.

F.	Changes in Standardized Measure of Discounted Future Net Cash Flows

The following chart shows changes in standardized measures of discounted future net cash flows for the periods indicated:


	2014			2015			2016			2017			2018
	(in US$ thousands)
Standardized measure of discounted Future Net Cash Flows, beginning of the year.		97,474			74,668			223,262			137,374			140,353
Revenue less production and other costs		(75,490	)		(103,058	)		(75,202	)		(96,045	)		(127,974	)
Net changes in future development costs		11,497			(185,387	)		(53,464	)		94,388			(6,204	)
Changes in price, net of production costs		(53,214	)		(284,832	)		560			(109,168	)		(68,095	)
Development cost incurred		13,126			17,179			19,161			22,905			29,218
Revisions of previous quantity estimates		23,273			674,418			(54,052	)		27,456			72,852
Accretion of discount		16,836			67,666			55,438			70,152			99,822
Net change in income taxes		9,286			(53,715	)		21,327			(85	)		427
Timing difference and other		31,879			(16,330	)		(343	)		(6,623	)		(886	)
Standardized measure of discounted Future Net Cash Flows, end of the year		74,668			223,262			137,374			140,353			139,514

S-4

EXHIBIT INDEX


Exhibit Number		Description

1.01*		By-Laws of the Registrant, as currently in effect

2.01**		Registrant’s Form of American Depositary Receipt

2.02**		Deposit Agreement, dated as of December 31, 2018, among the Registrant, The Bank of New York Mellon, as depositary, and all owners and holders from time to time of American depositary shares issued thereunder

8.01		Subsidiaries of the Registrant

10.01***		Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.1***		Amendment No. 1, dated as of December 22, 2015, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.2***		Amendment No. 2, dated as of February 1, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.3***		Amendment No. 3, dated as of February 12, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.4***		Amendment No. 4, dated as of February 29, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.5***		Amendment No. 5, dated as of April 15, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.6***		Waiver and Amendment No. 6, dated as of September 15, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.7***		Amendment No. 7, dated as of December 16, 2016, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.8*** +		Amendment No. 8, dated as of June 27, 2017, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.01.9***		Amendment No. 9, dated as of October 12, 2017, to the Credit Agreement, dated as of December 10, 2015, by and among, inter alia, Graña y Montero, as borrower, and Credit Suisse AG, Cayman Islands Branch, as administrative agent.

10.02***		Loan Agreement, dated as of June 27, 2017, by and among, inter alia, Graña y Montero, as borrower, and Natixis, New York Branch, as administrative agent.

10.02.1***		Waiver and Amendment, dated as of March 26, 2018, to the Credit Agreement, dated as of June 27, 2017, by and among, inter alia, Graña y Montero, as borrower, and Natixis, New York Branch, as administrative agent.


Exhibit Number		Description

10.03***		English translation of Financial Stability Framework Agreement, dated as of July 31, 2017, by and among, inter alia, Graña y Montero, as borrower, and Scotiabank Perú 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., as lenders.

10.04***		English translation of Section 20 of Concession Agreement, dated as of July 22, 2014, by and among the Peruvian Ministry of Energy and Mines, as contracting authority and the concessionaire party thereto.

10.05***		English translation of Memorandum of Understanding, dated as of September 26, 2017, by and among Graña y Montero, Negocios de Gas S.A., Enagás S.A., Odebrecht S.A., and Inversiones en Infraestructura de Transporte por Ductos S.A.C.

10.05.1***		English translation of Rights Subordination Agreement, dated as of April 29, 2016, by and among Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., and Gasoducto Sur Peruano S.A.

10.05.1.1***		English translation of Addendum No. 1, dated as of June 24, 2016, to the Rights Subordination Agreement, dated as of April 29, 2016, by and among, inter alia, Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, GyM S.A., Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., Gasoducto Sur Peruano S.A., Odebrecht Perú Ingeniería y Construcción S.A.C., and Constructora Norberto Odebrecht S.A., Sucursal del Perú.

10.05.1.2***		English translation of Addendum No. 2 and Assignment Agreement, dated as of August 11, 2016, to the Rights Subordination Agreement, dated as of April 29, 2016, by and among, inter alia, Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, GyM S.A., Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., Gasoducto Sur Peruano S.A., Odebrecht Perú Ingeniería y Construcción S.A.C., and Constructora Norberto Odebrecht S.A., Sucursal del Perú.

10.05.1.3***		English translation of Modification to Addendum No. 2 and Assignment Agreement, dated as of October 25, 2016, to the Rights Subordination Agreement, dated as of April 29, 2016, by and among, inter alia, Odebrecht Latinvest Peru Ductos, S.A., Odebrecht S.A., Enagás, S.A., Graña y Montero, GyM S.A., Negocios de Gas S.A., Inversiones en Infraestructura de Transporte por Ductos S.A.C., Gasoducto Sur Peruano S.A., Odebrecht Perú Ingeniería y Construcción S.A.C., and Constructora Norberto Odebrecht S.A., Sucursal del Perú.

12.01		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

12.02		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

13.01****		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act

13.02****		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act

16.01***		Letter dated May 15, 2018 by Gaveglio, Aparicio y Asociados S.C. de R.L., a member firm of PricewaterhouseCoopers, as required by Item 16F of Form 20-F.

101. INS		XBRL Instance Document

101. SCH		XBRL Taxonomy Extension Schema Document

101. CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101. DEF		XBRL Taxonomy Extension Definition Linkbase Document

101. LAB		XBRL Taxonomy Extension Label Linkbase Document

101. PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Incorporated herein by reference to exhibit 1.01 of the Registrant’s Form 20-F (File No. 333-172855) filed with the SEC on April 30, 2014.

**	Incorporated herein by reference to exhibit 1 to the Registrant’s registration statement on Form F-6 (File No. 333-228727) filed with the SEC on December 10, 2018.

***	Incorporated herein by reference to the Registrant’s Form 20-F (File No. 333-172855) filed with the SEC on May 15, 2018.

****

+	Confidential treatment requested.