Empresas ICA, S.A.B. de C.V.
ICA CORP (Form: 20-F, Received: 05/17/2016 17:24:52)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

Commission file number: 001-11080

Empresas ICA, S.A.B. de C.V.

(Exact name of registrant as specified in its charter)

 

The ICA Corporation   United Mexican States
(Translation of registrant’s name into English)   (Jurisdiction of incorporation or organization)

Blvd. Manuel Avila Camacho 36

Col. Lomas de Chapultepec

Del. Miguel Hidalgo

11000 Mexico City

Mexico

(Address of principal executive offices)

Pablo Garcia Aguilar

Blvd. Manuel Avila Camacho 36

Col. Lomas de Chapultepec

Del. Miguel Hidalgo

11000 Mexico City

Mexico

(5255) 5272 9991 x 3653

pablo.garcia@ica.mx

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

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

 

Title of each class:   Name of each exchange on which registered

Ordinary Shares

Ordinary Participation Certificates, or CPOs, each

representing one Ordinary Share

American Depositary Shares, or ADSs, evidenced by

American Depositary Receipts, each representing four

CPOs

 

New York Stock Exchange, Inc.*

New York Stock Exchange, Inc.*

New York Stock Exchange, Inc.

 

* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be 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: N/A

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: 611,029,276 Ordinary Shares

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

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

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   þ     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     Yes   ¨     No   þ

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

Large accelerated filer   ¨                 Accelerated filer   þ                 Non-accelerated filer   ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP   ¨     IFRS   þ     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 by Rule 12b-2 of the Exchange Act).     Yes   ¨     No   þ

 

 

 


Table of Contents

TABLE OF CONTENTS

 

       Page  

Item 1. Identity of Directors, Senior Management and Advisors

     1   

Item 2. Offer Statistics and Expected Timetable

     1   

Item 3. Key Information

     1   

A. Selected Financial Data

     1   

B. Risk Factors

     4   

C. Forward-Looking Statements

     24   

Item 4. Information on the Company

     25   

A. History and Development of the Company

     25   

B. Business Overview

     30   

C. Organizational Structure

     55   

D. Property, Plant and Equipment

     55   

Item 4A. Unresolved Staff Comments

     55   

Item 5. Operating and Financial Review and Prospects

     55   

A. Operating Results

     57   

B. Liquidity and Capital Resources

     91   

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

     106   

D. Trend Information

     106   

E. Off-Balance Sheet Arrangements

     106   

F. Tabular Disclosure of Contractual Obligations

     106   

Item 6. Directors, Senior Management and Employees

     107   

A. Directors and Senior Management

     107   

B. Compensation

     111   

C. Board Practices

     112   

D. Employees

     114   

E. Share Ownership

     114   

Item 7. Major Shareholders and Related Party Transactions

     115   

A. Major Shareholders

     115   

B. Related Party Transactions

     116   

Item 8. Financial Information

     116   

A. Legal and Administrative Proceedings

     116   

B. Dividends

     128   

C. Significant Changes

     128   

Item 9. The Offer and Listing

     128   

A. Trading

     128   

Item 10. Additional Information

     131   

A. Memorandum and Articles of Incorporation

     131   

B. Material Contracts

     137   

C. Exchange Controls

     137   

D. Taxation

     137   

E. Documents On Display

     140   

Item 11 Quantitative and Qualitative Disclosures about Market Risk

     140   

Item 12. Description of Securities Other than Equity Securities

     142   

Item 13. Defaults, Dividend Arrearages and Delinquencies

     144   

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     145   

Item 15. Controls and Procedures

     145   

Item 16. [Reserved]

     148   

Item 16A. Audit Committee Financial Expert

     148   

Item 16B. Code of Ethics

     148   

Item 16C. Principal Accountant Fees and Services

     149   

Item 16D. Exemptions from the Listing Standards for Audit Committees

     149   

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     150   

Item 16F. Changes in Registrant’s Certifying Accountant

     150   

Item 16G. Corporate Governance

     150   

 

-i-


Table of Contents

TABLE OF CONTENTS

(continued)

 

       Page  

Item 16H. Mine Safety Disclosure

     154   

Item 17. Financial Statements

     155   

Item 18. Financial Statements

     155   

Item 19. Exhibits

     155   

 

-ii-


Table of Contents

PART I

Introduction

Empresas ICA, S.A.B. de C.V. is a corporation ( sociedad anonima bursatil de capital variable ) organized under the laws of the United Mexican States, or Mexico. Our principal executive offices are located at Blvd. Manuel Avila Camacho 36, Col. Lomas de Chapultepec, Del. Miguel Hidalgo, 11000, Mexico City, Mexico. Unless the context otherwise requires, the terms “us,” “we,” “our Company” and “ICA” as used in this annual report refer to Empresas ICA, S.A.B. de C.V. and its consolidated subsidiaries. The term “EMICA” as used in this annual report refers to Empresas ICA, S.A.B. de C.V. on a stand-alone basis. EMICA is a holding company that conducts all of its operations through subsidiaries that perform civil and industrial construction and engineering, engage in real estate, home development and operate infrastructure facilities, including airports, toll roads and water treatment systems. The references herein to segments or sectors are to combinations of various subsidiaries that have been grouped together for management or financial reporting purposes.

 

Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

Not applicable.

 

Item  3. Key Information

A. SELECTED FINANCIAL DATA

Our consolidated financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

We publish our consolidated financial statements in Mexican pesos. References in this annual report to “dollars,” “U.S.$” or “U.S. dollars” are to United States dollars. References to “Ps.” or “pesos” are to Mexican pesos. This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for your convenience. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 17.34 to U.S.$ 1.00, the exchange rate determined by reference to the free market exchange rate as reported by Banco de Mexico, or Banxico, as of December 31, 2015.

The term “billion” as used in this annual report means 1,000 million. Certain amounts in this annual report may not sum due to rounding.

Financial Data

The following table presents our selected consolidated financial information for or as of each of the periods or dates indicated, and has been derived in part from our audited consolidated financial statements. This information should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements, including the notes to our consolidated financial statements.

The consolidated financial statements of income and other comprehensive income for the years ended December 31, 2014, 2013, 2012 and 2011 have been adjusted to reflect the reclassification of the SPC Projects, which previously had been classified as discontinued operations, as a continuing operation reported in our Concessions segment. See Note 3.b to our consolidated financial statements.

 

1


Table of Contents
            As of and for the year ended December 31,  
         2015          2015      2014      2013      2012      2011  
    

(Millions of

U.S.

dollars) (1)

    

(Thousands of Mexican pesos, except share, per

share and per ADS data)

 

Comprehensive Income (Loss) Data:

           

Total revenues

     1,910         33,124,082         38,328,852         32,357,565         38,122,120         34,258,849   

Fair value upon initial recognition of real estate inventories (2)

     —           —           1,099,381         —           —           —     

Gross profit (loss) (3)

     (219      (3,797,520      9,290,947         7,954,233         4,923,899         5,281,040   

General expenses

     176         3,056,660         3,065,828         3,012,300         3,695,296         2,903,749   

Other expenses (income), net (4)

     (26      (458,241      180,908         (61,467      (449,973      (490,143

Operating income (loss)

     (369      (6,395,939      6,044,211         5,003,401         1,678,576         2,867,434   

Financing cost, net

     632         10,965,656         9,430,380         4,285,583         1,159,846         3,321,463   

Share in results of joint ventures and associated companies

     47         820,774         549,203         350,198         (409,051      (286,033

Income tax (benefit) expenses

     186         3,223,034         (751,077      (354,337      (34,792      (337,683

Income (loss) from continuing operations

     (1,140      (19,763,855      (2,085,890      1,422,353         962,573         169,687   

Income from discontinued operations, net

     0         0               566,658         1,577,402   

Consolidated net (loss) income for the year

     (1,140      (19,763,855      (2,085,890      1,422,353         1,529,231         1,747,089   

Total other comprehensive income (loss), net

     35         598,293         352,479         641,451         (709,832      636,483   

Total comprehensive (loss) income

     (1,105      (19,165,562      (1,733,411      2,063,804         819,399         2,383,572   

Consolidated net (loss) income attributable to controlling interest

     (1,178      (20,422,693      (3,023,539      423,554         955,038         1,437,135   

Consolidated net income attributable to noncontrolling interest

     38         658,838         937,649         998,799         574,193         309,954   

Basic and diluted (loss) earnings per share of controlling interest from continuing operations

     —           (33.284      (4.970      0.695         (0.640      (0.220

Basic and diluted earnings per share of controlling interest from discontinued operations

     —           —                 0.935         2.498   

Basic and diluted earnings per share of controlling interest from consolidated net (loss) income (5)

     —           (33.284      (4.970      0.695         1.575         2.275   

Basic and diluted earnings per ADS of controlling interest from consolidated net (loss) income (5)

     —           (133.13      (19.88      2.78         6.30         9.10   

Weighted average shares outstanding (000s):

           

Basic and diluted (5)

     —           613,595         608,392         609,690         606,233         631,588   

Statement of Financial Position Data:

           

Total assets

     6,245         108,294,910         117,882,728         101,012,230         98,269,924         90,548,366   

Long-term debt (6)

     1,916         33,226,192         56,534,865         38,357,802         36,161,067         26,727,486   

Capital stock

     486         8,421,563         8,478,845         8,407,532         8,370,958         8,334,043   

Additional paid-in capital

     421         7,296,739         7,296,739         7,140,502         7,043,377         7,091,318   

Total stockholders’ equity

     259         4,494,256         21,850,420         24,131,783         20,433,901         20,757,910   

Other Data:

           

Capital expenditures

     478         8,283,236         6,901,848         8,113,233         4,201,421         5,230,202   

Depreciation and amortization

     75         1,302,332         1,070,908         1,022,320         929,300         1,130,448   

 

2


Table of Contents

 

  (1) Except share, per share, and per ADS data. Amounts stated in U.S. dollars as of and for the year ended December 31, 2015 have been translated at a rate of Ps. 17.34 to U.S.$ 1.00 using the Banxico free market exchange rate on December 31, 2015.
  (2) Represents the adjustment to fair value for an acquisition by our subsidiary State Town Corp, S.A. of a property in Panama. See “Item 5. Operating and Financial Review and Prospects—Operating Results” and Note 10 to our consolidated financial statements.
  (3) Gross profit is calculated as the sum of construction revenues, concession revenues and sales of assets and other, less their respective costs, and does not include fair value upon recognition of real estate inventories.
  (4) For 2015, includes principally (i) Ps. 507 million in restructuring costs related to severance payments, (ii) Ps. 128 million from the deconsolidation of San Martin Contratistas Generales, S.A. or San Martin, which we ceased consolidating in October 2015 due to our loss of control over the entity, as a result of our decrease in shareholding from 51% to 31.2%, (iii) Ps. 112 million from the sale of Punta Condesa Group, (iv) Ps. 163 million of a gain resulting from an adjustment in the contingent consideration for the acquisition of Facchina, (v) Ps. 209 million gain from the sale of equity method investments; and (vi) profit related to the sale of property, plant and equipment for Ps. 228 million. For 2014, includes principally (i) Ps. 194 million for the additional payments made as part of the acquisition cost of San Martín Contratistas Generales, S.A., or San Martin, (ii) Ps. 17 million in loss on sales of shares mainly related to the Aguas Tratadas del Valle de Mexico consortium, or ATVM, and (iii) Ps. 10 million in gain on sales of property, plant and equipment. For 2013 includes principally, (i) Ps. 544 million for adjustments to contingent consideration for the acquisition of San Martin, (ii) Ps. 586 million in gain on sales of shares mainly related to Red de Carreteras de Occidente, S.A.B. de C.V., or RCO, and (iii) Ps. 12 million in gain on sales of property, plant and equipment. For 2012, includes principally (i) Ps. 436 million as a result of the revaluation of certain investment property, and (ii) Ps. 13 million in gain on sales of property, plant and equipment. For 2011, includes principally (i) Ps. 467 million in gain on sales of investments and (ii) Ps. 1 million in gain on sales of property, plant and equipment.
  (5) Basic earnings per share and per ADS are based on the weighted average number of shares outstanding during each period and are calculated assuming a ratio of four shares per ADS. Diluted earnings (loss) per share and per ADS are calculated by giving effect to all potentially dilutive common shares outstanding during the period. The dilutive effect of our potential ordinary shares does not have a material effect on our determination of earnings per share; thus, diluted earnings per share approximates basic earnings per share for the years ended December 31, 2015, 2014, 2013, 2012, and 2011.
  (6) Excluding current portion of long-term debt and is presented net of commissions.

 

3


Table of Contents

Exchange Rates

The following table sets forth, for the periods indicated, the high, low, average and period-end, free-market exchange rate between the peso and the U.S. dollar, expressed in pesos per U.S. dollar. The data provided in this table is based on noon buying rates published by the U.S. Federal Reserve Board in its H.10 Weekly Release of Foreign Exchange Rates. The average annual rates presented in the following table were calculated using the average of the exchange rates on the last day of each month during the relevant period. All amounts are stated in pesos. We make no representation that the Mexican peso amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all.

 

     Exchange Rate  

Year Ended December 31,

   High      Low      Period End      Average (1)  

2010

     13.19         12.16         12.38         12.62   

2011

     14.25         11.51         13.95         12.43   

2012

     14.37         12.63         12.96         13.15   

2013

     13.43         11.98         13.10         12.76   

2014

     14.79         13.94         14.75         14.52   

2015

     17.36         14.56         17.20         15.87   

October

     16.89         16.38         16.53         16.57   

November

     16.85         16.37         16.60         16.63   

December

     17.36         16.53         17.19         17.07   

2016:

           

January

     18.59         17.36         18.21         18.06   

February

     19.19         18.02         18.07         18.43   

March

     17.94         17.21         17.21         17.63   

April

     17.91         17.19         17.19         17.48   

May (through May 13)

     18.15         17.24         18.15         17.84   

 

  (1) Average of month-end rates or daily rates, as applicable.

Source : U.S. Federal Reserve Board.

In recent decades, the Mexican Central Bank has consistently made foreign currency available to Mexican private-sector entities (such as us) to meet their foreign currency obligations. Nevertheless, in the event of shortages of foreign currency, we cannot assure you that foreign currency would continue to be available to private-sector companies or that foreign currency needed by us to service foreign currency obligations or to import goods could be purchased in the open market without substantial additional cost.

Fluctuations in the exchange rate between the peso and the U.S. dollar will affect the U.S. dollar value of securities traded on the Mexican Stock Exchange ( Bolsa Mexicana de Valores ), and, as a result, will likely affect the market price of our American Depository Shares, or ADSs. Such fluctuations will also affect the U.S. dollar conversion by The Bank of New York, the depositary for our ADSs, of any cash dividends paid by us in pesos.

On May 13, 2016, the exchange rate was Ps. 18.21 per U.S.$1.00, according to the U.S. Federal Reserve Board. The above rates may differ from the actual rates used in the preparation of the financial statements and the other financial information appearing in this Form 20-F.

For a discussion of the effects of fluctuations in the exchange rates between the Mexican peso and the U.S. dollar, see “Item 10. Additional Information—Exchange Controls.”

B. RISK FACTORS

Risks Related to Our Operations

We have insufficient liquidity to pay or repay our debt and other obligations. If a restructuring of our debt is not successful, we may not be able to pay all or a portion of the principal or interest on our unsecured debt and our operations may be adversely affected.

In recent years, we have incurred substantial indebtedness to finance our Company’s growth and operations. As of December 31 2015, we had consolidated indebtedness to banks, financial institutions and other lenders of approximately Ps. 69,913 million. Currently, income from our projects does not generate sufficient liquidity to satisfy our outstanding debt and other payment obligations.

 

4


Table of Contents

As of December 2015, we have been in default on payments under our unsecured indebtedness, including our Senior Notes. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.” In December 2015, we announced that we would pursue a restructuring of our debt. We can make no assurances that a restructuring will be successful or that our projects in the future will satisfy our payment obligations.

On October 29, 2015, we announced our engagement of Rothschild Mexico as a financial advisor to advise us in evaluating debt restructuring alternatives to implement a long-term solution to our capital structure and debt service requirements.

In December 2015, we announced our engagement of FTI Consulting as a financial advisor to advise us in preparing a cost-cutting plan and restructuring plan, in conjunction with Rothschild Mexico.

During this time, Standard & Poor’s Investment Advisory Services, (“Standard & Poor’s”) has lowered our foreign and local currency corporate credit ratings to “D”, as well as the ratings on our senior unsecured notes due 2017, 2021, and 2024 with a negative outlook; additionally, Moody’s Investors Service (“Moody’s”) lowered our long-term corporate credit rating and the ratings on our existing notes to Caa3 with negative outlook. These negative credit ratings and downgrades have further restricted our sources for short-term financing, thereby impeding our ability to finance our operations. Furthermore, the negative publicity surrounding these recent downgrades has further adversely affected our ability to pay our providers.

If our current liquidity crisis continues, our ability to undertake important activities may be impaired, including:

 

   

our ability to adjust to rapidly changing market conditions, thus making us more vulnerable in the event the downturn in general economic conditions or our business continues;

 

   

our ability to maintain relationships with key suppliers;

 

   

our ability to participate in public bids;

 

   

our ability to enter into long-term contracts with customers;

 

   

our ability to undertake capital expenditures;

 

   

our ability to maintain a positive image to regulators, investors, lenders or credit rating agencies; or

 

   

our ability to maintain and improve our enterprise value.

We are in default under our indentures and other financial instruments, and our future is dependent upon our ability to restructure our debt and other financial instruments.

In order to preserve the cash necessary to continue our operations, we did not make a U.S.$31 million scheduled interest payment due November 30, 2015 on our U.S.$ 700 million in 8.875% senior notes due 2024, or (the “2024 Notes”). In 2016, we did not make a U.S.$6 million scheduled interest payment due January 25, 2016 on our U.S.$ 150 million of 8.375% senior notes due 2017, (the “2017 Notes”), and we did not make a U.S.$ 22 million scheduled interest payment due February 4, 2016 on our U.S.$ 500 million of 8.9% senior notes due 2021, (the “2021 Notes” and together with the 2017 Notes and the 2024 Notes the “Senior Notes”). Under the indentures governing the Senior Notes, the noteholders have the right to accelerate this debt, resulting in cross-defaults under certain other corporate debt of our Company starting in December 2015. As a result, certain creditors have foreclosed on the collateral securing our corporate debt or initiated other remedial actions against us.

Any restructuring is dependent upon third parties over whom we have no control. We cannot assure that these third parties will be willing to engage in negotiations with us, nor that any negotiations will completely restructure or reduce our debt obligations. Even if a restructuring is successful with third parties, we cannot assure that any agreements reached will not be overturned in Mexican courts.

 

5


Table of Contents

Our insufficient liquidity could severely impact our ability to continue as a going concern.

Our Company’s operations require liquidity. If we are unable to obtain and maintain sources of liquidity, we will not be able to complete our construction projects and, consequently, will not generate income under those projects or be able to pay our employees.

Our ability to continue as a going concern could also be affected by our overall inability to pay our debt and other payment obligations, such as taxes and secured credit arrangements.

Our consolidated financial statements have been prepared under the assumption that we will continue as a going concern. However, our independent auditors have stated in their most recent report that there is substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. If we are not successful in consummating a debt restructuring and in generating sufficient cash from operating activities to meet our financial obligations and to make essential capital expenditures, our inability to successfully restructure our debt would materially and adversely affect our financial condition and continuing operations and would likely cause us to seek bankruptcy court protection. If we are required to liquidate our operations, the holders of our debt and our shareholders will likely incur a significant loss.

If the debt restructuring negotiations with our creditors are not successful, we face a substantial risk of Mexican reorganization-related proceedings.

If we remain in default on our obligations, including our Senior Notes, some or all of our creditors will have the option of taking legal action against us, including starting an involuntary reorganization proceeding in Mexico. Further, we may choose to start a voluntary reorganization proceeding under either the Ley de Concursos Mercantiles (Mexican Bankruptcy Law) or the United States Bankruptcy Code. We cannot predict the duration of any such restructuring. A reorganization proceeding would likely result in significant changes to our existing obligations that could include the cancellation or rescheduling of all or part of those obligations. While any such proceeding is pending, our ability to operate or manage our business, to retain employees, to maintain existing or create new customer relationships, to continue to collect payments for our services or to obtain any type of funding or financing would likely be materially adversely affected.

We are dependent on third parties agreeing to renegotiate our debt and our ability to make agreements with them using the assets we currently have. If we are unable to do so, our liquidity will be insufficient and we will be forced to initiate reorganization proceedings in court.

Our current Mexican construction projects may be terminated by our clients if one of our construction subsidiaries is directly subject to a bankruptcy proceeding under the Ley de Concursos Mercantiles .

If we were declared bankrupt, our creditors would find it difficult to collect payment on our unsecured debt instruments.

If we were declared bankrupt by a Mexican court, or if we were subject to a reorganization proceeding in a Mexican court, our obligations under our debt securities would be dependent upon the outcome of the bankruptcy or reorganization proceeding. Payment, if any, of our unsecured debt obligations would occur at the same time as the claims of all of our unsecured creditors are satisfied, if and to the extent funds are sufficient. A substantial portion of our assets are pledged as collateral under guarantee agreements and the value of those assets may be insufficient to generate funds to repay our secured creditors. A Mexican court may order unsecured creditors to accept a significant reduction in repayment. There can be no assurance that our unsecured creditors would receive any meaningful recovery from a bankruptcy or reorganization proceeding.

 

6


Table of Contents

We may be unable to realize the value of our planned divestitures in time to repay our creditors or reach agreements with them and we may not receive the full expected value from them. Our restructuring program requires liquidity during the time that we are negotiating with our creditors.

We are currently prioritizing the continuation of ongoing projects. As a result, liquidity generated from our projects is applied primarily to satisfy financial and operating expenses directly related to those projects. Consequently, liquidity to carry out our restructuring program is dependent upon income from divestitures. These divestitures may not occur as planned or may be subject to pricing pressure. Either of these situations would adversely affect our creditors in either our ability to repay debt or our ability to renegotiate our debt. As of December 31, 2015, we have not classified any asset as held for sale.

We and our independent registered accounting firm have concluded that our internal control over financial reporting was not effective as of December 31, 2015. Investor confidence and the market price of our common shares may be adversely impacted if we are unable to maintain effective internal control over financial reporting.

As we are subject to reporting obligations under the U.S. federal securities laws, we are required by the U.S. Securities and Exchange Commission, or SEC, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, to include a report on our internal control over financial reporting in our annual reports on Form 20-F to disclose our management’s assessment of the effectiveness of our internal control over financial reporting.

In addition, our annual reports on Form 20-F shall include an independent registered public accounting firm’s attestation report on the effectiveness of our internal control over financial reporting.

In connection with the evaluation of our internal control over financial reporting as of December 31, 2015, our management identified material weaknesses in our internal control over: (i) a deficiency in our Company’s control activities, information and communication, and monitoring activities associated with the valuation of deferred tax assets related to net loss carry forwards, and (ii) deficiencies in our Company’s control activities, information and communication, and monitoring activities in our Civil Construction Segment.

These material weaknesses arose during the restructuring process of our Company and we are defining a remediation plan to be implemented promptly. To address these material weaknesses we have identified, we have added the task of preparing a risk analysis and action plan for these material weaknesses to the Audit Committee’s agenda.

The actions that we are taking are subject to ongoing management review. See “Item 15 —Controls and Procedures.” However, we cannot assure you that these remedial measures will be effective or complete, or that we will be able to implement such measures or any additional measures in a timely manner. After we implement these remedial measures, these material weaknesses identified in our internal control over financial reporting may not be successfully remedied.

 

7


Table of Contents

The covenants in our debt agreements could cause a reduction in our income from operations.

Some of our debt instruments have cross default provisions and restrictive covenants, including mandatory repayment obligations that require prepayment in the event of an asset sale or failure to maintain certain debt coverage ratios. If a mandatory payment is triggered, or any other covenant is breached in project-related debt, proceeds from our project-related debt may not be available to use in the operation of those projects. In 2015, certain creditors foreclosed on collateral securing our secured debt obligations, such as Deutsche Bank, which foreclosed on certain of our shares in GACN. We entered into remedial agreements with other lenders related to assets securing debt obligations such as shares in San Martin thereby decreasing our ability to generate income from this and other assets or investments.

We may not be able to make payments in U.S. Dollars. We have to pay interest and principal on our dollar-denominated debt with revenues generated in pesos or other currencies, as we do not generate sufficient revenue in U.S. Dollars from our operations.

The depreciation of the Mexican peso has negatively affected our ability to repay any debt we have in U.S. dollars. The peso depreciated from Ps. 14.7348 per U.S. dollar on December 31, 2014 to Ps. 17.3398 per dollar on December 31, 2015, and was 18.21 on May 13, 2016. Given that more than 69% of our income is paid in Mexican pesos, this depreciation trend and any further depreciation will additionally negatively affect our ability to make payments in U.S. dollars. Only our Facchina subsidiary generates a significant portion of its income in U.S. dollars, and our bonding and operating agreements significantly restrict our ability to use the cash from operations for any purpose other than that company’s operations.

Our business and our ability to continue operations are highly dependent on sales volume, which has been significantly reduced as a result of our financial situation.

We are highly dependent on the Mexican government for sales. Since announcing our restructuring we have not yet been awarded a significant contract by the Mexican government. Although the rate of awards is lower than in prior years across the industry, not receiving any project awards is not viable going forward. If we are not able to come to agreements with clients for additional works, or to qualify to bid on new projects, we will be unable to operate.

If we are subject to bankruptcy proceedings, it may result in the inability of holders of our shares and ADSs to recover any of their investments.

Our future is dependent on our ability to refinance or restructure our indebtedness successfully. If we fail to do so for any reason, we might not be able to continue as a going concern and could be forced to seek relief under applicable bankruptcy procedures, in which case our shares and ADSs may lose all or substantial amount of their value.

Our performance is tied to Mexican public sector spending on infrastructure facilities.

Our performance historically has been tied to Mexican public sector spending on infrastructure facilities and to our ability to bid successfully for such contracts. Mexican public sector spending, in turn, generally has been dependent on the state of the Mexican economy. A decrease in public sector spending as a result of a deterioration of the Mexican economy, changes in Mexican governmental policy, or for other reasons can have an adverse effect on our financial condition and results of operations. Beginning in the second half of 2008 and due to the impact of the credit crisis and turmoil in the global financial system, the rate of awards of infrastructure projects in Mexico was slower than contemplated under the National Infrastructure Program, although we did see an increase in contracting in 2010 and 2011 for our company. Federal elections were held in Mexico on July 2, 2012, Enrique Peña Nieto of the political party known as the Partido Revolucionario Institucional , or PRI, obtained a plurality of the vote and assumed office on December 1, 2012. In 2015, the PRI again won a plurality with its coalition parties in Congressional elections. Although the PRI won a plurality of the seats in the Mexican Congress, no party succeeded in securing a majority in either chamber of the Mexican Congress. The absence of a clear majority by a single party is likely to continue, at least until the Presidential and Congressional elections in 2018. In the period leading up to

 

8


Table of Contents

and following the change in presidential administration, the number of large public sector construction contracts the Mexican government offered for public bidding decreased. The rate of awards decreased in 2014 due to a decrease in public works spending in Mexico. In 2015 the rate of awards decreased due to both a decrease in public works spending in Mexico as well as the reputational and other consequences of our restructuring. We cannot provide any assurances that the rate of awards will not increase or decrease. Decreases in the number of available projects or delays in bidding for projects, including delays in payment for current projects, can also result from the federal, state or local administration reviewing the terms of project contracts granted by the previous administration or authorities pursuing different priorities than the previous administration or authority. Additionally, the Mexican government may face budget deficits that prohibit it from funding proposed and existing projects or that cause it to exercise its right to terminate our contracts with little or no prior notice. The decrease in the price of oil in 2015 negatively affected Mexico’s economy generally and its infrastructure spending in particular. Traditionally Mexico’s revenues have been highly dependent on oil revenues. With the drop in price and its effect on the Mexican Peso, Petroleos Mexicanos decreased its spending by 11.5% in February 2015, further producing decreases in infrastructure spending. We cannot provide any assurances that economic and political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition or results of operation. See “—Risks Related to Mexico and Other Markets in Which We Operate—Economic and political developments in Mexico could affect Mexican economic policy and adversely affect us.”

Our current accounts payable to our key providers and other providers may impair our ability to successfully complete our current projects or to bid at competitive prices for future projects.

Our accounts payable to our providers was Ps. 7,285 million at December 31, 2015. There are key products in the Mexican market that we generally need to source for all our projects, including cement and machinery. If our key providers or other local providers stop providing services for our current projects it may severely delay or impair our projects. If our failure to pay key providers results in their ceasing to provide goods and services, we would be forced to obtain these products from providers who may require guarantees or uncompetitive prices.

Competition from foreign and domestic construction companies may adversely affect our results of operations.

The market for construction services in Mexico is highly competitive. As a result of the integration of the Mexican economy into the global economy, we compete with foreign construction companies for most of the industrial and infrastructure projects on which we bid in Mexico and civil construction projects as well. We believe that competition from foreign companies has reduced and may continue to reduce the Mexican construction industry’s operating margins, including our own, as foreign competition has driven down pricing. Furthermore, our foreign competitors may have better access to capital and greater financial and other resources, which would give them a competitive advantage in bidding for such projects.

Foreign competition also allows sponsors such as government agencies for infrastructure construction and industrial construction projects to require contractors to provide construction on a “turnkey” basis, which increases our financial risks.

Our use of the percentage-of-completion method of accounting for construction contracts could result in a reduction of previously recorded profits.

Under our accounting policies, we measure and recognize a large portion of our revenues and profits under the percentage-of-completion accounting methodology for construction contracts. This methodology allows us to recognize revenues and profits ratably over the life of a construction contract, without regard to the likelihood, and 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, including under contracts like our construction contract for Line 12 of the Mexico City metro system. However, as our clients are under scrutiny related to their processes of project variation and controls, we reevaluated those projects where the recovery of amounts included in our progress toward completion was unlikely either in the near-term or at all and determined that we needed to reserve a significant portion of amounts owed to us related to costs and estimated earnings in excess of billings, thereby affecting our profits. Given the uncertainties associated with these types of contracts and inherent in the nature of our industry, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded profits in the future as well.

 

9


Table of Contents

Our future revenues will depend on our ability to finance and bid for infrastructure projects.

In recent years we have been increasingly required to contribute equity to and arrange financing for construction projects. We are currently undertaking various construction and infrastructure projects that involve significant funding commitments and minimum equity requirements. Our policy is not to bid for projects that have significant financing requirements without prior funding commitments from financial institutions. However, we cannot assure you that we will obtain financing on a timely basis or on favorable terms, particularly due to the continuing defaults on our indebtedness and the ongoing restructuring process. The financing requirements for public construction contracts may range from a term of months to the total construction period of the project, which may last several years. Providing financing for construction projects, however, increases our capital requirements and exposes us to the risk of loss of our investment in the project. In particular, uncertainty and tightening in the global credit markets, including developments related to the global economic crisis, may adversely affect our ability to obtain financing. Our inability to obtain financing for any of these projects could have a material adverse effect on our financial condition and results of operation. Additionally, EMICA (our parent company) had been increasingly been required to give parent guarantees as a form of credit enhancement for debt of our subsidiaries, as well as to accept take-out financing clauses (where the debtor commits to either incur or cause the project company to incur permanent or long-term indebtedness in order to refinance short-term project indebtedness) and clauses which, if invoked, typically require EMICA to pay additional amounts under a loan agreement as may be necessary to compensate a lender for any increase in costs to such lender as a result of a change in law, regulation or directive. Our ability to obtain financing through parent company guarantees may also be affected by our parent company’s defaults.

Global credit crises or unfavorable general economic and market conditions, including those that affect the Mexican economy may negatively affect our liquidity, business and results of operations, and may affect a portion of our client base, subcontractors and suppliers.

The effect of an economic crisis and related turmoil in the global financial system on the economies in which we operate, our clients, our subcontractors, our suppliers and us cannot be predicted. It could lead to reduced demand and lower prices for construction projects, air travel and our related businesses. The Mexican economy has suffered from a devaluation of the Peso versus the U.S. dollar during 2015, as well as a significant decrease in the price of oil, both of which have affected the Mexican financial markets. See “—Our performance is tied to Mexican public sector spending on infrastructure facilities.” In response to market conditions, clients may choose to make fewer capital expenditures, to otherwise slow their spending on or cancel our services, to delay payments (which may in turn cause us to pay our providers more slowly) or to seek contract terms more favorable to them. Furthermore, any financial difficulties suffered by our subcontractors or suppliers could increase our costs or adversely impact project schedules.

Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers. Credit rating agencies have also become more stringent in their debt rating requirements. Continued disruption of the credit markets could adversely affect our suppliers’, clients’ (particularly our private sector clients’) and our own borrowing capacities, which could, in turn, adversely affect the continuation and expansion of our projects because of contract cancellations or suspensions, project delays (as delays in our supply chain can in turn affect our deliverables) or payment delays or defaults by our clients, which could result in the need to foreclose on our rights to collateral. See “—We may have difficulty obtaining the letters of credit and performance bonds that we require in the normal course of our operations.” Our ability to expand our business would be limited if, in the future, we were unable to access or increase our existing credit facilities on favorable terms or at all. These disruptions could negatively affect our liquidity, business and results of operations.

Under our construction contracts, we are increasingly required to assume the risk of inflation, increases in the cost of raw materials and errors in contract specifications, which could jeopardize our profits and liquidity.

Historically, a majority of our construction business was conducted under unit price contracts, which contain an “escalation” clause that permits us to increase unit prices to reflect the impact of increases in the costs of labor,

 

10


Table of Contents

materials and certain other items due to inflation. These unit price contracts allow flexibility in adjusting the contract price to reflect work actually performed and the effects of inflation. However, our construction contracts, and construction contracts throughout the industry, have been increasingly fixed price or not-to-exceed contracts, under which we are committed to provide materials or services at fixed unit prices, including our two major raw material requirements—cement and steel. Fixed price and not-to-exceed contracts shift the risk of any increase in our unit cost over our unit bid price to us. See “Item 4. Information on our Company—Business Overview—Description of Business Segments—Construction—Contracting Practices.”

In the past we experienced significant losses due to risks assumed by us in fixed price and not-to-exceed contracts, and we may face similar difficulties in the future. For example, a number of our construction contracts specify fixed prices for various raw materials and other inputs necessary for the construction business, including steel, asphalt, cement, construction aggregates, fuels and various metal products. Increased prices of these materials can negatively affect our results if we are unable to transfer the risk to the client. Under the terms of many of our fixed price contracts, we have been required to bear the cost of the increases in the cost of raw materials from the time we entered into the contracts, which has adversely affected our results of operations and liquidity. While we may enter into long term contracts with certain providers of cement and steel for the life of some of our larger projects, we have generally relied on purchases from various suppliers. Prices for various steel products increased significantly between 2003 and 2008, we believe due in part to a decrease in production and global consumption because of the global financial crisis, but stabilized beginning in 2009, which continued through 2015. Despite a significant depreciation in the Mexican peso, steel prices have fluctuated between +/-5% mainly because of the low demand for steel in Mexico caused by a slower pace in the construction and infrastructure projects. Although we seek to negotiate for the recovery of the increase in the cost of raw materials in our contracts whenever possible, we cannot assure you that we will be successful in recovering any portion of these cost increases, which will negatively affect our operating margins.

We may also experience other construction and administrative cost overruns, including as a result of incorrect contract specifications that we are unable to pass on to the customer. We expect that, because of conditions attendant to financing arrangements, future concession-related, infrastructure and industrial construction contracts may not permit an adjustment of the contract price for additional work done due to incorrect project specifications and, as a result, our operating margins and liquidity would be negatively affected. Additionally given that our clients have increased regulation related to project variations, we may not be able to recover for these changes in our civil construction projects. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Construction—Civil Construction.”

Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future revenue or earnings.

Our backlog is not necessarily indicative of our future operating revenues or earnings related to the performance of the underlying work. Our backlog, which represents our expected revenues under signed contracts, is often subject to revision over time. We cannot guarantee that our backlog will be realized or profitable or that we will secure contracts equivalent in scope and duration to replace current backlog. Project cancellations, scope adjustments or deferrals may occur, from time to time, due to various factors including but not limited to commercial issues, regulatory requirements and adverse weather. Such developments could have a material adverse effect on our business and our profits. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Construction—Construction Backlog.”

Our participation in projects and other operations, particularly including our participation in joint ventures and affiliates, or acquisitions, outside Mexico involves greater and different risks than those typically faced in Mexican projects and could jeopardize our profits.

To date, our foreign projects and operations in Latin America and elsewhere have generated negative to mixed results. We have experienced significant losses on projects in Latin America and elsewhere in the past. There can be no assurance that our projects outside of Mexico will be successful, which would jeopardize profits.

 

11


Table of Contents

Our operations in markets outside of Mexico expose us to several risks, including risks from changes in foreign currency exchange rates, interest rates, inflation, governmental spending, social instability and other political, economic or social developments that may materially reduce our net income.

Our hedging contracts may not effectively protect us from financial market risks including exchange rate risk and may negatively affect our cash flow.

Our activities are exposed to various financial market risks (such as risks related to interest rates, exchange rates and prices). One strategy we use to attempt to minimize the potential negative effects of these risks on our financial performance is to enter into derivative financial instruments to hedge our exposure to such risks with respect to our recognized and forecasted transactions and our firm commitments.

We have entered into various types of hedges, including with respect to foreign currency exposure, and other trading derivative instruments for the terms of some of our credit facilities with the objective of reducing the uncertainties resulting from interest rate and exchange rate fluctuations. To date, our derivative financial instruments have had mixed results. Their marked-to-market valuation as of December 31, 2015 decreased our derivative liabilities by Ps.46 million and decreased our derivative assets by Ps. 937 million.

The contract amounts for our derivative financial instruments are generally based on our estimates of cash flows for a project as of the date we execute the derivative. As actual cash flows may differ from estimated cash flows, we cannot assure you that our derivative financial instruments will protect us from the adverse effects of financial market risks. See “—Risks Related to Mexico and Other Markets in Which We Operate—Appreciation or depreciation of the Mexican peso relative to the U.S. dollar, other currency fluctuations and foreign exchange controls could adversely affect our financial condition and results of operations.” The use of derivative financial instruments may also generate obligations for us to make additional cash payments, which would negatively affect our liquidity. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Derivative Financial Instruments.”

A substantial percentage of our cash and cash equivalents is held through less-than-wholly owned subsidiaries, or in reserves, that restrict our access to them.

As of December 31, 2015, we had total cash and cash equivalents of Ps. 9,289 million, of which Ps. 4,473 million was restricted, as compared to Ps. 3,513 million of restricted cash as of December 31, 2014. Restricted cash is presented as a separate line item in our statement of financial position. As of December 31, 2015, we held Ps. 5,058 million that represent 54% of our consolidated cash and cash equivalents (including restricted cash) through less-than-wholly owned subsidiaries (including 29% in the Airports segment, 10% in the Kantunil–Cancun toll road, 6% in Rio Verde-Ciudad Valles Highway and 5% in Acapulco Tunnel among others). Approximately Ps. 4,231 million, the remainder of our total cash and cash equivalents as of December 31, 2015, was held in our parent company EMICA or in other operating subsidiaries.

A portion of our cash and cash equivalents are held in reserves established to secure financings. These resources form part of our restricted cash, mentioned above, as presented in our statement of financial position. At December 31, 2015, Ps. 4,039 million, or 43%, of our cash and cash equivalents were held in reserves established to secure financings, including any related expenses, principally in connection with the following projects: the SPC Projects, the Acapulco Tunnel, the Kantunil–Cancun Toll Road, Rio Verde-Ciudad Valles Highway, the La Piedad bypass and the Palmillas-Apaseo El Grande Toll Road, all of which are restricted. The reserve requirements of such financings could also limit our access to liquid resources and limit our ability to decide when to use our cash and cash equivalents.

Additionally, some uses of cash and cash equivalents by certain of our less than wholly-owned subsidiaries require the consent of the other shareholders or partners, as applicable, of such subsidiary, such as Caisse de depot et placement du Quebec or (CDPQ) in the case of ICA OVT Constructora Meco S.A. in the case of the Domingo Diaz project in Panama, and Promotora del Desarrollo de America Latina, S.A. de C.V., in the case of Scenic Bypass project in Acapulco. While the cash held in these entities is not designated for a specific use or set aside as a compensating balance, the requirements for its use could limit our access to liquid resources or limit us from freely deciding when to use cash and cash equivalents outside of normal operations.

 

12


Table of Contents

A significant portion of our assets are pledged under financing arrangements.

Portions of our assets are pledged to a number of banks under credit arrangements, including: Credit Suisse AG, Cayman Islands Branch, Global Bank Corporation; Banco Inbursa, BBVA Bancomer Institución de Banca Multiple, Grupo Financiero BBVA Bancomer; Banco Mercantil de Norte, S.A. Grupo Financiero Banorter; Bancodel Bajo, S.A, Banco Nacional de Obras y Servicios Publicos, S.N.C; Bancolombia, S.A., Deutsche Bank AG, London Branch; Interamerican Credit Corporation and Sociedad Hipotecaria Federal. The assets we have pledged include collection rights under construction contracts, concessions, construction machinery and equipment, real property, dividend rights and shares of each of our financed concession projects. Notably among these, we have pledged, Autovia Necaxa-Tihuatlan, S.A. de C.V., (“Auneti”), our joint venture that operates the Nuevo Necaxa-Tihuatlan highway, our 50% interest in Los Portales, S.A., a real estate associate located in Peru, our interest in the El Realito project, our interest in the Agua Prieta project, our shares of Autopista Naucalpan Ecatepec, S.A. de C.V., (“ANESA”), the contractor for the Rio de los Remedios-Ecatepec toll highway project, as well as the collection rights of the Rio de Los Remedios-Ecatepec project and Palmillas-Apaseo El Grande toll road Apaseo El Grande Toll Road. In general, assets securing credit arrangements will remain pledged until the arrangement secured by these assets expire. As a result of these arrangements, our ability to dispose of pledged assets requires the consent of these banks and our ability to incur further debt (whether secured or unsecured) is limited. In 2015, Deutsche Bank foreclosed on certain of our shares in GACN and subsequently, during 2016, we have reached agreements with other secured parties regarding foreclosure on additional shares in GACN.

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

Historically, our clients have required us to obtain bonds to secure, among other things, bids, and performance, or to make advance payments. In recent years, however, our clients, including the Mexican Federal Electricity Commission ( Comision Federal de Electricidad ), the Mexican Ministry of Communication and Transportation, and Petroleos Mexicanos, or Pemex, and foreign clients, have increasingly required letters of credit and other forms of guarantees to secure such bids, to advance payments and to guarantee performance. As a result of our financial condition, we have found it difficult to obtain the performance bonds or letters of credit necessary to perform the large infrastructure projects in Mexico and abroad that historically have generated a substantial majority of our revenues. We cannot assure you that in the future we will not find it difficult to obtain performance bonds or letters of credit as lenders generally have reduced the credit they extend to us for bonding and our access to new sources of letters of credit and bonding for our construction projects is restricted as a result of our current defaults. Our ability to provide additional letters of credit and other forms of collateralized guarantees is limited, which may impact our ability to participate in projects in the future.

The nature of our engineering and construction business exposes us to potential liability claims and contract disputes, which may reduce our profits.

We engage in engineering and construction activities for large facilities where design, construction or systems failures can result in substantial injury or damage to third parties or our clients and result in reputational damage to us. We have been and may in the future be named as a defendant in legal proceedings where third parties or our clients may make a claim for damages or other remedies with respect to our projects or other matters. These claims generally arise in the normal course of our business. We are currently involved in litigation related to alleged defects in construction of Line 12 of the Mexico City metro system. See “Item 8. Financial Information—Legal and Administrative Proceedings—Line 12 of the Mexico City Metro.” When it is determined that we have a liability, we may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed our policy limits. In addition, even where insurance is maintained for such exposures, the policies have deductibles resulting in our assuming exposure for a layer of coverage with respect to any such claims. Any liability not covered by our insurance, in excess of our insurance limits or, if covered by insurance but subject to a high deductible, could result in a significant loss for us, which may reduce our profits and cash available for operations.

 

13


Table of Contents

We have increasingly been required to meet minimum equity requirements, financial ratios or more stringent experience requirements and obtain transaction ratings in order to bid on large public infrastructure projects, which could reduce our ability to bid for potential projects.

In recent years, we have increasingly been required to meet minimum equity requirements, certain financial ratios or more stringent experience requirements (particularly in international biddings) and obtain transaction ratings on our financial proposals from a recognized rating agency in order to bid on large public infrastructure projects. For example, Pemex, Mexico’s state-owned oil company, has increasingly required that companies that submit bids for certain of its public projects meet minimum equity requirements. Similarly, Mexico City’s government has increasingly required that companies submitting bids for its public works projects meet minimum financial ratios. The levels and types of ratios vary substantially. We cannot assure you that we will be able to comply with such during our restructuring or in the future. If we do not meet such requirements, it could impair our ability to bid for potential projects, which would have an adverse effect on our financial condition and results of operations.

We are subject to Mexico’s anti-corruption laws and the U.S. Foreign Corrupt Practices Act. Our failure to comply with these laws could result in penalties, which could harm our reputation and have an adverse effect on our business, results of operations and financial condition.

We are subject to Mexican and international anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, or the FCPA, which generally prohibits companies and anyone acting on their behalf from offering or making improper payments or providing benefits to government officials for the purpose of obtaining or keeping business. Transparency International, an international organization that reviews potential governmental and institutional corruption, has rated the construction industry and many of the countries in which we operate poorly in terms of corruption risk. As part of our construction business, we often bid for projects run by or related to government-owned enterprises or government ministries, departments and agencies, or require governmental authorizations to perform work. We are thus in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations.

We maintain policies and procedures that require our employees to comply with anti-corruption laws, including the FCPA, and our corporate standards of ethical conduct. However, we cannot ensure that these policies and procedures will always protect us from intentional, reckless or negligent acts committed by our employees or agents. If we are not in compliance with the FCPA and other applicable anti-corruption laws, we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, and results of operations. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or other governmental authorities, including Mexican authorities, could adversely impact our reputation, cause us to lose or become disqualified from bids, and lead to other adverse impacts on our business, financial condition and results of operations.

In 2015, the global infrastructure industry was subject to increasing anticorruption scrutiny, implicating some of the biggest companies in the industry.

Our business may evolve through foreign or domestic mergers, acquisitions or divestitures which may pose risks or challenges.

Our Board of Directors and management may from time to time engage in discussions regarding possible strategic transactions, including merger, acquisition or divestment transactions with third parties and other alternatives, for the purpose of strengthening our position or restructuring our company. However, there can be no assurance that we will be able to successfully identify, negotiate and complete any such strategic transactions. In addition, if we complete a strategic transaction, the implementation of such transaction will involve risks, including the risks that we will not realize the expected benefits of such transaction, that we may be required to incur non-recurring costs or other charges and that such transaction may result in a change in control. In addition, certain strategic transactions must be approved by our stockholders or Board of Directors, depending upon their materiality, and may require, among other things, approval from governmental agencies.

 

14


Table of Contents

The success of our strategic alliances depends on the satisfactory performance by our alliance partners of their joint venture obligations. The failure of our alliance partners to perform their joint venture obligations could impose on us additional financial and performance obligations that could result in reduced profits or, in some cases, significant losses for us with respect to the alliance.

We enter into various joint ventures, associations and other strategic alliances and collaborations as part of our engineering, procurement, construction and infrastructure businesses, including ICA Fluor, Los Portales, and Actica Sistemas S. de R.L. de C.V., or Actica, as well as project-specific joint ventures, including the Eastern Discharge Tunnel, On April 13, 2015, we entered into an agreement with the Caisse de dépôt et placement du Québec to sell a 49% stake in our subsidiary ICA Operadora de Vías Terrestres, S.A.P.I. de C.V. (“ICA OVT”), created on March 19, 2015, which owns the concessions for Consorcio del Mayab, S.A. de C.V., ICA San Luis, S.A. de C.V., Libramiento La Piedad, S.A. de C.V. and Túneles Concesionados de Acapulco, S.A. de C.V. The success of these and other joint ventures depends, in part, on the satisfactory performance by our joint venture partners of their joint venture obligations. If our joint venture partners fail to satisfactorily perform their joint venture obligations as a result of financial or other difficulties, the joint venture may be unable to adequately perform or deliver its contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture. We cannot assure you that our business partnerships or joint ventures will be successful in the future.

Our current financial constraints, our defaults on our debt instruments, including those related to certain of our joint ventures may cause us to divest of revenue generating businesses or deconsolidate them due to change of control provisions.

We cannot assure you that we will not be forced to decrease our holdings in our joint ventures or fully divest them. For example, our acquisition of San Martin required certain payments over time and our inability to make such payments when due resulted in the sale of our controlling interest in that company. We now own a non-controlling interest and may further decrease our holding due to our default on a loan guaranteed by our shares in this entity.

If we are unable to form teaming arrangements, our ability to compete for and win certain contracts may be negatively impacted.

In both the private and public sectors, either acting as a prime contractor, a subcontractor or as a member of a team, we may join with other firms to form a team to compete for a single contract, especially in projects located outside of Mexico, where we may seek local experience, or involving a more complex technical and/or financial structure. Because a team can offer stronger combined qualifications than a firm standing alone, these teaming arrangements can be important to the success of a particular contract bid process or proposal. The failure to maintain such relationships in certain markets, such as the government market, may impact our ability to win work.

We face risks related to project performance requirements and completion schedules, which could jeopardize our profits.

In certain instances, we have guaranteed completion of a project by a scheduled acceptance date or achievement of certain acceptance and performance testing levels. However, there is a risk that adherence to these guarantees may not be possible. Additionally, under certain Mexican laws, public officials may be held personally liable for decisions made in their professional capacities, and as a result officials who oversee our projects may not make decisions, such as executing change orders, required for progress of our projects. We are currently involved in litigation with the Mexico City government related to alleged defects in construction of Line 12 of the Mexico City metro system. See “Item 8. Financial Information—Legal and Administrative Proceedings—Line 12 of the Mexico City Metro.” The failure to meet any schedule or performance requirements for any reason could result in costs that exceed projected profit margins, including fixed-amount liquidated damages up to a certain percentage of the overall contract amount and/or guarantees for the entire contract amount. We cannot assure you that the financial penalties stemming from the failure to meet guaranteed acceptance dates or achievement of acceptance and performance testing levels would not have an adverse effect on our reputation, financial condition and results of operations.

 

15


Table of Contents

Our return on our investment in a concession project may not meet the originally estimated returns.

Our return on any investment in any concession (including highway, social infrastructure, tunnel or wastewater treatment concessions) is based on the duration of the concession and the amount of capital invested, in addition to the amount of usage revenues collected, debt service costs and other factors. For example, traffic volumes, and thus toll revenues, are affected by a number of factors including toll rates, the quality and proximity of alternative free roads, fuel prices, taxation, environmental regulations, consumer purchasing power and general economic conditions. The level of traffic on a given highway also is influenced heavily by its integration into other road networks. Usually concession and Public-Private Partnership, or PPP, contracts provide that the grantor of the contract shall deliver the right-of-way to the project land in accordance with the construction schedule. If the grantor fails to deliver such rights-of-way on time, we may incur additional investments and delays at the start of operations, and therefore we may need to seek the modification of the concession or PPP contract. We cannot assure you that we will reach an agreement as to the amendment of any such contracts or that the grantor will honor its obligations thereunder. Particularly for new projects in which we take on construction risk, overruns of budgeted costs may create a higher capital investment base than expected, and therefore a lower return on capital. Given these factors, we cannot assure you that our return on any investment in a concession will meet the estimates contemplated in the relevant concession or PPP contract.

Governments may terminate our concessions under various circumstances, some of which are beyond our control.

Our concessions are among our principal assets, and we would be unable to continue the operations of a particular concession without the concession right from the granting government. A concession may be revoked by a government for certain prescribed reasons pursuant to the particular title and the particular governing law, which may include failure to comply with development and/or maintenance programs, temporary or permanent halt in our operations, failure to pay damages resulting from our operations, exceeding our maximum authorized rates or failure to comply with any other material term of a concession.

In particular, the Mexican government may also terminate a concession at any time through reversion, if, in accordance with applicable Mexican law, it determines that it is in the public interest to do so. The Mexican government may also assume the operation of a concession in the event of war, public disturbance or threat to national security. In addition, in the case of a force majeure event, the Mexican government may require us to implement certain changes in our operations. In the event of a reversion of the public domain assets that are the subject of our concessions, the Mexican government under Mexican law is generally required to compensate us for the value of the concessions or added costs. Similarly, in the event of an assumption of our operations, other than in the event of war, the government is required to compensate us and any other affected parties for any resulting damages. Other governments often have similar provisions in their concession contracts and applicable law. 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 and lost profits.

Our failure to recover adequately on claims or change orders against project owners for payment could have a material adverse effect on us.

We may bring claims against project owners for additional costs that exceed the contract price or for amounts not included in the original contract price, including change orders. These types of claims occur due to matters such as owner-caused delays, increased unit prices or changes from the initial project scope that result, both directly and indirectly, in additional costs. Often, these claims can be the subject of lengthy arbitration, litigation or third-party expert proceedings, and it can be difficult to accurately predict when these claims will be fully resolved. 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. With respect to change orders in particular, we may agree on the scope of work to be completed with a client without agreeing on the price, and in this case we may be required to use a third-party expert to set the price for the change order. We do not have control over such third-party experts and they may make price determinations that are unfavorable to us. As of December 31, 2015, we had Ps. 6,672 million of allowance for doubtful accounts related to contract and trade receivables, including an allowance for doubtful accounts in the Civil Construction segment related to the Line 12 of the Mexico City metro system project, Barranca Larga in Oaxaca and Lazaro Cardenas Port Terminal in

 

16


Table of Contents

Michoacan,. See “Item 8. Financial Information—Legal and Administrative Proceedings—Line 12 of the Mexico City Metro.” A failure to promptly recover on these types of claims and change orders could have a material adverse effect on our liquidity and financial condition. As of December 31, 2015, we created reserves for doubtful accounts receivable in the amount of Ps.5,380 in the Civil Construction Segment related to Barranca Larga, Terminal de Contenedores and Corredor Norte, as related to certain claims and unbilled but executed works.

Our operational stability during the restructuring and potential growth in the future will require us to hire and retain qualified personnel. If we lose key members of our management team and are unable to attract other qualified personnel, our business could be adversely affected.

Over the past years, the demand for employees who engage in and are experienced in the services we perform has continued to grow as other competitors enter the market, and as a result of the structural legal reforms related to the oil and gas industry. Although we significantly reduced our overall workforce in 2015 and continue to do so in connection with asset sales and our cost reduction plan, our current projects and our continuing obligations require us to retain employees. Our successful restructuring is also dependent upon being able to attract and retain personnel, including engineers, corporate management and craft employees, who have the necessary and required experience and expertise. Competition for this kind of personnel is intense and our reputation in the marketplace related to the restructuring and the corresponding reduction in workforce may affect our ability to compete. Difficulty in attracting and retaining these personnel could reduce our capacity to perform adequately in present projects and to bid for new ones.

We maintain a workforce based upon current and anticipated workloads. If we do not receive future contract awards or if these awards are delayed, we may incur significant costs.

Our estimates of future performance depend on, among other matters, whether and when we will receive certain new contract awards. While our estimates are based upon our good faith judgment, these estimates can be unreliable and may frequently change based on newly available information. As of December 31, 2015, the number of employees in our workforce decreased by 9,188 employees as compared to December 31, 2014, based on decreased expectations for future projects in the near term, resulting in additional costs under Mexican labor law related to these reductions. In the case of large-scale domestic and international projects where timing is often uncertain, it is particularly difficult to predict whether and when we will receive a contract award. The uncertainty of contract award timing can present difficulties in matching our workforce size with our contract needs. If an expected contract award is delayed or not received or if as a result of the current restructuring we need to continue to reduce our workforce, Mexican labor law requirements could cause us to incur costs resulting from reductions in workforce or redundancy of facilities that would have the effect of reducing our profits.

Risks Related to Our Airport Operations

Our Airport segment’s operating income and net income are dependent on our subsidiary GACN, and GACN’s revenues are closely linked to passenger and cargo traffic volumes and the number of air traffic movements at its airports.

We operate 13 concessioned airports in Mexico through Grupo Aeroportuario del Centro Norte, S.A. de C.V. (“GACN”). As of December 31, 2015, we controlled shares representing approximately 37.5% of GACN’s capital stock. Our interest in GACN exposes us to risks associated with airport operations.

In 2015, GACN represented 14% of our consolidated revenues and 32% of our operating income. GACN’s airport concessions from the Mexican government are essential to GACN’s contribution to revenues and operating income. Any adverse effect on GACN would have an adverse effect on our operating results.

Historically, a substantial majority of GACN’s revenues have been derived from aeronautical services, and GACN’s principal source of aeronautical services revenues is passenger charges. Passenger charges are payable for each passenger (other than diplomats, infants, transfer and transit passengers) departing from the airport terminals we operate, collected by the airlines and paid to GACN. In 2015, 2014 and 2013, passenger charges represented 55.6%, 55.5%, and 54.2%, respectively, of GACN’s total revenues. GACN’s revenues are thus closely linked to

 

17


Table of Contents

passenger and cargo traffic volumes and the number of air traffic movements at its airports. These factors directly determine GACN’s revenues from aeronautical services and indirectly determine its revenues from non-aeronautical services. Passenger and cargo traffic volumes and air traffic movements depend in part on many factors beyond our control, including economic conditions in Mexico, the U.S. and the world, the political situation in Mexico and elsewhere in the world, high incidences of crime, particularly related to drug trafficking, throughout Mexico but especially in the northern cities, the attractiveness of GACN’s airports relative to that of other competing airports, fluctuations in petroleum prices (which can have a negative impact on traffic as a result of fuel surcharges or other measures adopted by airlines in response to increased fuel costs) and changes in regulatory policies applicable to the aviation industry. International conflicts and health epidemics, such as the Influenza A(H1N1) epidemic, and the Ebola crisis, Zika and Chikungunya, have negatively affected the frequency and pattern of air travel worldwide. The future occurrence or worsening of any of such developments going forward would adversely affect GACN’s business, and in turn, our business. Any decreases in passenger and cargo traffic volumes and the number of air traffic movements to or from our airports as a result of these factors could adversely affect GACN’s business, results of operations, prospects and financial condition, thereby negatively affecting our overall results.

Terrorist attacks have had a severe impact on the international air travel industry, and terrorist attacks and other international events have adversely affected GACN’s business and may do so in the future.

As with all airport operators, GACN is subject to the threat of terrorist attack. The terrorist attacks on the United States on September 11, 2001 had a severe adverse impact on the air travel industry, particularly on U.S. carriers and on carriers operating international service to and from the United States. Airline traffic in the United States fell precipitously after the attacks. GACN’s terminal passenger volumes declined 5.8% in 2002 as compared to 2001. Any future terrorist attacks involving one of GACN’s airports, whether or not involving aircraft, will likely adversely affect our business, results of operations, prospects and financial condition. Among other consequences, airport operations would be disrupted or suspended during the time necessary to conduct rescue operations, investigate the incident and repair or rebuild damaged or destroyed facilities, and our future insurance premiums would likely increase. In addition, GACN’s insurance policies do not cover all losses and liabilities resulting from terrorism. Any future terrorist attacks, whether or not involving aircraft, will likely adversely affect GACN’s business, results of operations, prospects and financial condition.

Because a substantial majority of GACN’s international flights involve travel to the U.S., it may be required to comply with security directives of the U.S. Federal Aviation Authority, in addition to the directives of Mexican aviation authorities. The International Civil Aviation Organization, an agency of the United Nations Organization, established security guidelines requiring checked baggage on all international commercial flights as of January 2006, and all domestic commercial flights as of July 2006, to undergo a comprehensive screening process for the detection of explosives; on May 1, 2014, the Mexican Bureau of Civil Aviation published similar guidelines. Security measures taken to comply with future security directives or in response to a terrorist attack or threat could reduce passenger capacity at GACN’s airports due to increased passenger screening and slower security checkpoints, as well as increase our operating costs, which would have an adverse effect on GACN’s business, results of operations, prospects and financial condition. Recent world events such as the terrorist attacks in Paris and Brussels and other attacks attributed to the Islamic State of Iraq and Syria or any other organization could lead to additional security measures taken by the FAA or the ICAO and could require GACN to incur additional costs to comply with these measures. Similarly, GACN’s airport operations and passenger volume could be negatively impacted by terrorist attacks on aircrafts, such as those which occurred with international airlines’ aircraft operating over Egypt and the Ukraine in 2015.

Other international events such as the conflicts in the Middle East and public health crises such as the Severe Acute Respiratory Syndrome, or SARS crisis and the Influenza A(H1N1) crisis, the Ebola crisis, Zika and Chikungunya have, in the past, negatively affected the frequency and pattern of air travel worldwide. Because GACN’s revenues are largely dependent on the level of passenger traffic in its airports, any general increase of hostilities relating to reprisals against terrorist organizations, further conflict in the Middle East, outbreaks of health epidemics such as SARS, Influenza A(H1N1) and, Ebola, Zika and Chikungunya,or other international events of general concern (and any related economic impact of such events) could result in decreased passenger traffic and increased costs to the air travel industry and, as a result, could cause a material adverse effect on GACN’s business, results of operations, prospects and financial condition.

 

18


Table of Contents

Variations in international fuel prices could directly or indirectly affect GACN’s business and results from operations.

Although international fuel prices, which represent a significant cost for airlines using GACN’s airports, have decreased in recent months, in the past, increased costs were among the factors leading to cancellations of routes, decreases in frequencies of flights, and in some cases even contributed to filings for bankruptcy by some airlines. Likewise, recent decreases in international fuel prices have led to budgetary cuts in Mexico, affecting economic growth and consumer spending. Any substantial variation in fuel prices could have an adverse effect on GACN’s results of operations and financial condition.

GACN provides a public service regulated by the Mexican government and its flexibility in managing its aeronautical activities is limited by the regulatory environment in which it operates.

GACN operates its airports under concessions, the terms of which are regulated by the Mexican government. As with most airports in other countries, GACN’s aeronautical fees charged to airlines and passengers are regulated. In 2015, 2014 and 2013, approximately 67.5%, 67.9% and 66.4%, respectively, of GACN’s total revenues were earned from aeronautical services, which are subject to price regulation under its maximum rates. These regulations may limit GACN’s flexibility in operating its aeronautical activities, which could have a material adverse effect on its business, results of operations, prospects or financial condition. In addition, several of the regulations applicable to GACN’s operations and that affect its profitability are authorized (as in the case of its master development programs) or established (as in the case of its maximum rates) by the Ministry of Communications and Transportation for five-year terms. We generally do not have the ability to unilaterally change GACN’s obligations (such as the investment obligations under its master development programs or the obligation under its concessions to provide a public service) or increase its maximum rates applicable under those regulations should passenger traffic or other assumptions on which the regulations were based change during the applicable term. In addition, this price regulation system may be amended in the future in a manner that would cause additional sources of GACN’s revenues to be regulated, which could limit GACN’s flexibility in setting prices for additional sources of revenues that are not currently subject to any restriction.

We cannot predict how the regulations governing our Airports segment will be applied.

Many of the laws, regulations and instruments that regulate our airport business were adopted or became effective in 1999, and there is only a limited history that would allow GACN to predict the impact of these legal requirements on GACN’s future operations. In addition, although Mexican law establishes ranges of sanctions that might be imposed should GACN fail to comply with the terms of one of its concessions, the Mexican Airport Law ( Ley de Aeropuertos ) and its regulations or other applicable law, we cannot predict the sanctions that are likely to be assessed for a given violation within these ranges. We may encounter difficulties in complying with these laws, regulations and instruments.

Although GACN’s master development programs and maximum rates through 2000 have been set, we cannot predict what GACN’s master development plan for 2021 and the following years will establish. When determining GACN’s maximum rates for the next five-year period (covering 2021 to 2025), the Ministry of Communications and Transportation may be subject to significant pressure from different entities (for example, the Mexican Federal Competition Commission (Comisión Federal de Competencia) and the carriers operating at GACN’s airports) to modify GACN’s maximum rates, which may reduce the profitability of our airport business. The laws and regulations governing our airport business, including the rate-setting process and the Mexican Airport Law, may change in the future or be applied or interpreted in a way that could have a material adverse effect on GACN’s business, results of operations, prospects and financial condition.

Additionally, the Ministry of Communications and Transportation has announced that it intends to establish a new, independent regulatory agency, the Federal Agency of Civil Aviation, that is expected to serve a role similar to that of the Mexican Bureau of Civil Aviation ( Dirección General de Aeronáutica Civil ) of establishing, coordinating, overseeing and controlling international and national air transportation, as well as overseeing the airports, complementary services and generally all activities related to civil aviation. We cannot predict whether or when this new agency will be organized, the scope of its authority, the actions that it will take in the future or the effect of any such actions on our business.

 

19


Table of Contents

The Mexican government could grant new concessions that compete with our airports and could have an adverse effect on our revenues.

The Mexican government could grant additional concessions to operate existing government managed airports or authorize the construction of new airports, which could compete directly with our airports. Any competition from other such airports could have a material adverse effect on GACN’s business and results of operations. Under certain circumstances, the grant of a concession for a new or existing airport must be made pursuant to a public bidding process. In the event that a competing concession is offered in a public bidding process, we may not participate in such process, or we may not be successful if we were to participate.

Our operations depend on certain key airline customers, and the loss of or suspension of operations of one or more of them could result in a loss of a significant amount of our revenues.

Of the total aeronautical revenues generated at GACN’s airports in 2015, Aerovias de Mexico, S.A. de C.V., or Aeromexico, and its affiliates accounted for 28.3%, VivaAerobus represented 16.3%, Interjet represented 17.5% and Volaris represented 12.1%.

None of GACN’s contracts with its airline customers obligate them to continue providing service from GACN’s airports and if any of GACN’s key customers reduced their use of GACN’s airports, competing airlines may not add flights to their schedules to replace any flights no longer handled by GACN’s principal airline customers. Our business and results of operations could be adversely affected if we do not continue to generate comparable portions of our revenue from our key customers.

In addition, Mexican law prohibits an international airline from transporting passengers from one Mexican location to another (unless the flight originated outside Mexico), which limits the number of airlines providing domestic service in Mexico. Accordingly, GACN expects to continue to generate a significant portion of its revenues from domestic travel from a limited number of airlines.

Due to increased competition, volatility in fuel prices and the general decrease in demand consequent to the global volatility in the financial and exchange markets and economic crisis, many airlines are operating in adverse conditions. Should fuel prices increase or in the event of other adverse economic developments one or more of GACN’s principal carriers could become insolvent, cancel routes, suspend operations or file for bankruptcy. All such events could have a material adverse effect on GACN’s results of operations.

The operations of GACN’s airports may be affected by the actions of third parties, which are beyond our control.

As is the case with most airports, the operation of GACN’s airports is largely dependent on the services of third parties, such as air traffic control authorities, airlines and providers of catering and baggage handling. GACN is also dependent upon the Mexican government or government entities for provision of services, such as electricity, supply of fuel to aircraft, air traffic control and immigration and customs services for international passengers. The disruption or stoppage of taxi or bus services at one or more of GACN’s airports could also adversely affect GACN’s operations. We are not responsible for and cannot control the services provided by these parties. Any disruption in, or adverse consequence resulting from, their services, including a work stoppage, financial difficulties or other similar event, may have a material adverse effect on the operation of GACN’s airports and on GACN’s results of operations.

Risks Related to Mexico and Other Markets in Which We Operate

Adverse economic conditions in Mexico may adversely affect our business, financial condition or results of operations.

A substantial portion of our operations is conducted in Mexico and is dependent upon the performance of the Mexican economy. As a result, our business, financial condition and results of operations may be affected by the general condition of the Mexican economy, over which we have no control. See “Item 4. Information on our

 

20


Table of Contents

Company—History and Development of our Company—Public Sector Spending and the Mexican Economy.” In the past, Mexico has experienced economic crises, caused by internal and external factors, characterized by exchange rate instability (including large devaluations), high inflation, high domestic interest rates, economic contraction, a reduction of international capital flows, a reduction of liquidity in the banking sector and high unemployment rates. We cannot assume that such conditions will not return or that such conditions will not have a material adverse effect on our business, financial condition or results of operations.

In 2008, GDP grew by approximately 1.8% and inflation reached 6.5%. Mexico entered into a recession beginning in the fourth quarter of 2008, and in 2009 GDP fell by approximately 6.5% and inflation was 3.6%. In 2010, GDP grew 5.5% and inflation reached 4.4%. In 2011, GDP grew by 3.9% and inflation declined to 3.8%. In 2012, GDP grew by 3.9% and inflation decreased to 3.6%. In 2013, GDP growth fell to 1.1% and inflation reached 3.97%. In 2014, GDP grew by 2.1% and inflation reached 4.0%. In 2015, GDP grew by 2.5% and inflation reached 2.13%.

Mexico also has, and is expected to continue to have, high real and nominal interest rates as compared to the United States. The annualized interest rates on 28-day Cetes averaged approximately, 3.7%, 3.0 % and 3.1% for 2013, 2014 and 2015 respectively. As of December 31, 2015, 55% of our debt is denominated in Mexican pesos, and we may continue to incur peso-denominated debt for our projects in Mexico for which the source of repayment of financing is in Mexican pesos. To the extent that we incur peso-denominated debt in the future, it could be at high interest rates compared to U.S. dollar-denominated debt.

If the Mexican economy experiences another recession, if inflation or interest rates increase significantly or if the Mexican economy is otherwise adversely impacted, our business, financial condition or results of operations could be materially and adversely affected.

Appreciation or depreciation of the Mexican peso relative to the U.S. dollar, other currency fluctuations and foreign exchange controls could adversely affect our financial condition and results of operations.

A substantial portion of our construction revenues and a substantial portion of our debt, including the Senior Notes are denominated in U.S. dollars, while the majority of our raw materials, a portion of our long-term indebtedness and a substantial portion of our purchases of machinery and day-to-day expenses, including employee compensation, are denominated in Mexican pesos. As a result, an appreciation of the Mexican peso relative to the U.S. dollar would decrease our dollar revenues when expressed in Mexican pesos. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods, due to the translation of the financial results of our foreign subsidiaries.

In 2015, there was a significant depreciation in the Mexican peso against the U.S. dollar, and the noon buying rate increased to Ps. 17.3398 on December 31, 2015, representing a depreciation of approximately 17.7% compared to December 31, 2014. The Mexican peso has since further depreciated, and the noon buying rate was Ps. 18.2105 per U.S.$1.00 on May 13, 2016. Fixed price and not-to-exceed contracts require us to bear the risk of fluctuation in the exchange rate between the Mexican peso and other currencies in which our contracts, such as financing agreements, are denominated or which we may use for purchases of supplies, machinery or raw materials, day-to-day expenses or other inputs. A severe devaluation or depreciation of the Mexican peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated indebtedness or obligations in other currencies. While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange control policies in the future. We cannot assure you that the Mexican Central Bank will maintain its current policy with respect to the peso. Currency fluctuations may have an adverse effect on our financial condition, results of operations and cash flows in future periods. Such effects include foreign exchange gains and losses on assets and liabilities denominated in U.S. dollars, fair value gains and losses on derivative financial instruments, and changes in interest income and interest expense. These effects can be more volatile than our operating performance and our cash flows from operations. See “—Risks Related to Our Operations—Our hedging contracts may not effectively protect us from financial market risks and may negatively affect our cash flow.”

 

21


Table of Contents

Economic and political developments in Mexico could affect Mexican economic policy and adversely affect us.

Mexican governmental actions concerning the economy and state-owned enterprises could have a significant effect on Mexican private sector entities in general, and us in particular, as well as on market conditions, prices and returns on Mexican securities, including our securities. In the past, economic and other reforms have not been enacted due to legislative gridlock. Because no single party obtained a clear majority in the 2015 congressional election, governmental gridlock and political uncertainty may continue.

In December 2013, reforms to the Mexican Income Tax Law were approved for fiscal year 2014, resulting in several changes, including the elimination of the Mexican business flat tax (Impuesto Empresarial a la Tasa Unica or IETU) and the consolidation regime. See “Item 5. Operating and Financial Review and Prospects—Tax.”

In July 2013, the Federal Law for the Prevention and Identification of Transactions with Proceeds of Illicit Origin was enacted as part of the Mexican government’s strategies to combat criminal organizations and activity, including money laundering.

The law incorporates recommendations by the Financial Action Task Force on the prevention of money laundering and terrorism financing. Effective November 2013, certain of our subsidiaries, including our subsidiary ICA Planeación y Financiamiento, S.A. de C.V., SOFOM E.N.R., or ICAPLAN, are subject to additional reporting and other procedural requirements to comply with the law and implementing regulations, in particular with regard to our operations related to intercompany loans, real estate sales, and real estate leasing.

Compliance with these regulations may be burdensome and could result in increased costs. Additionally, if as a result of the more stringent requirements under the new law we are associated with, or accused of being associated with, or become a party to, money laundering and/or terrorism financing, then our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement, any one of which could have a material adverse effect on our operating results, financial condition and prospects.

The timing and scope of modifications such as the above are unpredictable, which can adversely affect our ability to manage our tax or other planning and, as a result, negatively affect our business, financial condition and results of operation.

Security risks may negatively affect our business, specifically with regards to our user-number based projects located in regions with increased security risk.

We have projects located in regions with recently increased security risks that may affect the revenues of projects based on number of users, such as our toll road, tunnel and airport concessions.

Additionally, home sales in low-income housing depend substantially on purchasers’ access to credit through the Institution for Worker’s Housing ( Instituto del Fondo Nacional de la Vivienda para los Trabajadores , or Infonavit), a public funding agency. An increase in drug-related offenses and other crime has led to higher vacancy rates in housing developments in the northern border states of Mexico. As a result, it is possible that Infonavit may restrict grants or disbursements of housing credit in northern cities.

Developments in other countries could adversely affect the Mexican economy, our business, financial condition or results of operations and the market value of our securities.

The Mexican economy, the business, financial condition or results of operations of Mexican companies and the market value of securities of Mexican companies may be, to varying degrees, affected by economic, geopolitical and market conditions in other countries. Although economic conditions in other countries may differ significantly from economic conditions in Mexico, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of securities of Mexican issuers. In recent years, economic conditions in Mexico

 

22


Table of Contents

have become increasingly correlated with economic conditions in the United States as a result of NAFTA and increased economic activity between the two countries. In the second half of 2008, the prices of both Mexican debt and equity securities decreased substantially as a result of the prolonged decrease in the United States securities markets. This general correlation continued in 2011 and 2012. However, in the first quarter of 2013 the Mexican economy declined while the U.S. economy improved. For example, during 2014 and 2015 the U.S. securities market trended upward while the Mexican market oscillated at a stable rate. Nonetheless, adverse economic conditions in the United States, the termination of NAFTA or other related events or geopolitical events with global repercussions could have a material adverse effect on the Mexican economy. However, Mexico may not, and has not, uniformly benefited from the strengthening of the U.S. economy. The Mexican debt and equities markets also have been adversely affected by ongoing developments in the global credit markets. We cannot assure you that events in other emerging market countries, in the United States or elsewhere will not materially adversely affect our business, financial condition or results of operations.

Corporate disclosure in Mexico may differ from disclosure regularly published by or about issuers of securities in other countries, including the United States.

A principal objective of the securities laws of the United States, Mexico, and other countries is to promote full and fair disclosure of all material corporate information, including accounting information. However, there may be different or less publicly available information about issuers of securities in Mexico than is regularly made available by public companies in countries with highly developed capital markets, including the United States.

Risks Related to our Securities and our Major Shareholders

We have been notified by the New York Stock Exchange that the average trading price of our ADSs does not meet the New York Stock Exchange’s continued listing requirements.

The New York Stock Exchange requires a certain minimum average trading price over a thirty-day period. On January 8 2016, we were notified by the New York Stock Exchange that the average trading price of our ADSs did not meet the New York Stock Exchange’s continued listing requirements. We may not be able to comply with or remedy the average trading price in order to continue trading after the cure period for doing so expires. If we are unable to comply with the NYSE’s trading price requirements, the NYSE may suspend our ADSs from trading.

You may not be entitled to participate in future preemptive rights offerings.

In a public offering, pursuant to Article 53 of the Mexican Securities Market Law, we are not required to grant preemptive rights to any holders of our ADSs, Ordinary Participation Certificates, or CPOs, or shares. We are not required by law to undertake our capital increases using public offerings.

If we issue new shares for cash in a private offering, as part of a capital increase, we must grant our stockholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to purchase shares in these circumstances are known as preemptive rights. However, we are not legally required to grant holders of ADSs, CPOs or shares in the United States any preemptive rights in any future private offering.

To allow holders of ADSs in the United States to participate in a private preemptive rights offering, we would have to file a registration statement with the Securities and Exchange Commission or conduct an offering that qualified for an exemption from the registration requirements of the Securities Act of 1933, as amended. We cannot assure you that we would do so. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the Securities and Exchange Commission, as well as any other factors that we consider important to determine whether we will file such a registration statement. In addition, under current Mexican law, sales by the depository of preemptive rights and distribution of the proceeds from such sales to you, the ADS holders, is not possible.

 

23


Table of Contents

The significant share ownership of our management and members of our Board of Directors, coupled with their rights under the bylaws, may have an adverse effect on the future market price of our ADSs and shares.

As of December 31, 2015, the total beneficial shareholding of our directors and executive officers (including shares held in a management trust) was approximately 67,234,136 or 11.0%, of our outstanding shares. This total included shares beneficially owned by the Chairman of our Board of Directors, Bernardo Quintana Isaac, or his family, including Alonso Quintana (our former Chief Executive Officer, and a member of our Board of Directors), Diego Quintana (formerly responsible for investments in our industrial construction operations and all partnerships, former member of our Board of Directors and current Chairman of GACN’s Board of Directors), and Rodrigo Quintana (our General Counsel), comprising approximately 7.4% of our outstanding shares. Additionally, the management trust held 21,631,035 or 3.5%, of our outstanding shares (including 1.1% shares included in the total of beneficial ownership by the Quintana family). Another trust controlled by our management, the foundation trust, held 8,343,608 or 1.4%, of our shares. See “Item 6. Directors and Senior Management—Share Ownership,” “—Compensation—Management Bonuses” and “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.”

Actions by our management and Board of Directors with respect to the disposition of the shares and ADSs they beneficially own, or the perception that such action may occur, may adversely affect the trading price of the shares on the Mexican Stock Exchange or the ADSs on the New York Stock Exchange.

Holders of ADSs and CPOs are not entitled to vote.

Holders of ADSs and the underlying CPOs are not entitled to vote the shares underlying such ADSs or CPOs. Such voting rights are exercisable only by the CPO trustee, which is required to vote all such shares in the same manner as the holders of a majority of the shares that are not held in the CPO trust and that are voted at the relevant meeting. As a result, holders of ADSs or CPOs will not be entitled to exercise minority rights to protect their interests and are affected by decisions taken by significant holders of our shares that may have interests different from those of holders of ADSs and CPOs.

C. FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements. We may from time to time make forward-looking statements in our periodic reports to the Securities and Exchange Commission on Forms 20-F and 6-K, in our annual report to shareholders, in offering circulars and prospectuses, in press releases and other written materials, and in oral statements made by our officers, directors or employees to analysts, institutional investors, representatives of the media and others. This annual report contains forward-looking statements. Examples of such forward-looking statements include:

 

   

projections of operating revenues, net income (loss), earnings per share, capital expenditures, dividends, cash flow, capital structure or other financial items or ratios, taxes and projections related to our business and results of operation;

 

   

statements of our plans, objectives or goals, including those related to anticipated trends, competition, regulation, financing, key management personnel, restructuring, subsidiaries and subcontractors, government housing policy and rates;

 

   

statements about anticipated changes to our accounting policies;

 

   

statements about exchange controls and fluctuations in interest rates;

 

   

statements about our future performance or economic conditions in Mexico (including any depreciation or appreciation of the peso) or other countries in which we operate;

 

   

statements about anticipated political events in Mexico;

 

24


Table of Contents
   

statements about changes in Mexican federal government policies, legislation or regulation; and

 

   

statements of assumptions underlying such statements.

Words such as “believe,” “could,” “may,” “will,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors, some of which are discussed under “Risk Factors,” include cancellations of significant construction projects included in backlog, material changes in the performance or terms of our concessions, additional costs incurred in projects under construction, failure to comply with covenants contained in our debt agreements, developments in legal proceedings, unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms, changes to our liquidity, economic and political conditions and government policies in Mexico or elsewhere, changes in capital markets in general that may affect policies or attitudes towards lending to Mexico or Mexican companies, changes in inflation rates, exchange rates, regulatory developments, customer demand, competition and tax and other laws affecting ICA’s businesses. We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments.

 

Item 4. Information on the Company

A. HISTORY AND DEVELOPMENT OF THE COMPANY

We are a sociedad anonima bursatil de capital variable incorporated as Empresas ICA, S.A.B. de C.V. under the laws of Mexico. Our business began in 1947 with the incorporation of Ingenieros Civiles Asociados, S.A. de C.V., which provided construction services for infrastructure projects for the Mexican public sector. Our registered office is located at Blvd. Manuel Avila Camacho 36, Col. Lomas de Chapultepec, Del. Miguel Hidalgo, 11000 Mexico City, Mexico, telephone (52-55) 5272-9991.

We are an engineering, procurement and construction company, and a provider of construction services to both public and private-sector clients in Mexico and abroad. We are engaged in a full range of construction and related activities, involving the development and construction of infrastructure facilities, as well as industrial and urban construction. In addition, we are engaged in the construction, maintenance and operation of airports, highways, social infrastructure and tunnels and in the management and operation of water supply systems and solid waste disposal systems under concessions granted by governmental authorities.

Since 1947, we have expanded and diversified our construction and related businesses. In the past, our business strategy had been to strengthen and expand our core construction business, while diversifying our sources of revenue. We are active in every stage of the infrastructure development cycle, from engineering and financing to construction and operation. In 2016 we expect to focus on our construction activities in Mexico. Our construction business accounted for approximately 62% of revenues in 2015, 66% in 2014, 67% in 2013 and 80% in 2012.

We also expect to continue our planned asset sales. These planned asset sales may be of our entire interest in an asset or may involve sales of shares representing less than a controlling interest which would allow us to obtain value in the short term and retain control. This includes the securitization and subordination of our project debt and sale of minority stake in our assets.

Due to our current lack of liquidity, in December 2015 we suspended corporate debt payments and entered into a full operational and financial restructuring. As of December 31 2015, our restructuring was focused on cost reduction, including a reduction of our workforce. Our workforce of 22,116 total employees (of which 9,898 are administrative staff) as of December 31, 2015 represents a reduction of 9,188 total employees and 2,295 administrative staff employees, as compared to December 31, 2014. Our workforce of 18,069 total employees (of which 8,473 are administrative staff) as of April 30, 2016 represents a reduction of 14,647 total employees and 4,072 administrative staff employees as compared to April 30, 2014.

 

25


Table of Contents

Capital Spending

Our capital spending program is focused on the acquisition, upgrading and replacement of property, plant and equipment as well as investments in infrastructure concessions required for our projects.

The following table sets forth our capital spending for each year in the three-year period ended December 31, 2015. Capital spending in the following table includes amounts invested for property, plant and equipment as well as for acquisitions of real estate inventories, which are included in the Corporate and Other segment. Acquisitions of real estate inventories are included in operating activities in our consolidated statements of cash flows. Accordingly, the table below does not reflect capital expenditures as reported in our consolidated statements of cash flows. Capital spending in our Industrial Construction segment is not reflected in our consolidated capital spending, but is incorporated in our consolidated results through our share in results of joint ventures and associated companies.

 

     Year Ended December 31,  
     2015      2015      2014      2013  
    

(Millions of

U.S. dollars)

     (Millions of Mexican pesos)  

Civil Construction

   U.S.$  166         Ps. 2,877         Ps. 710         Ps. 487   

Industrial Construction

     5         85         52         —     

Airports

     32         558         436         489   

Concessions

     223         3,862         3,394         5,861   

Corporate and Other

     57         986         2,362         1,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Industrial Construction Eliminations

     (5      (85      (52      —     

Total

   U.S.$ 478         Ps. 8,283         Ps. 6,902         Ps. 8,113   

Aggregate capital spending increased 20% in 2015 as compared to 2014. The increase in aggregate capital spending in 2015 primarily reflected increased spending in our Construction and Concession segments. The increased spending in our Construction segment was primarily due to investments in machinery and equipment. Concession segment was primarily due to investments in Barranca Larga-Ventanilla Highway, Palmillas – Apaseo el Gande toll road and Acapulco Scenic Bypass. In our Airports segment the increase in spending primarily resulted from increased spending on improvements related to teminals, runways and aprons. The decreases in the Corporate and Other segment primarily resulted from the decrease in our real state business .

Our principal capital expenditures currently in progress include Ps. 3,862 million in investments in our Concessions segment. Most of our principal expenditures are in Mexico and funded through third party financings, including proceeds from our 2011, 2012 and 2014 notes offerings and our 2009 equity offering. Third party financing, other than our 2011, 2012 and 2014 senior notes offerings and 2009 equity offering, is typically structured through project finance vehicles and, to a lesser extent, through corporate term loan financing.

In 2012, ICA acquired the business of San Martin. As of December 31, 2014, we had a pending consideration payment of US $46.4 million, equivalent to Ps.683.7 million, which was scheduled to be paid as follows: (i) a payment of US $ 33.8 million in June 2015 and (ii) another payment for US $12.6 million in May 2016, in addition to the agreement to pay interest. The payment due in June 2015 was not fully paid, resulting in the total pending consideration amount becoming immediately due and payable. However, we negotiated with the counterparty to make a partial payment and extend the date for payment of the remaining payment. On October 19, 2015, our Company received formal notification of default and on October 22, 2015, settlement of the obligation was made through delivery by our Company of 19.98% of its shareholding in San Martin, thereby reducing our investment to 31.2%. Our Company also assigned to another shareholder legal rights over dividends on future results of San Martín up to US $3 million and a new shareholder agreement was signed, where the relevant operating and financing decisions of San Martin and the board integration are in favor of another shareholder.

As a result of the above, in October 2015, ICA lost control over the management and operation in San Martín and ceased consolidating the entity as of such date.

 

26


Table of Contents

On April 14, 2014, our subsidiary, ICATECH Corporation, acquired 100% of the equity of Facchina Construction Company, Inc. (“Facchina”), a U.S. medium-sized heavy construction firm that operates in the Washington D.C. metropolitan area and the southeast of Florida. The purchase price is payable over a five-year period and could range from our initial payment of U.S.$59.3 million to a total of U.S.$95 million if Facchina meets agreed EBITDA targets and other conditions established by us and Facchina. In 2015, we negotiated a U.S.$5.1 million reduction of initial payment amount , decreasing the intial payment to U.S.$54.2 million. As of December 31, 2015, the amount of contigent consideration is U.S.$18.4 million or Ps. 319.6 million. This acquisition is included in the Civil Construction segment

Divestitures

We have recently undertaken several divestments as part of a short-term strategy to reinvest capital in new projects and pay down certain indebtedness.

On September 3, 2015, we sold our shares of Grupo Punta Condesa, S. A. de C.V., a subsidiary of ViveICA, S. A. de C.V. The sale price was Ps. 500 million, of which Ps.150 million was collected on the date of signing the agreement, Ps. 150 million was collected within 90 calendar days following the date of the agreement and Ps. 200 million remains to be collected on July 3, 2016.

On December 17, 2015, our Company signed a sale and purchase agreement with CI Banco Institución de Banca Múltiple to sale its participation in Proactiva Medio Ambiente, S.A. de C.V. (“Proactiva”), representing 49% of the shares of Proactiva. The agreed price was Ps. 1,240 million, consisting of an initial payment of Ps. 992 million or 80% of the price, with the remaining Ps. 248 million, or 20% of the payment, deposited into a trust chosen by the buyer. Of this Ps. 248 million, 5% of the purchase price is allocated for possible indemnity payments to the buyer and 15% is allocated to payment of the remaining purchase price, subject to certain conditions being met and subject to adjustments under the contract.

In September 2015, our Company transferred its fiduciary rights in the real estate development Reserva Escondida, for Ps. 100 million.

In October 2015, our Company sold its 50% stake in Grupo Rodio Kronsa for an amount of Ps. 284 million.

On July 12, 2013, our subsidiary Aeroinvest, which held approximately 41.38% of the outstanding capital stock of GACN, sold approximately 17.25% of the capital stock, or 69 million shares, of GACN in an underwritten global public offering at a price of Ps. 40.00 per Series B share and U.S.$24.76 per ADS. The aggregate sale price was approximately Ps. 2,760 million. As a result, Aeroinvest directly retained 98,702,700 shares or 24.7% of the outstanding capital stock of GACN.

Subsequently, on December 17, 2014, Aeroinvest sold approximately 0.9% of its shares in GACN, or 3.5 million GACN shares at a price of Ps. 61.50 per Series B share and an aggregate sale price of Ps. 215 million.

In August 2015, Aeroinvest sold a total of 12,081,300 Series B Shares of GACN, or approximately 3.02% of Series B Shares of GACN outstanding of the Issuer, including the sale of 12,081,300 Series B Shares through a block trade on the Mexican Stock Exchange to a third party through Barclays Bank, PLC for a price of Ps. 83.5 per Series B Share.

On January 5, 2016, Aeroinvest merged into CONOISA, a wholly-owned subsidiary of EMICA, with CONOISA as the surviving entity. As a result of this internal merger, CONOISA assumed all of the rights and obligations of Aeroinvest, including with respect to Aeroinvest’s beneficial ownership of Series B Shares of GACN.

In January 2016, in connection with the termination of a financing transaction with Banco Santander Mexico S.A. (“Santander”), (i) on January 8, 2016, Santander sold an aggregate of 27,795,120 Series B Shares of GACN, or 6.9% of Series B Shares of GACN currently outstanding, at a price of Ps. 78.01 per Series B Share, which resulted in aggregate net proceeds of Ps. 2,168 million; and (ii) on January 15, 2016, Monex Casa de Bolsa, S.A. de C.V.,

 

27


Table of Contents

Monex Grupo Financiero, as pledge administrator under the financing transaction sold an aggregate of 2,550,475 Series B Shares of GACN, or 0.6% of Series B Shares of GACN currently outstanding, at a price of Ps. 77.37 per Series B Share, which resulted in an aggregate net proceeds of Ps. 197 million.

In a series of sales between January 29, 2016 and February 5, 2016, CONOISA sold an aggregate of 4,386,250 Series B Shares of GACN, or approximately 1.10% of Series B Shares of GACN outstanding at an average price of Ps. 84.05 per Series B Share.

On February 2, 2016, as a result of a foreclosure on Series B Shares of GACN pledged as collateral to Deutsche Securities, S.A. de C.V., Casa de Bolsa (“Deutsche Bank”) in connection with a loan to CONOISA (as successor in interest to Aeroinvest), Deutsche Bank sold an aggregate of 33,162,600 Series B shares of GACN or 8.29% of Series B Shares of GACN currently outstanding at a price of Ps. 78.51 per Series B Share.

Between March 10, 2016 and March 17, 2016, as a result of a foreclosure on Series B shares of GACN pledged to Value, S.A. de C.V., Casa de Bolsa (“Value”) in connection with a loan agreement between Value, ICA Planeación y Financiamiento, S.A. de C.V., S.O.F.O.M., E.N.R and CONOISA (as successor in interest to Aeroinvest), Value sold an aggregate of 6,814,578 Series B Shares of GACN or 1.70% of Series B Shares of GACN currently outstanding at an average price of Ps. 90.94 per Series B Share, released the pledge on 907,100 Series B Shares of GACN (the “Remaining Value Shares”), which were returned to CONOISA and terminated the financing transaction.

On March 18, 2016, CONOISA sold the Remaining Value Shares at a price of Ps. 92.12 per Series B Share. As of May 12, 2016, we owned, directly and indirectly, 14.32% of Series B Shares of GACN.

See Note 42 to our consolidated financial statements.

In August 2013, we completed the sale of our 18.7% stake in Red de Carreteras de Occidente, S.A.B. de C.V., or RCO, the concessionaire for approximately 760 kilometers of highways in Mexico, to funds managed by Goldman Sachs for approximately Ps. 5,073 million. The gain on the sale in this investment was Ps. 441 million.

In the fourth quarter of 2013, we completed the sale of our Ciudad Acuña water treatment plant to Suministros Termoelectronicos, S.A. de C.V. and Promotora ELJA, S.A. de C.V. for a purchase price of approximately Ps. 145 million. We will no longer operate and maintain this water treatment plant.

In December 2013 , we entered into an agreement with Promotora del Desarrollo de America Latina, S.A. de C.V., for the sale of our interest in the Atotonilco water treatment plant concession. In November 2014 we completed the sale of our interest in the Atotonilco water treatment plant concession for a purchase price of approximately Ps. 55 million.

In December 2013, we completed the sale of our interest in the Panamanian company Compania Insular Americana, S.A., a company created to perform the real estate development of previously existing fill-in rights from our prior Corredor Sur concession, to Ocean Reef Islands Inc. for a purchase price of Ps. 225 million.

On March 31, 2014, we completed the sale to Promotora del Desarrollo de America Latina, S.A. de C.V. of our interest in the concession for the Autovia Urbana Sur expressway for a purchase price of approximately Ps. 1,000 million. We will no longer operate and maintain this expressway. See Note 34 to our consolidated financial statements.

In January 2014, we announced that we had signed an agreement with CGL Management Group, LLC, or CGL, a subsidiary of the Hunt Corporation, to form a joint venture for managing and developing additional social infrastructure facilities in Mexico. Under the agreement, we would sell to CGL a 70% equity interest in the holding company of our two SPC contracts to provide future ongoing non-penitentiary services at the federal detention centers in Sonora and Guanajuato for a purchase price of approximately U.S.$ 116 million. As of December 31, 2013, the related assets and liabilities were classified as held for sale, valued at their fair value, in our consolidated statement of financial position. Their results of operations were classified as discontinued operations.

 

28


Table of Contents

Subsequently, on December 5, 2014, we and CGL announced that we had terminated the agreement due to the parties’ failure to obtain consent from the Mexican federal government for the transaction as proposed. However, as we actively sought sale of our investment, we continued to report discontinued operations in our consolidated financial statements as of and for the year ended December 31, 2014.

During 2015, after not receiving a formal offer to purchase, the administration of our Company decided to withdraw its intention to sell such assets. Consequently, at December 31, 2015, we reclassified the operations of the two SPC contracts to continuing operations for all years presented.

On April 13, 2015, we announced that we had signed an agreement with the Caisse de dépôt et placement du Québec (CDPQ) to form an entity focused on developing, operating, and acquiring non-rail road, highway and toll-road infrastructure assets in Mexico. Under the agreement, we sold to CDPQ a 49% interest in our subsidiary ICA OVT, which owns the toll road and highway concessions of our concessionaire subsidiaries Consorcio del Mayab, S.A. de C.V., ICA San Luis, S.A. de C.V., Libramiento La Piedad, S.A. de C.V. and Túneles Concesionados de Acapulco, S.A. de C.V., including the concessions for the Mayab Toll Road, the Rio Verde-Ciudad Valles Highway, the La Piedad Bypass and the Acapulco Tunnel. We hold a 51% stake in ICA OVT after the closing of the transaction. We continue to operate the highways owned by ICA OVT and are responsible for all operating and maintenance and major maintenance requirements for those highway concessions. In June 2015, our Company completed the sale of 49% of our stake in ICA OVT to CDPQ, who paid approximately Ps. 3,014 million for the participation in ICA OVT’s capital. The financial statements of ICA OVT continue to be incorporated in the consolidated financial statements, since we exercise control over the entity.

Public Sector Spending and the Mexican Economy

Our performance and results of operations historically have been tied to Mexican public sector spending on infrastructure and industrial facilities. Mexican public sector spending, in turn, has generally been dependent on the state of the Mexican economy and accordingly has varied significantly in the past. Mexico’s gross domestic product grew by 5.5% in 2010. In 2012 GDP grew by 3.9%, and in 2013, GDP grew by 1.1%. In 2014, GDP grew by 2.1%. In 2015, GDP grew by 2.5%. The average interest rates on 28-day Mexican treasury notes were 3.14% in 2015, 3.0% in 2014 and 3.7% in 2013. Inflation was 2.13% in 2015, 4.1% in 2014 and 3.9% in 2013.

According to the INEGI, GDP of the Mexican construction sector, in real terms as compared to the prior year, increased by 2.5% in 2015, increased by 1.9% in 2014 and decreased by 4.7% in 2013, and represented 7.1%, 7.3%, and 7.4% of Mexico’s total gross domestic product in those years, respectively. According to data published by the Mexican Ministry of Finance and Public Credit, the average annual budgetary investment in infrastructure was 7.2% of GDP during 2013, and 5.5% during the period between 2008 and 2012.

In June 2013, Mexican President Enrique Peña Nieto announced the National Development Plan for the period 2013 to 2018. The new program contemplated investments of approximately U.S.$ 415 billion, representing 5.7% of Mexico’s gross domestic product, in over 1,000 projects in the transportation, water management, energy and urban development sectors. The majority of the budget (approximately 64%) was expected to be allocated to the energy sector, and investment in highways was expected to represent approximately U.S.$ 17 billion, or 4.1% of the proposed new program. The program was expected to generate 3.9 million jobs and to contribute to Mexico’s economic development.

In December 2013, the Mexican government enacted constitutional amendments designed to reform Mexico’s energy industry in order to allow greater economic development. These reforms are expected to stimulate public and private investment in Mexico’s energy industry, including infrastructure development. We believe that we are well positioned to take advantage of these developments and the expected economic growth given our experience in construction and construction-related services in the Mexican energy industry.

On April 29, 2014, Mexican President Enrique Peña Nieto announced the National Infrastructure Plan for the period 2014 – 2018. The new program contemplated investments of approximately Ps. 7,750 billion (U.S.$593 billion) in: (i) transportation and communication; (ii) energy; (iii) hydraulic development; (iv) health facilities; (v) urban development and housing; and (vi) tourism development, an increase over the 2013 announcements.

 

29


Table of Contents

On January 30, 2015, the Mexican Ministry of Finance and Public Credit announced adjustments to the 2015 annual budget, reducing it by Ps. 124.3 billion, equivalent to 0.7% of Mexico’s GDP. The most affected government entities were PEMEX with a reduction of Ps. 62 billion and CFE with a reduction of Ps. 10 billion. The investment budget in infrastructure, was reduced by Ps. 18.1 billion, which included the cancellation of the Transpeninsular train and the suspension of the Mexico-Queretaro train. These adjustments are not expected to affect the project for the new international airport in Mexico City.

On March 20, 2015, at the closing of the 78th Mexican Banking Convention, Mexican President Enrique Peña Nieto announced that the 2016 budget would undergo a complete redesign. To that end he has instructed his Cabinet to analyze the budgets of various government agencies in order to find areas of opportunity.

On April 28, 2015, Banco de Mexico announced that they reported an operating surplus of Ps. 31,000 million in their audited financial statements for the year ended at December 31, 2014. As a result, its board decided, in compliance with the Banco de Mexico Law, to transfer this amount to the Mexican Federal Government.

On February 17, 2016 the Mexican Ministry of Finance and Public Credit announced adjustments to the 2016 annual budget, reducing it by Ps. 132.3 billion, or 0.7 of Mexico’s GDP. The entities most affected by this reduction in the annual budget were Pemex with a reduction of Ps. 100 billion and the Federal Government itself with a reduction of Ps. 32 billion. 40% of the Ps. 2016 annual budget reduction affects investment projects that have no immediate technical or legal feasibility. The 2016 annual budget protects projects such as the New Airport of Mexico City and the Train between Mexico and Toluca, which are a priority for the administration.

On April 4, 2016, a 175 billion budget cut was announced for the 2017 budget, affecting mainly the health, education and agriculture sectors. Among the priority programs of the government, a program of railway infrastructure of the SCT and three of the Comisión de Energía e Hidrocarburos will have reduced budgets for the year 2017.

B. BUSINESS OVERVIEW

For the years ended at December 31, 2015, 2014 and 2013, our results are presented with the following five business segments under IFRS:

 

   

Civil Construction,

 

   

Industrial Construction,

 

   

Concessions,

 

   

Airports, and

 

   

Corporate and Other.

Historically, substantially all of our construction services were performed in connection with projects developed and financed by third parties. However, the current industry trend is that governments and government agencies, including the Mexican government and Mexican state-owned enterprises, have significantly changed their spending practices on traditional infrastructure and industrial facilities and have sought, instead, to stimulate private investment in such facilities. Accordingly, we are increasingly required to participate in arranging the financing for the construction of infrastructure facilities and to invest equity or provide other financing for such projects. Competition has also increased due in part to the ability of many foreign competitors to obtain financing on more attractive terms. We have experienced an increase in demand (and expect to continue experiencing strong demand) for infrastructure projects in which we are required to obtain financing, especially in projects for the construction of highways, railroads, power plants, hydroelectric projects, prisons, water storage facilities and oil drilling platforms and refineries.

 

30


Table of Contents

Description of Business Segments

Construction

Our construction business in 2015 was divided into the Civil Construction and Industrial Construction segments. See “Item 4. Business Overview—Description of Business Segments—Construction—Civil Construction” and “—Industrial Construction.”

Contracting Practices

Historically, a majority of our construction business was conducted under unit price contracts, which contain an “escalation” clause that permits us to increase unit prices to reflect the impact of increases in the costs of labor, materials and certain other items due to inflation. Under this traditional form of contract, while a total price is quoted, the construction project is broken down into its various constituent elements, such as excavation volume, square footage of built-up area, footage of pipes to be laid, and a price per unit is established for each such element. Where the amount of work required to complete the contract (i.e., the amount of each constituent element) is greater than the amount quoted in the contract due to incorrect specifications or changes in specifications, we are entitled to an increase in the contract price on the basis of the quantity of each element actually performed, multiplied by its unit price. These unit price contracts allow flexibility in adjusting the contract price to reflect work actually performed and the effects of inflation.

In recent years, however, our construction contracts have been increasingly of the fixed price type or not to exceed type, which generally do not provide for adjustment of pricing except under certain circumstances for inflation or as a result of errors in the contract’s specifications, or mixed price contracts in which a portion of the contract is at fixed price and the rest at unit prices. Examples of mixed price projects in which we are currently involved include the Eastern Discharge Tunnel. Fixed price, not-to-exceed and mixed price contracts collectively accounted for approximately 46% of our Civil Construction backlog as of December 31, 2015, 58% of our Civil Construction backlog as of December 31, 2014 and 56% of our Civil Construction backlog as of December 31, 2013. Despite the decrease as a percentage of our backlog in 2015, we believe that fixed price contracts are more prevalent in the construction market and the contracts that we enter into in the future may reflect this shift to fixed price contracts. Additionally, we expect that, because of conditions attendant to financing arrangements, future concession-related, infrastructure and industrial construction contracts may restrict the adjustment of the contract price for additional work done due to incorrect contract specifications.

However, under Mexican law, traditional public works contracts provide for the price adjustment of certain components, regardless of whether the contract is fixed price or mixed price. Under a traditional public works mechanism, the counterparty pays us periodically (often monthly) as our work is certified over the term of the contract and we do not finance the project.

We earn a portion of our Civil Construction revenues under contracts whose prices are denominated in currencies other than Mexican pesos, substantially all of which are of the fixed price, mixed price or not-to-exceed type. Approximately 79% of our contract awards in 2015 (based on the contract amount) were foreign-currency denominated, including the Facchina’s contracts. Approximately 16% of our Civil Construction backlog as of December 31, 2015 was denominated in foreign currencies. Our foreign currency denominated contracts are denominated in U.S. dollars, Costa Rican colones, Peruvian Soles Colombian pesos and Guatemalan Quetzals.

Our policy requires that a committee review and approve all construction projects and concessions with construction components expected to generate material revenues. The committee supervises our decisions to bid on new construction projects based upon a number of criteria, including the availability of multilateral financing for potential projects, the availability of rights of way, the adequacy of project specifications, the customer’s financial condition and the political stability of the host country, if the project is outside of Mexico.

We obtain new contracts for new projects either through a process of competitive bidding or through negotiation. Generally, the Mexican Federal Public Administration and its agencies may only award construction contracts through a public bidding process conducted in accordance with the Public Works and Related Services

 

31


Table of Contents

Law (Ley de Obras Publicas y Servicios Relacionados con las Mismas) . However, public sector construction contracts may be awarded without a public bidding process under limited circumstances, such as: (i) in response to certain emergencies, including those relating to public health and safety as well as environmental disasters; (ii) when the project to be executed will be performed exclusively for military purposes or if the bidding process could jeopardize national security; (iii) when a publicly-bid contract has been rescinded due to breach by the winning contractor; (iv) when a public bidding process is declared void due to a lack of offers that comply with the bidding guidelines or prices or inputs are unacceptable, provided that the conditions of contracting are the same as those originally published; or (v) when there is a proven strategic alliance between the government and the contractor in order to promote technological innovation in projects. The majority of the contracts for new projects awarded to us from Mexican public-sector clients are awarded through competitive bidding. Most contracts for new projects awarded to us by private sector and foreign government clients are also the result of a bidding process.

The competitive bidding process poses two basic risks: we may bid too high and lose the bid or bid too low and adversely affect our gross margins. The volume of work generally available in the market at the time of the bid, the size of our backlog at that time, the number and financial strength of potential bidders, whether the project requires the contractor to contribute equity or extend financing to the project, the availability of equipment and the complexity of the project under bid are all factors that may affect the competitiveness of a particular bidding process. Direct negotiation (as opposed to competitive bidding) generally tends to represent a more certain method of obtaining contracts and to result in better gross margins.

In addition to construction contracts for new projects, increases in the scope of work to be performed in connection with existing projects are an important source of revenue for us. In 2015, increases in scope of work accounted for Ps. 8,734 million in our total construction backlog. Construction contracts for such work are not typically put up for bid, but are negotiated by the client with the existing contractor.

In determining whether to bid for a project, we take into account (apart from the cost, including the cost of financing, and potential profit) efficient usage of machinery, the relative ease or difficulty of obtaining financing, geographic location, project-specific risks, current and projected backlog of work to be performed, our particular areas of expertise and our relationship with the client.

As is customary in the construction business, from time to time we employ sub-contractors for particular projects, such as specialists in electrical, hydraulic and electromechanical installations. We are not dependent upon any particular sub-contractor or group of sub-contractors.

Backlog

Backlog in the engineering and construction industry is a measure of the amount of revenue that we expect to realize from future work under long-term contracts at a particular reporting period. These estimates include revenues that we reasonably expect to realize from contracted work not yet completed at the beginning of the period, new contracts, firm orders, work scope modifications authorized by our clients, change orders authorized by our clients under conditions specified in the original contract and certain documented claims and termination or redemption fees presented to our clients. Backlog does not reflect operating margins earned from contract completion.

Backlog for each reporting period is calculated based on backlog from the prior reporting period, to which we (i) add estimated revenue from future uncompleted contracts, firm orders and other expected income streams and (ii) deduct revenue from contracts that have been canceled or fully completed during the reporting period. For each reporting period, we determine on a contract-by-contract basis as of the date of determination, the fair value of consideration billed or to be billed representing goods delivered and services to be delivered or performed over the course of the contract. Pursuant to the “percentage of completion” methodology, the contract amount for these purposes is estimated based on costs to be incurred through the end of the project and the estimated profit margin therein in accordance with IAS 11 “Construction Contracts.” Actual revenues earned from the contract during the reporting period are also determined based on the percentage-of-completion method. See Note 4(cc) to our consolidated financial statements.

 

32


Table of Contents

Consolidated backlog includes contracts pursuant to which we control a project, such as when we hold a controlling interest, a leadership role and decision-making power regarding key project areas. Through September 2015, we consolidated the backlog of San Martin, both its civil construction backlog and its mining services backlog but commencing in October 2015, we deconsolidated both revenue and backlog. See Note 2 c to our consolidated financial statements. For internal reporting purposes, we group our mining services business within our Civil Construction segment due to the similarity between our mining services and certain services provided by our traditional construction business, which leads us to review and manage our mining activities within the scope of our Civil Construction segment’s performance metrics.

The following table sets forth, at the dates indicated, our backlog of Civil Construction, mining services and other services contracts. See Note 8 to our consolidated financial statements.

 

    Civil Construction     Mining Services     Other Services  
    (Millions of Mexican pesos)  

Backlog at December 31, 2013

    Ps. 30,658        Ps. 4,949        Ps. 751   

New contracts in 2014

    22,437        2,886        —     

Changes and adjustments in 2014 (1)

    6,449        (228     31   

Less: Construction revenue earned in 2014

    22,587        2,836        444   
 

 

 

   

 

 

   

 

 

 

Backlog as of December 31, 2014

    Ps. 36,957        Ps. 4,770        Ps. 337   

New contracts in 2015

    5,595        2,170        —     

Changes and adjustments in 2015 (1)

    8,030        (4,937     228   

Less: Construction revenue earned in 2014

    18,201        2,003        474   
 

 

 

   

 

 

   

 

 

 

Backlog as of December 31, 2015

    Ps. 32,380        Ps. 0        Ps. 91   

 

  (1) Adjustments include change orders and additional work.

Total Civil Construction contract awards and net additions to existing contracts totaled Ps. 13,624 million (approximately U.S.$786 million) in 2015. Ten projects represented approximately 75% of backlog in the Civil Construction segment, and 86% of total consolidated backlog, each at December 31, 2015. The following table sets forth certain information relating to these ten projects:

 

     Amount      Estimated Completion Date      % of Total
Civil Construction

Backlog
   

 

     (Millions of Mexican pesos)                    

Civil Construction Backlog

          

Monterrey VI Aqueduct

     4,688        
 
 
36 months after
commencement of
construction
  
  
  
     14  

Santa Maria Dam, Sinaloa

     4,125         Third quarter of 2018         13  

Facchina Contracts Construction, USA

     3,612         —           11  

Palmillas – Apaseo EL Grande Toll Road

     3,398         Fourth quarter of 2016         10  

Mitla – Tehuantepec Highway

     2,822         Fourth quarter of 2016         9  

Mexico – Toluca Suburban Train

     2,397         Fourth quarter of 2017         7  

Eastern Discharge Tunnel

     2,196         Fourth quarter of 2018         7  

Churubusco Water Tunnel

     2,219         Fourth quarter of 2017         7  

Package Highways Sonora State

     1,392         Second quarter of 2019         4  

Guatemala Penitentiary

     1,226         Second quarter of 2016         4  

 

33


Table of Contents

As of December 31, 2015, approximately 16% of Civil Construction backlog was attributable to construction projects outside of Mexico. Public sector projects represented approximately 81% of our total Civil Construction backlog. At December 31, 2015, construction contracts with a value exceeding U.S.$200 million accounted for 38% of our total Civil Construction backlog, construction contracts with a value ranging from U.S.$100 million to U.S.$200 million accounted for 40% of our Civil Construction backlog and construction contracts with a value of less than U.S.$100 million accounted for 21% of our total Civil Construction backlog. Of these ten projects, the Mitla-Tehuantepec Highway had changes to margins, which decreased by 1.2% in 2015 compared to 2014, Facchina’s Projects decreased in 2.9%, the Palmillas – Apaseo El Grande Highway decreased by 1.1%, Tunel Emisor Oriente decreased by 2.4%, Churubusco Xochiaca Tunnel decreased by 0.3% and the Sonora Package Highways in Sonora State decreased by 0.9% .

In the case of joint ventures in which we share control, as well as associated companies, we include in unconsolidated backlog a share of expected contract revenues that corresponds to our percentage interest in the joint venture or associated company.

The following table sets forth, at the dates indicated, our unconsolidated backlog of joint venture and associated company contracts.

 

     As of December 31,  
     2015      2015      2014      2013  
    

(Millions of

U.S. dollars)

     (Millions of Mexican pesos)  

Joint Venture and Associated Company Backlog

   U.S. $  1,855         Ps. 32,163         Ps. 43,921         Ps. 10,864   

In 2015, Civil Construction backlog included the maintenance of approximately 990 kilometers of oil pipelines in southern Colombia for Ps. 1,937 million, the construction of the Acapulco Scenic Bypass in Acapulco Guerrero for Ps. 1,051 million and Facchina’s joint ventures for Ps. 464 million. We also incorporated backlog from San Martin’s joint ventures of Ps. 5,938 million.

Joint venture and associated company backlog increased 51% from 2015 over 2014 principally due to the incorporation of San Martin’s backlog related to mining and construction, which as of December 31, 2015 were Ps. 5,938 million, and the incorporation of a Ps. 17,616 million agreement related to ICA Fluor on the Tula 4a Package, Joint venture and associated company backlog increased 95% from 2014 over 2013 principally due to new contracts of ICA Fluor (of which we own a 51% share), including Ps. 18,339 million from the Tula Refinery Phase II, Ps. 9,379 million from the Ramones II Sur Gas Pipeline and Ps. 3,549 million from the well pad modules for Shell Canada, as well as net contract additions. See “Item 4. Information on our Company—Business Overview—Description of Business Segments—Construction—Civil and Industrial Construction”.

The amount of backlog is not necessarily indicative of our future revenues related to the performance of such work. Although backlog represents only business that is considered to be firm, we cannot assure you that cancellations or scope adjustments will not occur. In 2015, cancellations and scope adjustments did occur with respect to the TEC II and Monterrey VI contracts. However, margin trends are primarily influenced by the mix of projects in backlog, competition on awarded contracts, overall industry trends, force majeure, and delay in delivery of or obtaining rights-of-way, change orders and alleged breaches of contract, many of which are difficult to predict. In the period leading up to and following the change in presidential administration, the number of large public sector construction contracts the Mexican government offered for public bidding decreased. We experienced a significant decrease in the rate of awards in 2013 due to the change of administration as well as the administration’s initial focus on structural reforms, rather than a focus on its infrastructure projects. We have continued to experience a slowdown in contract awards through the first quarter of 2016. We can make no assurances that the rate of awards will increase.

 

34


Table of Contents

In certain instances, we have guaranteed completion by a scheduled acceptance date or achievement of certain acceptance and performance testing levels. Failure to meet any such schedule or performance requirements could result in costs that exceed projected profit margins, including substantial penalties fixed as a percentage of a contract price. Fixed price, not-to-exceed and mixed price contracts collectively accounted for approximately 46% of our Civil Construction backlog as of December 31, 2015. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Backlog.”

Competition

The main competitive factors in our Civil Construction segment, in addition to price, are performance and the ability to provide the engineering, planning, financing and management skills necessary to complete a project in a timely fashion.

The market for construction services in Mexico and elsewhere is highly competitive. In the Civil Construction segment, competition is relatively more intense for infrastructure and industrial construction projects outside Mexico.

In our Civil Construction segment, in addition to the Mexican companies, we compete primarily with Spanish and Brazilian companies. Major competitors include IDEAL and Carso Infraestructura y Construcciones, S.A. de C.V., both related parties of Grupo Carso, Omega Construcciones Industriales, S.A. de C.V., GIA+A, S.A. de C.V., Tradeco Infraestructura, S.A. de C.V., La Peninsular Compañia Constructora S.A. de C.V. (a member of Grupo Hermes), COCONAL, S.A. de C.V., Promotora y Desarrolladora Mexicana, S.A. de C.V., Azvi-Cointer de Mexico, S.A. de C.V., Fomento de Construcciones y Contratas, S.A., or FCC, ACS Actividades de Construcciones y Servicios, S.A. and Dragados S.A. (together, ACS), Mota-Engil, S.A. de C.V., and Constructora Aldesem, S.A. de C.V. This market is fragmented, with many small local participants in civil construction. In our Concessions segment, we compete primarily with Mexican and Spanish companies, including IDEAL, Globalvia Infraestructuras, S.A. de C.V., Compañia Contratistas Nacional, S.A. de C.V., La Peninsular Compañia Constructora, S.A. de C.V., OHL Mexico, S.A.B. de C.V., Promotora y Operadora de Infraestructura, S.A.B. de C.V., Fomento de Construcciones y Contratas, S.A., FCC Aqualia, S.A., Acciona Agua, S.A., Abengoa Mexico, S.A. de C.V., Impulsa Infraestructura, S.A. de C.V., Mota-Engil, S.A. de C.V., Mitusui de México, S. de R.L. de C.V., Grupo México, S.A.B de C.V. and GIA, S.A. de C.V.

We believe that our proven track record in Mexico and our experience and know-how have historically allowed us to maintain our leadership position in the Mexican construction market. Nevertheless, our recent limited liquidity has decreased our ability to compete in both the Concessions and Civil Construction segments. In recent years, the sponsors of many infrastructure construction and industrial construction projects throughout the world, including Mexico, have required contractors to provide construction on a “turnkey” basis. Many of our foreign competitors have better access to capital and greater financial and other resources. As a result, we have been increasingly experiencing significant competition in Mexico from Brazilian, Chinese, Japanese, Spanish and, to a lesser extent, other European construction companies.

Raw Materials

The main raw materials we require for our construction operations are cement, construction aggregates and steel. In our Civil Construction segment, raw materials accounted for Ps. 4,702 million, or 13%, of our consolidated cost of sales in 2015, Ps. 5,861 million, or 19%, of our consolidated cost of sales in 2014 and Ps. 3,806 million, or 16%, of our consolidated cost of sales in 2013.

Civil Construction

Our civil construction business focuses on infrastructure projects in Mexico, including the construction of roads, highways, transportation facilities (such as mass transit systems), bridges, dams, ports, hydroelectric plants, prisons, tunnels, canals and airports, hospitals, athletic complexes as well as the construction, development and remodeling of large multi-storied urban buildings, including office buildings, multiple-dwelling housing developments shopping centers. Our Civil Construction segment has also pursued projects in other parts of Latin America such as: Panama, Colombia, Guatemala, Costa Rica, Chile, Peru (through San Martín a consolidated

 

35


Table of Contents

subsidiary through September 2015, subsequently accounted for as an equity method investment), as well as in the United States (through Facchina). Our civil construction business performs activities such as demolition, clearing, excavation, de-watering, drainage, embankment fill, structural concrete construction, concrete and asphalt paving, mining services and tunneling.

In addition to construction for third parties, our civil construction business also includes revenues earned by our construction subsidiaries for construction work on our concessions performed under Engineering, Procurement and Construction (“EPC”) contracts with our concessionaire subsidiaries. These are eliminated upon consolidation but are presented within the civil construction business’ individual financial information.

In 2015, our Civil Construction segment accounted for approximately 62% of our total revenues.

The civil construction business projects are usually large and complex and require the use of large construction equipment and sophisticated managerial and engineering techniques. Although our Civil Construction segment is engaged in a wide variety of projects, our projects generally involve contracts whose terms range from two to five years.

We have played an active role in the development of Mexico’s infrastructure and have completed large infrastructure facilities and constructed buildings throughout Mexico and Latin America. Among the facilities and buildings we have constructed from our incorporation in 1947 through 2015:

 

   

the Apulco, Comedero, El Novillo, El Caracol, Cajon de Peña, Tomatlan, Infiernillo, Chicoasen, El Guineo, El Cobano, Jicalan, Falcon, Huites, Aguamilpa, Caruachi, El Cajon and La Yesca power dams;

 

   

the Mazatlan-Culiacan, Leon-Lagos-Aguascalientes, Guadalajara-Tepic, Mexico City-Morelia-Guadalajara, Cuernavaca-Acapulco, Oaxaca-Sola de Vega, Libramiento La Piedad, Río de los Remedios Ecatepec, Rioverde-Ciudad Valles and, Nuevo Necaxa-Tihuatlán concessioned highways and the Tehuacan-Oaxa federal highways as well as the Panama South Corridor;

 

   

17 of the 58 existing airports in Mexico and two airports outside Mexico (the Tocumen Panama international airport in Panama and the Philip S.W. Goldson international airport in Belize) and Terminal 2 of the Mexico City International Airport;

 

   

Buildings, including: offices, hospitals, stadiums, hotels such as Torre Mayor, Internacional Convention Center in Los Cabos, Manuel Gea González Hospital, Chivas Soccer Stadium, Hyatt Regency (formerly Hotel Nikko), Paraíso Radisson in Mexico City represent just some of our important buildings.

 

   

Lines 1through 12, A and part of B of the Mexico City metro system; and

 

   

deep sewage systems, such as Río de la Compañía Tunnel, Medellín Northern Interceptor and Tunnel Emisor Oriente.

The following projects under construction contributed the most to revenues in the Civil Construction segment during 2015:

 

   

Mitla – Tehuantepec Highway;

 

   

Monterrey VI Aqueduct (1) ;

 

   

Churubusco Xochiaca Water Tunnel;

 

   

Facchina projects (including Le Parc, Apollo Residences at Town Center, the Grove at Grand Bay, Crimson Tower and Hoffman Town Center);

 

36


Table of Contents
   

San Martin projects (including Minera Chinalco Peru S.A., Hudbay Peru SAC, Union Andina de Cementos S.A.A. – UNACEM S.A.A., Gold Fields La Cima S.A.A. Shougang Hierro Peru S.A.A, and Compañía Minera Coimolache, S.A.);

 

   

Palmillas-Apaseo El Grande Toll Road;

 

   

Lazaro Cardenas Port Terminal;

 

   

Corredor Norte Toll Road in Panama;

 

   

Barranca Larga – Ventanilla Highway; (1)

 

   

Eastern Discharge Tunnel;

 

   

Mexico-Toluca Railway Tunnel; and

 

   

Santa Maria Dam.

 

  (1) These projects have recently been suspended; see further discussion below.

The civil construction business’ contract awards and additions in 2015 totaled approximately Ps. 13,624 million (approximately U.S.$786 million), of which Ps. 9,699 million were awarded outside Mexico, including the Facchina contracts.

The following projects were key projects in the Civil Construction segment, due to their contributions of revenues or backlog to the segment in 2015:

Mitla-Tehuantepec Highway. In June 2010, through our wholly-owned subsidiaries, Caminos y Carreteras del Mayab, S.A.P.I. de C.V. and CONOISA, we entered into a 20-year PPP concession for the construction, operation and maintenance of the 169-kilometer Mitla-Tehuantepec federal highway, which is expected to link the city of Oaxaca with the Isthmus of Tehuantepec, Mexico, thereby increasing connectivity between the industrial port of Salina Cruz and Oaxaca. The construction contract has a value of approximately Ps. 9,456 million. Construction of the highway, which includes three segments—Mitla-Santa María Albarradas, Santa Maria Albarradas-Lachiguir and Lachiguiri-Entronque Tehuantepec II. In January 2012, we completed the transfer of a 40% interest in this concession to IDEAL and now hold a 60% interest. In 2013, we entered into an agreement with IDEAL in this project, whereby we gained control of the construction contract. The highway is expected to be completed in November 2017. A rescheduling of the term of the construction works is currently under negotiation between the concessionaire and the Communications and Transportation Ministry, (“the SCT”), as a result of delays in the project caused by certain political and social issues and delays in the delivery of rights of way outside our Company’s control.

Monterrey VI Aqueduct. On October 6, 2014, a consortium led by our subsidiary CONOISA signed one of the first contracts under the new Public Private Partnership law in Mexico with the Water and Drainage Services of Monterrey ( Servicios de Agua y Drenaje de Monterrey ), the water and sanitation services company of the State of Nuevo León. CONOISA has a 37.75% interest in the consortium. As of the date of this report the project is expected to be approximately Ps. 17,684 million. The Monterrey VI Aqueduct will bring water from intake works on the Rio Panuco to the existing Cerro Prieto reservoir in Linares, Nuevo León and pass through the states of San Luis Potosi, Veracruz, and Tamaulipas. The 84-inch diameter pipeline will have a maximum capacity of 6,000 liters/second. The project also includes six pumping stations, seven regime change tanks, a regulation tank, a pre-treatment system, and telemetry. The project has been suspended by the Water and Drainage Services of Monterrey and the consortium hasn’t received any further communication from the client.

Palmillas-Apaseo El Grande Toll Road . We were awarded a 30-year concession for the Palmillas-Apaseo El Grande Toll Road by the Ministry of Communications and Transportation in November 2012. The concession title was signed in February 2013 for a total investment of Ps. 9,359 million. In June 2013 we entered into a Ps. 5,675

 

37


Table of Contents

million loan agreement, which was modified on September 19, 2013 to Ps. 5,450 million. The 86-kilometer, 4-lane, high specification toll road in the states of Queretaro and Guanajuato will create a new link between the Mexico City metropolitan region, the Central Mexican region and the Northern Mexican region. The concession includes nine interchanges, 29 vehicular overpasses and underpasses and calls for the construction of 15 major bridges, and is expected to start operations in 2016.

Churubusco Xochiaca Water Tunnel . On August 19, 2014, we were awarded a contract by the National Water Commission to build the Churubusco-Xochiaca water tunnel in Mexico City and Mexico state with a total value of Ps. 2,566 million. The fixed-price contract was awarded through a domestic bidding process. Construction will be completed over a period of 29 months. The Churubusco-Xochiaca water tunnel is designed as an additional measure to reduce seasonal flooding in the Valley of Mexico, particularly in a portion of the Nezahualcoyotl municipality and the adjacent Venustiano Carranza district of Mexico City. The project includes construction of a 13 kilometer, 5 meter interior diameter tunnel, nine 12-meter diameter drop shafts with a depth of 30 meters, six 8-meter diameter drop shafts with a depth of 18 meters, and associated work.

Barranca Larga – Ventanilla—Highway.  In August 2012, our construction company Ingenieros Civiles Asociados, S.A. de C.V. was awarded a contract to perform the construction work under the Barranca Larga – Ventanilla concession. This concession was awarded on April 16, 2012, by the Ministry of Communications and Transportation to our concession subsidiary Desarrolladora de Infraestructura Puerto Escondido, S.A. de C.V., or DIPESA. It is a 30-year concession for the construction, operation and maintenance of the 104-kilometer Barranca Larga-Ventanilla toll road in the state of Oaxaca. Constructions cost overruns caused by social and environmental issues and updated traffic studies have shown that the project is no longer financially viable. Accordingly, ICA has suspended construction work on most of the project. ICA is currently analyzing alternatives to restore the project to financial viability. An allowance of Ps. 1,731 million was recorded related to receivables from cost overruns; additionally, an impairment of Ps. 2,209 million in the intangible asset was recorded in 2015. See Note 13(h) to our consolidated financial statements.

Eastern Discharge Tunnel . In November 2008, the Mexican National Water Commission ( Comisión Nacional del Agua ), the government of Mexico City and the government of the state of Mexico, acting together as a trust, awarded an ICA-led consortium a Ps. 9,595 million (excluding value-added tax) contract for the construction of the Eastern Discharge Tunnel (Tunel Emisor Oriente) in the Mexico City valley. The tunnel will increase drainage capacity in the Mexico City region and prevent flooding during the rainy season. The ICA-led consortium, Constructora Mexicana de Infraestructura Subterranea, S.A. de C.V., is comprised of Ingenieros Civiles Asociados, S.A. de C.V., Carso Infraestructura y Construccion, S.A. de C.V., Construcciones y Trituraciones, S.A. de C.V., Constructora Estrella, S.A. de C.V. and Lombardo Construcciones, S.A. de C.V. We recognize 50% of the operations from this project, or Ps. 4,797 million of the total construction contract. In 2011, we entered into an agreement increasing our share of the total contract value to Ps. 7,062 million. In 2012 and 2013 we received an additional contract increase of Ps. 230 million, for a total value of Ps. 7,292 million. In 2014 we received an additional contract increase of Ps. 2,023 million, for a total value of Ps. 9,315 million. In 2015 we received an additional contract increase of Ps. 769 million, for a total value of Ps. 10,084 million. The fixed-term contract has both unit price and fixed price components, and scheduled completion of the project in October 2018. The construction contract is under a traditional public works mechanism, in which the counterparty pays us periodically (often monthly) as our work is certified over the term of the contract and we do not finance the project. The project includes the construction of a 62-kilometer tunnel and 24 related access shafts. The tunnel will start at the border of the Federal District and Ecatepec, run along one side of Lake Zumpango, and end in El Salto, Hidalgo.

Mexico Toluca Railway Tunnel . In August 2014, we were awarded, through a consortium, a construction contract for Ps. 10,400 million, of which we recognize a backlog for Ps. 2,462 million. This contract was awarded by the by the Secretariat of Works and Services of Mexico City. The project consists of a high speed rail (160 kilometers per hour) along the 57.7 kilometer route between the Observatorio metro station in Mexico City and Zinacatepec in the State of Mexico. The second phase includes the construction of two 4.6-kilometer tunnels. This project is scheduled to take 25 months.

Santa Maria Dam. In November 2014, we were awarded a Ps. 3,989 million unit-price public-works contract by the National Water Commission and the Environmental and Natural Resources Commission for the construction of Santa Maria water storage dam, located over the Baluarte River, in the region of Rosario in Sinaloa. This public works contract has a 3-year maturity. The construction schedule is currently under negotiation with the

 

38


Table of Contents

client as a result of delays caused by a suspension order by the client. The contract scope includes river diversion works formed by two cofferdams, three 2.4 kilometer-length and 16x16 meter width portal-section tunnels with three intakes and six floodgates. The construction contract also includes containment structured works including a 153 meter concrete-based rock-fill with a 980 meters-cubed storage capacity.

Our Civil Construction segment has pursued infrastructure projects in Central, America, South America and the Caribbean Due to the current operational restructuring, we do not expect to seek future projects abroad in the near future except for those associated with Facchina. In the past, projects in these areas have ranged from construction of a section of the subway system in Santiago, Chile to the construction of a natural gas pipeline system in Argentina and the Caruachi hydroelectric dam in Venezuela. In 2015, 30% of our revenues in the Civil Construction segment were attributable to construction activities outside Mexico. In January 2010, a consortium comprised of ICA, with a 43% interest; Fomento de Construcciones y Contratas of Spain, with a 43% interest; and Constructora Meco of Costa Rica, with a 14% interest, was awarded a contract with an approximate value of U.S.$ 268 million by the Panama Canal Authority for the construction of a three-kilometer section of the new Pacific Access Channel (PAC-4) for the Panama Canal’s new Pacific locks, running parallel to the existing channel from the Pedro Miguel to the Miraflores locks. The unit price, fixed term public works contract was awarded through an international bidding process. The PAC-4 contract is part of the overall project to widen the Panama Canal. In 2011, we were awarded contracts to (i) build the Northern Interceptor Tunnel in Medellin, Colombia, (ii) extend the Avenida Domingo Diaz and the Corredor Norte highways, both in Panama City, Panama, and (iii) expand the Atlantic petroleum terminal in Limon, Costa Rica. In 2013, Ecopetrol, S.A. awarded a multi-year contract with an approximate value of U.S.$ 272 million to the Pipeline Maintenance Alliance, a consortium of which we hold a 30% interest, for the maintenance of approximately 990 kilometers of oil pipelines in southern Colombia. Work on the pipelines began in December 2013. In November 2012, the San Carlos Consortium, comprised of ICA, with a 70% interest; ALCA Ingenieria S.A.S., with a 15% interest; and NOARCO, S.A., with a 15% interest, was awarded a construction project with an approximate value of U.S.$ 40 million for the maintenance and rehabilitation of the Florencia Altamira Highway in Colombia. Due to our acquisition of the Facchina in April 2014, we acquired their contracts, which have an approximate construction backlog value of U.S.$208 million as of December 31, 2015.

Mining Services and Other Services

Additionally, in our Civil Construction segment we reported our mining services and other services contracts. As of December 31, 2015, we no longer report mining services backlog. As of December 31, 2015, the other services backlog was Ps. 91 million. This sub-segment in our backlog no longer contemplates mining contracts from San Martin its deconsolidation in October 2015. Until 2014, these projects principally reflected the contracts held by our San Martin subsidiary in Peru. As a result of our inability to pay the full amount of the remaining acquisition price of San Martin, we reduced our participation in San Martín from 51% to 31.2% during the last quarter of 2015, which led to a reduction in mining and other services backlog as of December 31 2015 compared to as of December 31 2014. The results of our participation in San Martin, via the equity method, continue to be accounted for in our Civil Construction segment.

Industrial Construction

Beginning in the fourth quarter of 2014, our executive committee began to include the stand alone internal financial data and operational performance of ICA Fluor in its regular review process due to the importance of ICA Fluor’s operations to our consolidated results, among other factors. Accordingly, we include our 50% interest in ICA Fluor as a separate Industrial Construction segment. The amounts attributable to ICA Fluor are removed from our consolidated segment information through Industrial Construction eliminations such that the operations of our Industrial Construction segment are reflected in our consolidated results through our share in results of joint ventures and associated companies. We include backlog for our Industrial Construction segment within joint venture and associated company backlog.

Industrial Construction projects focus on the engineering, procurement, construction, design and commissioning of large manufacturing facilities such as power plants, chemical plants, petrochemical plants, fertilizer plants, pharmaceutical plants, steel mills, paper mills, drilling platforms and automobile and cement factories.

 

39


Table of Contents

Relationship with ICA Fluor. In 1993, we sold a 49% interest in our industrial construction subsidiary to Fluor Daniel Mexico, S.A., or Fluor, a subsidiary of The Fluor Corporation, forming the ICA Fluor joint venture. Since 1993, we have owned 50% of the ICA Fluor joint venture. Partner resolutions require the approval of a simple majority of ICA Fluor’s partners’ interests, except for decisions relating to matters such as capital increases, changes to ICA Fluor’s bylaws, dividend payments and a sale of all or substantially all of the assets of ICA Fluor. We and Fluor are each entitled to appoint an equal number of members of ICA Fluor’s board of directors and executive committee. Historically, we have designated the chief executive officer of ICA Fluor. In addition, we and Fluor have agreed that ICA Fluor will be the exclusive means for either party to provide construction, procurement, project management, start-up and maintenance services to the production and pipeline, power plant, petrochemical, industrial, environmental services, mining, chemicals and plastics and processing plants within Mexico, and portions of Central America and the Caribbean. This agreement will terminate upon a sale by Fluor or us of any of our partnership interests in ICA Fluor or, following a breach of any of the ICA Fluor agreements, one year after payment of any damages due to the non-breaching party in respect of this breach.

Typical Projects. Projects in our Industrial Construction segment typically involve sophisticated engineering techniques and require us to fulfill complicated technical and quality specifications. Our industrial construction backlog, as of December 31, 2015, was 43% peso-denominated and 57% dollar-denominated. 5% was fixed price and 95% was mixed price.

The most important projects under construction in our Industrial Construction segment during 2015 included:

 

   

Tula 4a package, Integration and auxiliary Services.

 

   

the Ramones II Sur Gas Pipeline;

 

   

Revamp of the vinyl chloride monomer (VCM) plant in Pajaritos;

 

   

DuPont Altamira L2,

 

   

Miguel Hidalgo Refinery;

 

   

Tula Coker plant;

 

   

DUBA Madero FEL 3.

Ramones II Sur Gas Pipeline : On April 2014, ICA Fluor signed a Ps. 10,835 million contract to build a gas pipeline in Mexico with TAG Pipelines Sur S. de R.L.S. de C.V. ICA Fluor will be responsible for the engineering, procurement, construction, testing, commissioning and start-up services of a 291.7-kilometer-long, 42-inch diameter pipeline with one compression station (for a total capacity of 1,420 MMCFD, 27,400 HP), located in the southern portion of the Los Ramones Phase II gas transportation system. The system is expected to be completed in the second quarter of 2016.

Revamp of the vinyl chloride monomer (VCM) plant in Pajaritos. In October 2013, ICA Fluor signed a contract with Petroquimica Mexicana de Vinilo (PMV) for the revamp of the vinyl chloride monomer (VCM) plant located in the Pajaritos petrochemical complex, in Veracruz, in the Gulf of Mexico. The total contract value is approximately Ps. 2,547 million. ICA Fluor is responsible for the engineering, procurement, construction, maintenance and commissioning services of the VCM plant improvements. The project was planned to be completed in the fourth quarter of 2015, due to the occurrence of an industrial accident the project is currently suspended.

DuPont Altamira L2 . In April 2013, ICA Fluor was awarded a Ps. 1,938 million contract for the construction of a new titanium dioxide train to be built in DuPont’s complex located in Altamira, Tamaulipas on the Gulf of Mexico. ICA Fluor is responsible for the construction, construction management and material management services for the production facility that was completed in April 2016.

 

40


Table of Contents

Miguel Hidalgo Refinery in Tula . In September 2013, ICA Fluor was awarded a Ps. 1,329 million contract by Pemex to develop the first phase of the project to reconfigure the Miguel Hidalgo Refinery, located in Tula, Hidalgo, Mexico. ICA Fluor is responsible for various aspects of engineering for the process plants, auxiliary services and integration works required to increase the refinery’s distillate production capacity from 63 to 80 percent.

Tula Coker Plant . In December 2014, ICA Fluor signed a contract with Pemex Refinación for the construction of a delayed coker unit that will be installed at the Miguel Hidalgo refinery in Tula, Hidalgo, Mexico. The total contract value is Ps. 19,147 million. This Phase II contract involves providing engineering, procurement and construction (EPC) services for the plant, which will have the capacity to produce 86,000 barrels per day. It is the first package to be converted to the EPC stage under the open book established in the Phase I contract. The mechanical completion of the project is scheduled for the second quarter of 2018. ICA Fluor was awarded the contract for Phase I of the Residue Recovery Project for the Miguel Hidalgo refinery in 2013.

DUBA Madero FEL 3 . On August 27, 2014, ICA Fluor was awarded a Ps. 1,129 million contract for the engineering and procurement of equipment and permanently installed materials, construction, testing, training, pre-start-up, start-up and performance tests for new hydrodesulfurization plants for certain middle distillates, a hydrogen production plant, a sulfur recovery plant, a bitter water treatment plant, the revamp of a hydrodesulfurization plant for middle distillate U-501 and integration and support services outside the battery limit of plants in the Francisco I. Madero refinery located in Madero, Tamaulipas. The project is expected to be completed in February 2018.

Tula 4A package, Integration and auxiliary Services. In November 2015, ICA Fluor signed a contract with Pemex Refinación for the construction of a Tula 4a package, Integration and auxiliary Services that will be installed at the Miguel Hidalgo refinery in Tula, Hidalgo, Mexico. The total contract value is Ps. 17,616 million. This Phase II contract, involves providing engineering, procurement and construction (EPC) services for the plants integration and auxiliary services. It is the second package to be converted to the EPC stage under the open book established in the Phase I contract. The mechanical completion of the project is scheduled for the fourth quarter of 2017. ICA Fluor was awarded the contract for Phase I of the Residue Recovery Project for the Miguel Hidalgo refinery in 2013.

Concessions

Our Concessions segment focuses on the construction, development, maintenance and operation of long-term concessions of toll roads, tunnels, social infrastructure and water projects and accounted for 22% of our total revenues in 2015. The construction work we perform on our concessions is included in our Civil Construction segment when, pursuant to an EPC contract, we sub-contract one of our construction subsidiaries to perform the work. If the construction work is contracted with a third party, as is the case of construction of rights of way and environmentally-related construction such as environmental impact assessment, our construction subsidiaries do not perform any construction services. In these cases, the construction revenues are recognized within the Concessions segment rather than the Civil Construction segment. Our concessionaire subsidiaries also recognize financing income, which stems from the (i) reimbursement of the cost of financing obtained to build infrastructure assets granted under concession arrangements and (ii) interest income earned on concession assets accounted for as long-term accounts receivable.

We participate in all stages of infrastructure project development, including formulation, engineering, structuring and financing, construction, operation and management as part of a portfolio of assets. We monetize assets that are in the operating stage and arrange new projects under development.

During 2015, we participated in: (i) six concessioned highways operating, in whole or in part, and one operating concessioned tunnel (the Acapulco tunnel), five of which we consolidate, (ii) four highways in construction, three of which we consolidate, (iii) two operating prisons that we consolidate and (iv) the management and operation of water supply systems such as the Aqueduct II water supply system, the El Realito Aqueduct and the Agua Prieta Water Treatment plant, which we do not consolidate.

 

41


Table of Contents

Contracting Practices

Mexican state and municipal governments and the governments of certain foreign countries award concessions for the construction, maintenance and operation of infrastructure facilities. The Mexican government actively pursues a policy of granting concessions to private parties for the design, construction, financing, maintenance and operation of highways, prisons, bridges and tunnels to promote the development of Mexico’s infrastructure without burdening the public sector’s resources and to stimulate private-sector investment in the Mexican economy. A long-term concession is a license of specified duration (typically between 20 and 40 years), granted by a federal, state or municipal government to finance, build, establish, operate and maintain a public means of communication or transportation.

Our return on any investment in a concession is based on the duration of the concession, in addition to the amount of toll revenues collected or government payments based on operation volume, operation and maintenance costs, debt service costs and other factors. Recovery of our investment in highway concessions is typically accomplished through the collection of toll tariffs or, if under the PPP contract structure, a fixed payment for highway availability (together with a smaller shadow tariff based on traffic volume), or a combination of the two methods. Our return on investment in our water treatment concessions is generally based on the volume of water supplied or treated.

To finance the obligations of our projects, we typically provide a portion of the equity and the rest is arranged through third party financing in the form of loans and debt securities. Recourse on the indebtedness is typically limited to the subsidiary engaged in the project. Our investment of equity is returned over time once the project is completed. Generally, we contribute equity to a project by accepting deferred payment of a portion of its construction contract price or through direct capital contributions. Depending on the requirements of each specific infrastructure concession project, we typically seek to form a consortium with entities that have expertise in different areas and that can assist us in obtaining financing from various sources.

Highway and Tunnel Concessions

The following table sets forth certain information as of December 31, 2015, regarding the eight highway and two tunnels concessions in which we currently participate, either through subsidiaries unconsolidated joint ventures or associated companies. As of December 31, 2015, we had five highway and one tunnel concessions in operation.

 

Concession (highway and tunnels)

  Kilometers     Date of
Concession
    Concession
Term
(Years)
    % Ownership 
of
Concessionaire
    % Ownership of
Construction
    Concessionaire’s
Net Investment
in Concession
(Millions of
Mexican pesos) (1)
    ICA’s
Balance of
Investment
(Millions of
Mexican pesos)
 

The Kantunil-Cancun Highway (2)(3)

    296        1990        30        51        100        4,146        467   

Acapulco Tunnel (2)(3)

    2.9        1994        40        51        100        742        342   

Acapulco Scenic Bypass (3)

    8        2013        30        100        —          861        296   

Rio Verde-Ciudad Valles Highway (2)(3)

    113.2        2007        20        51        100        5,303        946   

The La Piedad Bypass (2)(3)

    21        2009        30        51        100        2,368        653   

Barranca Larga-Ventanilla Highway (3)

    104        2012        27        100        100        1,547        80   

Palmillas – Apaseo El Grande Toll Road (3)

    86        2013        30        100        —          5,824        3,350   

Mitla-Tehuantepec
Highway
(4)

    169        2010        20        60        100        7,405        1,342   

Nuevo Necaxa-Tihuatlan Highway (2)(4)

    85        2007        30        50        60        7,815        413   

 

(1) Represents each concessionaire’s investment in the applicable concession as of December 31, 2015, net of depreciation and revaluation of assets for inflation through 2007.
(2) Concession in operation, including the extension, if any, of the toll road.
(3) Concession fully consolidated in our financial statements.
(4) Concession accounted for using the equity method in our financial statements. See Notes 4 and 19 to our consolidated financial statements.

 

42


Table of Contents

The Kantunil-Cancun Highway (Mayab Consortium). On March 12, 2008, we acquired all of the equity of the Mayab Consortium, which holds the concession for the Kantunil-Cancun toll road. We paid Ps. 912 million to acquire the Mayab Consortium, which holds the concession to construct, operate, and maintain the 241.5-kilometer highway that connects the cities of Kantunil and Cancun in the states of Yucatan and Quintana Roo through December 2020. In August 2011, we signed an amendment to our concession agreement with the Ministry of Communications and Transportation to construct an extension of the toll road. The amendment includes the construction, operation, conservation and maintenance of a 54-kilometer expansion of the Kantunil-Cancun highway to Playa del Carmen and extends the term of the concession to 2050. The expansion of the highway required an estimated investment of approximately Ps. 5,370 million. We consolidate the investment in our consolidated financial statements, including long term debt that, as of December 31, 2015, was equivalent to Ps. 4,542 million. This long-term debt matures in 2034, and is expected to be repaid from toll revenues generated by the concession. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—The Kantunil-Cancun Highway (Mayab Consortium).” On June 18, 2015, we announced that we had closed an agreement to sell to CDPQ a 49% participation in our subsidiary ICA OVT, which was established on March 19, 2015 and owns the Kantunil-Cancun Highway concession. We expect to continue to operate this highway for the 35 years remaining in the concession.

Acapulco Tunnel. In 1994, the government of the state of Guerrero granted our subsidiary Tuneles Concesionados de Acapulco, S.A. de C.V., or TUCA, a 25-year concession for the construction, operation and maintenance of a 2.9-kilometer tunnel connecting Acapulco and Las Cruces. The concession term started in June 1994. On November 25, 2002, the Congress of the State Government of Guerrero approved the extension of the concession term by 15 years because the actual volume of usage was lower than the amount foreseen by the terms of the concession agreement. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—Acapulco Tunnel” and Note 13 to our audited consolidated financial statements. On June 18, 2015, we announced that we had closed an agreement to sell to CDPQ a 49% participation in our subsidiary ICA OVT, which was established on March 19, 2015 and owns the Acapulco Tunnel concession. We expect to continue to operate this highway for the 19 years remaining in the concession.

Acapulco Scenic Bypass . In November 2012 the State of Guerrero awarded us with a 30-year concession for a toll tunnel and highway in Acapulco. The project includes a 3.3-kilometer tunnel from the Brisamar interchange to Cayao – Puerto Marques and a 4.7-kilometer highway from the tunnel entrance to the Zona Diamante section of Acapulco. The expected date of completion of construction is July 2017.

The Rio Verde-Ciudad Valles Highway. In July 2007, the Ministry of Communications and Transportation awarded the 20-year concession for a 113.2-kilometer highway between Rio Verde and Ciudad Valles in the state of San Luis Potosi to a consortium made up of our subsidiaries. The estimated total investment at December 2014 will be approximately Ps. 5,240 million. The scope of the concession includes: (i) the operation, conservation, maintenance, modernization, and widening of a 36.6 kilometer tranche from Rio Verde—Rayon; (ii) the construction, operation, conservation, and maintenance of a 68.6 kilometer tranche from Rayon—La Pitahaya; and (iii) the operation, conservation, maintenance, modernization, and widening of an 8.0 kilometer tranche from La

 

43


Table of Contents

Pitahaya—Ciudad Valles. This concession includes the exclusive right for the 20-year service contract with the Mexican federal government, acting through the Ministry of Communications and Transportation. On September 19, 2008, we procured the financing for this project in the amount of Ps. 2,550 million. In August 2014, the Ministry of Communications and Transportation extended the PPP term for 4 additional years, with a termination date in August 2031. The Ministry also extended the concession for 20 additional years until August 2047. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—Rio Verde-Ciudad Valles Highway.” The concession began full operations in July 2013. On June 18, 2015, we announced that we had closed an agreement to sell to CDPQ a 49% participation in our subsidiary ICA OVT, which was established on March 19, 2015 and owns the Rio Verde-Ciudad Valles Highway concession. We expect to continue to operate this highway for the 32 years remaining in the concession.

The La Piedad Bypass. On March 24, 2009, through our wholly-owned subsidiary Libramiento ICA La Piedad, S.A. de C.V., we entered into a thirty-year concession for (i) the construction, operation, conservation and maintenance of the 21.38-kilometer La Piedad Bypass, to alleviate congestion caused by long-haul traffic between the Bajio region and western Mexico, and (ii) the modernization of 38.8 kilometers of the toll-free Federal Highway 110 in the states of Guanajuato and Michoacan and 7.32 kilometers of Highway 90. This concession began full operations in November 2012. In September 2013 the Ministry of Communications and Transportation extended the concession for 15 additional years, with a termination date in March 2054 On June 18, 2015, we announced that we had closed an agreement to sell to CDPQ a 49% participation in our subsidiary ICA OVT, which was created on March 19 2015 and owns the La Piedad Bypass concession. We expect to continue to operate this highway for the 39 years remaining in the concession.

Barranca Larga-Ventanilla Highway . On April 16 2012, the Ministry of Communications and Transportation awarded us a 30-year concession for the construction, operation and maintenance of the 104-kilometer Barranca Larga-Ventanilla toll road in the state of Oaxaca. We entered into long term financing for the project on June 15 2012. An impairment loss of Ps. 2,208 million was recognized for the investment in the Barranca Larga-Ventanilla tollroad concession. Construction cost overruns caused by social and environmental issues and updated traffic studies have shown that the project is no longer financially viable. Accordingly, ICA has suspended construction work on most of the project. ICA is currently analyzing alternatives to restore the project to financial viability.

Palmillas-Apaseo El Grande Toll Road . We were awarded a 30-year concession for the Palmillas-Apaseo El Grande Toll Road by the Ministry of Communications and Transportation in November 2012. The concession title was signed in February 2013 for a total investment of Ps. 9,359 million. In June 2013 we entered into a Ps. 5,675 million loan agreement, which was amended on September 19, 2013 to Ps. 5,450 million. The 86-kilometer, 4-lane, high specification toll road in the states of Queretaro and Guanajuato will create a new link between the Mexico City metropolitan region, the Central Mexican region and the Northern Mexican region. The concession includes nine interchanges, 29 vehicular overpasses and underpasses and calls for the construction of 15 major bridges, and is expected to start operations in 2016.

The Mitla-Tehuantepec Highway. On June 17, 2010, through our wholly-owned subsidiaries Caminos y Carreteras del Mayab, S.A.P.I. de CV, and Controladora de Operaciones de Infraestructura, S.A. de C.V., or CONOISA, we entered into a twenty-year PPP concession for the construction, operation and maintenance of the 169-kilometer Mitla-Tehuantepec federal highway in Oaxaca. The road includes three segments: Mitla-Entronque Tehuantepec II, Mitla-Santa Maria Albarradas and Lachiguiri-Entronque Tehuantepec II. The construction work is expected to take 40 months. The highway will link the city of Oaxaca with the Isthmus of Tehuantepec, increasing the connectivity of the industrial port of Salina Cruz with central Oaxaca. The modernized highway is expected to promote the economic development of the region and the communities along its route. We began the construction of this project in July 2012. In January 2012, we completed the transfer of 40% of this concession to IDEAL and now hold 60%. A rescheduling of the term of the construction works is currently under negotiation between the concessionaire and the SCT, as a result of delays in the project caused by political and social issues and delays in the delivery of rights of way outside our Company’s control.

Nuevo Necaxa-Tihuatlan Highway. In June 2007, the Ministry of Communications and Transportation awarded us a 30-year concession for the construction, operation, maintenance and preservation of the Nuevo Necaxa—Tihuatlan highway. The 85-kilometer highway is located in the states of Puebla and Veracruz. The 30-year concession, with a total investment of approximately Ps. 10,284 million, includes: (i) construction, operation,

 

44


Table of Contents

maintenance, and preservation of the 36.6 kilometer Nuevo Necaxa—Avila Camacho segment; (ii) operation, maintenance, and preservation of the 48.1 kilometer Avila Camacho—Tihuatlan segment; and (iii) a long-term service contract to sustain the capacity of the highway for the Nuevo Necaxa—Avila Camacho segment, in accordance with the exclusive rights provided by the concession. This is the final tranche to complete the highway that will connect Mexico City with the port of Tuxpan in Veracruz. In June 2008, we entered into a financing agreement in the amount of Ps. 6,061 million to finance the construction of this project. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness—Nuevo Necaxa—Tihuatlan.” The project was completed in the third quarter of 2014.

Other Long-Term Investments

 

Long-term contract

   Kilometers/
Volume
     Date of
Concession
     Concession
Term
(Years)
   % Ownership of
Concessionaire
     % Ownership of
Construction
     Concessionaire’s
Net Investment in
Concession
(Millions of
Mexican pesos)
 

Rio de los Remedios (1)

     25.5 km         2008       5 (Renewable)      100         100         (2)  

 

(1) Fully consolidated in our financial statements. In the third quarter of 2011, the contract was amended to increase the value of the contract for the construction of the highway.
(2) Presented in the financial statements for Ps. 11,871 million in long-term accounts receivables for construction, and Ps.271 million in current accounts receivable.

Rio de los Remedios—Ecatepec. We participate in the Rio de los Remedios—Ecatepec project with a 100% interest in ANESA (formerly known as Viabilis Infraestructura S.A.P.I. de C.V., or Viabilis). In 2008, we began participating in this project with a 50% interest in Viabilis, the contractor for the construction and financing of public works. In June 2009, we obtained a controlling interest in Viabilis by purchase one additional share above our existing 50% interest, allowing us an additional seat on the board of directors of Viabilis. As of such date, we consolidate ANESA. In May 2012, we completed the acquisition of the 50% interest we did not own in Viabilis, and as a result we now wholly own the company and changed its name to ANESA. The Ps. 6,568 million project relates to isolating a drainage canal and building a 25.5-kilometer toll highway in the Mexico City and state of Mexico metropolitan areas. The project calls for construction in three phases, with Phase 1 completed in July 2009 and Phase 2 completed in March 2013. As of the date of this report, we are in negotiations with the System of Highways, Airports, Related and Auxiliary Services (“SAASCAEM”) of the government of the state of Mexico regarding Phase 3 of the project. ANESA was awarded the construction contract for the project on November 15, 2004 by the SAASCAEM. The contract was amended and restated in May 2007. In June 2008, we obtained bridge loan financing for the project in the amount of U.S.$40 million structured by the Ahorro Corporacion of Spain with Caja de Ahorros Municipal de Burgos as agent for various lenders. We have repaid the bridge loan and subsequently became a lender to the project, and in February 2010 we entered into a long term financing agreement in the amount of Ps. 3,000 million with Banobras development bank. An allowance of Ps. 1,201 million was made for receivables for the Rio de los Remedios financed public works project, as a result of a change in the estimated return on the project. As of December 31, 2015, the 3 stretches of the Río de los Remedios-Ecatepec Highway have been in operation for two full years, generating real toll data, as well as the experience of the application of the resources managed by the Trust, and the assessment of periodic rate increases. By assessing this information, the cash flow analysis was estimated to the end of 2015, which is determined based on discounted future flows. Additionally, the cash flow variables were reviewed, taking into account the operating experience of the highway in the last 3 years, the inflation rate reduction observed during the year, and the rate increases that were lower than what had been projected. According to the results obtained, our management decided to define a maximum recovery term of 60 years, even though that pursuant to the construction contract, there is no deadline for the recovery of the account receivable, and an estimate for bad debt accounts was recorded in the amount of Ps.1,012 million, presented in the cost of concessions in the profit and loss statement and in other comprehensive loss items.

 

45


Table of Contents

Port Concessions.

Lazaro Cardenas Port Terminal . In 2012, our affiliate APM Terminals Lazaro Cardenas, S.A. de C.V., or APMT-Lazaro Cardenas, of which we own 5%, signed a thirty-year agreement to design, finance, construct, operate and maintain the new “TEC II” container terminal in Lazaro Cardenas port, located on Mexico’s Pacific coast. There will be four separate stages of investment and construction. Phase I is expected to be completed in 2015 and was expected to require an investment of approximately Ps. 7,682 million. ICA was expected to perform 100% of the construction of Phase I. The construction contract for Phase I was awarded to ICA, which during 2015 received a notification of early termination. Currently the parties to the construction contract are involved I an ordinary dispute resolution proceeding. On June 2015, we completed the sale of our interest in this concession.

Water Distribution and Water Treatment Concessions

During 2014, we participated in one water treatment plant, which is currently under construction, and in three water supply systems, two of which are currently under construction . The following table sets forth certain information as of December 31, 2015, regarding the water treatment plant and water supply system concessions in which we currently participate, either through subsidiaries or affiliates. We account for all of our water projects using the equity method in our consolidated financial statements as we either consider that we have joint control over the joint venture investment, or we have the ability to significantly influence the key operating and financial decisions of the venture.

Atotonilco Water Treatment Plant . A consortium of which our subsidiary CONOISA holds 10.2% was awarded, through an international bidding process, the concession for the construction and operation of the Atotonilco water treatment plant in Tula, Hidalgo by the National Water Commission, (or “Conagua”). On January 7, 2010, the consortium entered into a final contract with Conagua. The consortium is responsible for the design, construction, electromechanical equipment and testing, as well as the operation, conservation and maintenance of the water treatment plant including electricity cogeneration and the removal and final disposition of all waste and biosolids that are produced, over the 25-year term of the agreement. The Atotonilco plant is expected to be the largest of its kind in Mexico and one of the largest in the world, with a treatment capacity of up to 42 cubic meters of wastewater per second. The plant will be located at the outlet of the Eastern Discharge Tunnel, which we are also building. The consortium was comprised of Promotora del Desarrollo de America Latina, S.A. de C.V., a subsidiary of Grupo Carso, as the leader with 40.8%, ACCIONA Agua S.A. with 24.26%, Atlatec, S.A. de C.V. (a subsidiary of Mitsui & Co., Ltd.) with 24.26%, our subsidiary CONOISA with 10.2% and other minority investors. The resources for the investment will be provided by the National Fund for Infrastructure for Ps. 4.6 billion, representing 49% of the equity capital of the consortium, and commercial bank debt. In December 2013, we entered into an agreement to sell our share of the concession to Promotora del Desarrollo de America Latina, S.A. de C.V. The agreement to sell our interest in this plant was signed on November 3, 2014 and the sale was completed in November 2014.

 

Concession

  Capacity
(m3mm)
    Date of
Concession
    Concession
Term
(Years)
    % Ownership of
Concessionaire
    % of
Construction
Work
    Concessionaire’s
Net Investment
in Concession
(Millions of
Mexican pesos) (1)
    Balance of the
investment
(Millions of
Mexican pesos)
 

Aqueducto II water supply system (2)(3)

    1.5        2007        20        42        50        2,102        303   

El Realito water supply system (2) (3)

    1        2009        25        51        51        1,856        230   

Agua Prieta Water Treatment Plant (2) (3)

    8.5        2009        20        50        100        2,209        253   

 

(1) Represents each concessionaire’s investment in the applicable concession, net of depreciation and revaluation of assets for inflation through 2007.
(2) Concession in operation.
(3) Concession accounted for using the equity method, in our financial statements. See Note 19 to our consolidated financial statements.

 

46


Table of Contents

Aqueduct II Water Supply. In May 2007, a consortium we lead was granted a 20-year concession by the State Water Commission of Queretaro for the construction, operation, and maintenance of the Aqueduct II water supply and purification system in Queretaro state. The Aqueduct II brings water 108 kilometers from the Moctezuma River to the city of Queretaro. The required investment of Ps. 2,854 million was financed by Banco Santander with HSBC and Banorte, among others, on October 5, 2007 in the amount of Ps. 1,700 million for a 17-year period. Additionally, the National Fund for Infrastructure is contributing Ps. 872 million directly to the project. The construction of this project began in 2007. We initiated operations of the project in February 2011. The concessionaire Suministro de Agua de Queretaro, S.A. de C.V., or SAQSA, is made up of the following shareholders: ICA, as consortium leader (primarily through our subsidiary CONOISA) with 37%; Servicios de Agua Trident, S.A. de C.V., a subsidiary of Mitsui Corp with 26%; Fomento de Construcciones y Contratas (including two additional affiliates) with 26%; and Proactiva Medio Ambiente Mexico, S.A. de C.V., or PMA Mexico, with 11%. Including our interest in PMA Mexico, which is our affiliate, our direct and indirect economic interest in SAQSA is 42.39%. We account for this investment using the equity method.

El Realito Aqueduct . In 2009, a consortium we lead signed a 25-year service contract with the State Water Commission of San Luis Potosi to build, operate and maintain the El Realito aqueduct water supply and purification system. In March 2011, our subsidiary Aquos el Realito S.A. de C.V. entered into an 18-year term financing agreement for the construction of the El Realito Aqueduct project, to which it holds a long-term service agreement, in an amount up to Ps. 1,319 million. The consortium is comprised of our subsidiary Controladora de Operaciones de Infraestructura, S.A. de C.V., or CONOISA, as consortium leader, with 51% and Fomento de Construcciones y Contratas, through a subsidiary, with 49%. We account for this investment using the equity method. See Note 4 to our consolidated financial statements. We initiated operations of this aqueduct in January 2015.

Agua Prieta Water Treatment Plant . In 2009, a consortium we lead was granted a 20-year contract with the Jalisco State Water Commission for the construction and operation of the Agua Prieta wastewater treatment plant. The Ps. 2,318 million contract is a fixed price, fixed term contract with a 33-month term for construction and a subsequent 207-month term for operation. We will earn a portion of the total contract price based on our construction work, which will be set forth in a construction contract at a later date. We expect to finance the project with contributions from the Mexican federal government’s National Fund for Infrastructure, equity contributions from the consortium and commercial bank debt. In addition to ICA, which is consortium leader and holds a 50% interest, the consortium also includes ATLATEC, S.A. de C.V. with a 34% interest and Servicios de Agua Trident S.A. de C.V. with a 16% interest, both of which are subsidiaries of Mitsui & Co, Ltd. We account for this investment using the equity method. The Agua Prieta Water Treatment Plant was inaugurated in July 2014 and initiated operations in November 2014. The total investment for this project was Ps. 2,967 million.

Monterrey VI. In October 2014, a consortium led by CONOISA signed one of the first contracts under the new Public Private Partnership law in Mexico with Servicios de Agua y Drenaje de Monterrey, the water and sanitation services company of the State of Nuevo León. CONOISA has a 37.75% interest in the consortium. The bulk water delivery contract includes the construction, equipment, operation, and maintenance of the Monterrey VI Aqueduct. The 372 kilometer pipeline will have a capacity of 6 cubic meters and will increase by more than 40% the supply of potable water for the Monterrey metropolitan region. This increase ensure adequate water supplies for the next 30 years. Total investment in the project is expected to be approximately Ps. 17,684 million. The Monterrey VI Aqueduct will bring water from intake works on the Rio Panuco to the existing Cerro Prieto reservoir in Linares, Nuevo León and will pass through the states of San Luis Potosi, Veracruz, and Tamaulipas. The 84-inch diameter pipeline will have a maximum capacity of 6,000 liters per second. The project also includes six pumping stations, seven regime change tanks, a regulation tank, a pre-treatment system, and telemetry. The project has been suspended by the Water and Drainage Services of Monterrey and the consortium hasn’t had any further communication from the client. We account for the concession using the equity method.

Energy Concessions

Reynosa I Windpark. On October 17, 2014, we, through our subsidiary CONOISA, announced that we had joined a consortium to invest in and build the 60 megawatt Reynosa I Windpark in Reynosa, Tamaulipas, together with Santander Capital Structuring, S.A. de C.V. (“SCS”), the capital structuring arm of the Santander Group, which

 

47


Table of Contents

focuses on investing the bank’s own capital in renewable energy, energy efficiency and climate change projects, and private equity investors.

CONOISA was expected to be the primary user of the electricity generated under long-term Power Purchase Agreements (PPAs). Some of the necessary environmental permits have been received. The Phase I project will require a total investment of approximately U.S.$151 million. CONOISA held 20% of the equity and was responsible for construction. CONOISA was also party to the asset management contract during the operation phase. SCS and private equity investors own the remaining 80%. CONOISA’s 20% stake in the project was sold to Zuma Energía, S.A. de C.V. and Zuma Energía Servicios, S.A. de C.V on March 23, 2016. Prior to the sale, the Reynosa I Windpark was accounted for as a Joint Ventures and Associated Company in our consolidated financial statements.

Discontinued operations.

As of December 31, 2015, we do not have any operations classified as discontinued operations.

In our consolidated financial statements as of and for the year ended December 31, 2014, we previously reported the project below as a discontinued operation:

 

Long-term contract

   Kilometers/
volume
     Date of
Concession
     Concession
Term
(Years)
     % Ownership of
Concessionaire
     % Ownership of
Construction
     Concessionaire’s
Net Investment
in Concession
(Millions of
Mexican pesos)
 

SPC projects

     N/A         2010         22         100         100         10,124   

SPC Projects. In 2011, we entered into two agreements to build and operate over a 22-year term two federal penitentiaries (the “SPC Project”) for a total investment of Ps. 9,890 million. Construction for the projects was completed in 2012 and the projects are now operational. The infrastructure operations relate to non-penitentiary services. In January 2014, we announced that we had signed an agreement to sell CGL a 70% equity interest in our two SPC contracts. This investment was reported as a discontinued operation. On December 5, 2014, we announced the expiration of this agreement. However, as we actively sought sale of our investment, we continued to report discontinued operations in our consolidated financial statements as of and for the year ended December 31, 2014. During 2015, after not receiving a formal offer to purchase, the administration of our Company decided to withdraw its intention to sell such assets. Consequently, at December 31, 2015, we reclassified the operations of the two SPC contracts to continuing operations for all years presented. See Note 2.d to our consolidated financial statements.

Airports

Our Airports segment accounted for 14% of our total revenues in 2015.

As of December 31, 2015, we controlled the vote of 149,932,500 shares of GACN, representing 37.48% of GACN’s capital stock. Our investment in GACN was comprised of 83,132,500 Series B Shares owned directly through our wholly-owned subsidiary Aeroinvest, and 49,766,000 Series B and BB Shares controlled through our ownership of 74.5% of the capital stock of SETA. The remaining 25.5% of SETA was owned by Aeroports de Paris Management, or ADPM. The remaining shareholders in GACN held 60.56% of its outstanding capital stock and 1.96% of the shares are held in GACN’s treasury. Because of the decrease in our interest in GACN in 2013, we continued to reassess our effective control over GACN and concluded that we retained effective control through December 31, 2014 based on our substantive rights as controlling shareholder, ability to appoint directors and executives of GACN, administration of the relevant activities of GACN and other factors. Additionally during 2015 we sold 3.09% of our shares in

 

48


Table of Contents

GACN and also reassessed our effective control over it, concluding that based on our substantive rights as the controlling shareholder of the BB shares, our ability to appoint directors and executives of GACN, administration of the relevant activities of GACN and other factors we continued to effectively control GACN. Although in 2016 we have been subject to foreclosure of additional B shares in GACN and have sold an additional 50.43% of those shares, we continue to effectively control GACN through the same rights under our shareholding agreements, as further demonstrated by our ability to nominate board members in GACN’s most recent Shareholders’ Meeting held in the second quarter of 2016. See Note 17 to our consolidated financial statements. GACN is listed on the Mexican Stock Exchange and the NASDAQ Stock Market. CONOISA (as successor in interest to Aeroinvest) and ADPM have agreed that:

 

   

The GACN Corporate Practices Committee and Audit Committee shall be comprised of at least three independent members; and

 

   

CONOISA (as successor in interest to Aeroinvest) and ADPM shall have the right to propose at least one of the members of each Committee.

Pursuant to the consortium agreement entered into among ADPM, CONOISA (as successor in interest to Aeroinvest) and Vinci, S.A. (a corporation organized under the laws of France) on May 16, 2000, as amended and restated on April 13, 2015, the shareholders of SETA agreed that ADPM shall have the right to appoint one member of our Board of Directors and that CONOISA shall have the right to appoint two directors. Since September 14, 2005, ADPM and CONOISA (as successor in interest to Aeroinvest) are the sole parties to the consortium agreement. The right to appoint certain of our officers under the consortium agreement is allocated as follows: CONOISA shall appoint our chief executive officer, chief financial officer, human resources manager (subject to the approval of ADPM) and general counsel; ADPM shall appoint our chief operating officer and our commercial and marketing officer (subject to the approval of CONOISA). The maintenance and infrastructure officer shall be appointed by SETA.

CONOISA (as successor in interest to Aeroinvest) and ADPM have also agreed that, in accordance with our bylaws, at least one member of each of our Audit Committee and Corporate Practices, Finance, Planning and Sustainability Committee shall be appointed by SETA.

The consortium agreement also requires the unanimous vote of CONOISA (as successor in interest to Aeroinvest) and ADPM to approve (if approved at the meeting on first call): (i) the pledging or creation of a security interest in any of our shares held by SETA and the shares issued by SETA; (ii) any amendments to SETA’s bylaws or the SETA shareholders’ agreement; (iii) our merger, split, dissolution or liquidation; (iv) the amendment or termination of our bylaws, the Participation Agreement, the Technical Assistance Agreement, the technology transfer agreement or related ancillary agreements; (v) changes in our capital structure; (vi) the conversion of our Series BB shares into our Series B Shares; and (vii) any sale or transfer of shares of SETA.

Under the consortium agreement, transfers by either of CONOISA or ADPM of its respective shares in SETA to an unaffiliated party are subject to limited rights of first refusal in favor of the non-transferring shareholder, and such transfers by CONOISA are subject, under certain conditions, to tag-along rights in favor of ADPM. The consortium agreement also sets forth a put option in favor of ADPM pursuant to which, under certain conditions, ADPM may require CONOISA to purchase all of ADPM’s shares in SETA in case of a disagreement between the parties with respect to a matter to be decided by our or SETA’s Board of Directors or shareholders. Through GACN, we operate 13 airports in the Central North region of Mexico pursuant to concessions granted by the Mexican government, including the Monterrey airport, which accounted for approximately 44.5% of GACN’s revenues in 2015 and 42% in 2014. The airports serve a major metropolitan area (Monterrey), three tourist destinations (Acapulco, Mazatlan and Zihuatanejo), two border cities (Ciudad Juarez and Reynosa) and seven regional centers (Chihuahua, Culiacan, Durango, San Luis Potosi, Tampico, Torreon and Zacatecas). All of the airports are designated as international airports under Mexican law, meaning that they are all equipped to receive international flights and maintain customs, refueling and immigration services managed by the Mexican government.

 

49


Table of Contents

In October 2008, GACN acquired 90% of the shares of Consorcio Grupo Hotelero T2, S.A. de C.V., which has the rights to develop and operate a 287-room hotel and approximately 5,000 square meters of commercial space inside the new Terminal 2 of the Mexico City International Airport under a 20-year lease agreement with the Mexico City International Airport. NH Hoteles, S.A. de C.V., a Spanish company, owns the other 10%. For the year ended December 31, 2015, total revenues of the hotel amounted to Ps. 212 million. Annual average occupancy increased to 80.5% in 2015 from 79.6% in 2014. In 2015, the annual average rate per room was Ps. 1,968, as compared to Ps. 1,817 in 2014.

The substantial majority of the Airports segment’s revenues are derived from providing tariff-regulated services, which generally are related to the use of airport facilities by airlines and passengers. For example, approximately 66.4% of GACN’s total revenues in 2015 were earned from aeronautical (tariff-regulated) services such as the provision of aircraft parking, passenger walkways and airport security services. Changes in revenues from aeronautical services are principally driven by the passenger and cargo volume at the airports. All of our revenues from aeronautical services are also affected by the “maximum rates” the subsidiary concessionaires are allowed to charge under the price regulation system established by the Ministry of Communications and Transportation. The “maximum rate” system of price regulation that applies to aeronautical revenues is linked to the traffic volume (measured in workload units) at each airport; thus, increases in passenger and cargo volume generally permit greater revenues from aeronautical services. In December 2010, the Ministry of Communications and Transportation approved the master development programs for each of our Airport segment’s subsidiary concession holders for the 2011 to 2015 period. These programs will be in effect from January 1, 2011 until December 31, 2015. In December 2015, the Ministry of Communications and Transportation approved the master development programs for each of our Airport segment’s subsidiary concession holders for the 2016 to 2020 period. These five-year master development programs will be in effect from January 1, 2016 until December 31, 2020.

The Airports segment also derives revenues from non-aeronautical activities, which principally relate to the commercial, non-aeronautical activities carried out at the airports, such as the leasing of space in terminal buildings to restaurants and retailers. Revenues from non-aeronautical activities are not subject to the system of price regulation established by the Ministry of Communications and Transportation. Thus, non-aeronautical revenues are principally affected by the passenger volume at the airports and the mix of commercial activities carried out at the airports. While we believe aeronautical revenues will continue to represent a substantial majority of future total revenues, we anticipate that the future growth of revenues from commercial activities will exceed the growth rate of this division’s aeronautical revenues.

The airports are also focusing their business strategy on generating new services and products to diversify our revenue, such as hotel services, air cargo logistics services and real estate services. They plan to develop land not needed for aeronautical operations at all of the airports for industrial, logistical or commercial uses that are directly or indirectly related to airport activities in order to strengthen the airports’ role as focal points of economic development in the cities where they are located. As a result of such efforts, revenues from diversification activities increased by 38.4% in the year ended December 31, 2015 as compared to the year ended December 31, 2014.

 

50


Table of Contents

The following table provides summary data for each of the airports for the year ended December 31, 2015:

 

     Year Ended December 31, 2015  
     Terminal
Passengers
     Revenues (1)      Revenues  Per
Terminal
Passenger (2)
 

Airport

   (Number in
millions)
     %      (Millions of
pesos)
     %      (Pesos)  

Metropolitan area:

              

Monterrey International Airport

     8.5         50.0         1,927.4         50.4         227.8   

Tourist destinations:

              

Acapulco International Airport

     0.7         4.3         166.2         4.3         227.5   

Mazatlan International Airport

     0.9         5.0         209.5         5.5         245.5   

Zihuatanejo International Airport

     0.6         3.3         142.5         3.7         253.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total tourist destinations

     2.1         12.7         518.2         13.5         241.5   

Regional cities:

              

Chihuahua International Airport

     1.1         6.6         236.2         6.2         212.7   

Culiacan International Airport

     1.4         8.5         295.9         7.7         206.6   

Durango International Airport

     0.3         1.9         72.3         1.9         228.8   

San Luis Potosi International Airport

     0.4         2.6         119.8         3.1         269.6   

Tampico International Airport

     0.8         4.5         167         4.4         218.6   

Torreon International Airport

     0.6         3.3         128.7         3.4         231.2   

Zacatecas International Airport

     0.3         1.9         76.3         2.0         238.3   

Total regional destinations

     4.9         29.2         1,096.1         28.7         221.7   

Border cities:

              

Ciudad Juarez International Airport

     0.9         5.1         175.4         4.6         203.1   

Reynosa International Airport

     0.5         3.0         108.3         2.8         213.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total border city destinations

     1.4         8.1         283.7         7.4         207.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     16.9         100.0         3,825.5         100.0         226.1   

 

(1) Does not include eliminations of transactions among GACN’s subsidiaries or revenues from construction services.
(2) Revenues per terminal passenger are calculated by dividing the total revenues for each airport by the number of terminal passengers for each airport. The result has been rounded to the decimal.

Competition

The Acapulco, Mazatlan and Zihuatanejo International Airports are substantially dependent on tourists. These airports face competition from competing tourist destinations. We believe that the main competitors to these airports are those airports serving other vacation destinations in Mexico, such as Los Cabos, Cancun and Puerto Vallarta, and abroad, such as Puerto Rico, Florida, Cuba, Jamaica, the Dominican Republic, other Caribbean islands and Central America.

In the future, we may face competition from Aeropuerto del Norte, an airport near Monterrey operated by a third party pursuant to a concession. Historically, Aeropuerto del Norte has been used solely for general aviation operations. The state of Nuevo Leon has requested in the past that the Ministry of Communications and Transportation amend Aeropuerto del Norte’s concession to allow it to serve commercial aviation operations. To date, the Ministry of Communications and Transportation has not amended Aeropuerto del Norte’s concession. The Ministry of Communications and Transportation may authorize such an amendment, and commercial aviation flights may operate from Aeropuerto del Norte in the future. In addition, we understand that Aeropuerto del Norte is not capable of accommodating commercial passenger traffic with its current infrastructure.

Excluding our airports servicing tourist destinations, our airports currently do not face significant competition.

Corporate and Other

Our Corporate and Other segment includes all of our real estate operations, including our affordable entry-level housing operations as well as our corporate operations through our subsidiary Grupo ICA S.A. de C.V. See “Item 4. Information on our Company—History and Development of our Company—Divestitures.” In 2015, our Corporate and Other segment accounted for 2% of our total revenues.

 

51


Table of Contents

Our housing operations during 2015 covered all stages of the housing industry, performing and procuring architectural and engineering design, facilitating buyer financing and constructing and marketing homes. We subcontracted some construction services, such as urbanization.

As of December 31, 2015, due to various market factors, including third party offers received, we recorded an adjustment in the determination of net realizable value of inventories of Ps. 1,757 million. See Note 10 to our consolidated financial statements.

The principal raw materials we require for our housing operations are cement, steel, construction aggregates, doors, windows and other housing fixtures.

In 2010, we expanded our operations in the housing operations by increasing our stake in Los Portales, a real estate development company in Peru, from 18% to 50%, and we participated in several new housing development projects in Mexico, including a joint venture with Prudential Investment Management, Inc. to develop social interest housing with Prudential Real Estate Investors, S. de R.L. de C.V. During 2015, 2014 and 2013 we sold 629, 1,859 and 1,513 homes, respectively.

Additionally we continued to develop certain vertical residential properties, and other selected mid-rise and high-rise properties that together make up our vertical housing business.

Our housing operations compete primarily with large and mid size Mexican public housing developers such as Corporacion GEO, S.A.B. de C.V., Grupo Javer, S.A. de C.V., Grupo Sadasi, S.A. de C.V., Inmobiliaria Ruba, S.A. de C.V., and Consorcio Ara S.A.B. de C.V., as well as regional competitors.

Recently, the industry has been affected by instability due to changes in government housing policies and access to sources of funding has become increasingly limited. Several of our competitors in the industry recently entered into reorganization proceedings ( Concurso mercantil ), which has contributed to instability among other companies in the industry. The outlook of the housing sector remains uncertain.

Geographical Distribution of Revenues

Revenues from foreign operations accounted for approximately 31% of our revenues in 2015, 34% of our revenues in 2014 and 24% of our revenues in 2013. The decrease in 2015 over 2014 of the percentage of our revenues derived from foreign operations principally reflected a decreased in contribution from our projects in Panama which were completed or near completion during the period, and which contributed 79% less to revenues in 2015 as compared to 2014, as well as after the application of the equity method in San Martin during the fourth quarter of 2015 which represented a 20% decrease in revenues.

The following table sets forth our revenues for Mexico and abroad for each of the years in the three-year period ended at December 31, 2013, 2014, and 2015.

 

    Year Ended December 31,  
  2015     2014     2013  
  (Millions of
Mexican pesos)
    (Percent
of Total)
    (Millions of
Mexican pesos)
    (Percent
of Total)
    (Millions of
Mexican pesos)
    (Percent
of Total)
 

Mexico

    Ps. 22,708        69     Ps. 26,060        68     Ps. 24,452        76

Other countries

    10,416        31     12,269        32     7,905        24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    Ps. 33,124        100     Ps. 38,329        100     Ps. 32,358        100

 

52


Table of Contents

Approximately 16% of our Civil Construction backlog as of December 31, 2015 is related to projects outside Mexico (as compared to approximately 11% as of December 31, 2014) and approximately 16% of our Civil Construction backlog as of December 31, 2015 was denominated in foreign currencies (principally U.S. dollars) (as compared to approximately 11% of our backlog as of December 31, 2014).

Foreign projects may be more difficult to supervise due to their greater distances from our principal operations. Foreign projects require familiarity with foreign legal requirements and business practices. In contrast to domestic infrastructure projects, foreign projects also typically do not allow us to benefit from our reputation and past experiences with Mexican government officials and private-sector individuals. Although we are active abroad, we have sought to be more selective than in the past when bidding for international projects. See “Item 5. Operating and Financial Review and Prospects—Operating Results.”

Environmental Matters

Our Mexican operations are subject to both Mexican federal and state laws and regulations relating to the protection of the environment. At the federal level, the most important of these environmental laws is the Mexican General Law of Ecological Balance and Environmental Protection, or the Ecological Law (Ley General de Equilibrio Ecologico y Proteccion al Ambiente) . Under the Ecological Law, rules have been promulgated concerning water pollution, air pollution, noise pollution and hazardous substances. Additionally, the Mexican federal government has enacted regulations concerning the import, export and handling of hazardous materials and bio-hazardous wastes. The waste and water treatment plants that are operated by one of our equity investees are subject to certain waste regulations, including for bio-hazardous waste. The Mexican federal agency in charge of overseeing compliance with the federal environmental laws is the Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales) . The Ministry of the Environment and Natural Resources has the authority to enforce Mexican federal environmental laws. As part of its enforcement powers, the Ministry of the Environment and Natural Resources can bring administrative and criminal proceedings against companies that violate environmental laws, and has the power to close non-complying facilities. We believe that we are in substantial compliance with Mexican federal and state environmental laws. Changes in Mexican federal or state environmental laws could require us to make additional investments to remain in compliance with such environmental laws, and changes in the interpretation or enforcement of such laws could cause our operations to cease to be in compliance with such laws. Any such event could have an adverse effect on our financial condition and results of operations.

Since 1990, Mexican companies have been required to provide the Ministry of the Environment and Natural Resources with periodic reports regarding their production facilities’ compliance with the Ecological Law and the regulations thereunder. These reports are required to include information with respect to environmental protection controls and the disposal of industrial waste. We have provided the information required by these reports to the Ministry of the Environment and Natural Resources. There are currently no material legal or administrative proceedings pending against us with respect to any environmental matter in Mexico, and we do not believe that continued compliance with the Ecological Law or Mexican state environmental laws will have a material adverse effect on our financial condition or results of operations, or will result in material capital expenditures or materially adversely affect our competitive position. However, financing institutions providing credit for projects on a case—by-case basis now and in the future could require us to comply with international environmental regulations that may be more restrictive than Mexican environmental regulations.

Through our Environmental Management Systems—which have ISO 14001:2004 certification—and our material and human resources, we manage projects from the bidding phase through completion of construction. In the case of concessions, we manage the remediation of our projects, seeking to ensure that the necessary studies are conducted (among them identification of species of flora and fauna listed in NOM-059-SEMARNAT-2010

 

53


Table of Contents

“Environment protection – Native Mexican species of animal and plant wildlife categories of risk and specifications for inclusion, exclusion or change. This year 3,031 species of flora and fauna were recovered in construction projects, of which 2,517 were rescued and preserved corresponding to endangered species, and the environmental impact mitigation activities have been proposed before projects begin. We have promoted the management of natural resources through operational eco-efficiency. As part of the contractual conditions for infrastructure construction, we have established guidelines with our clients in order to use natural resources optimally and reduce emissions of greenhouse gases (GHG) emissions from fossil fuels. During the course of our projects, through external audits and consultation with environmental authorities and clients, we verify compliance with agreed-upon environmental protection activities, placing special emphasis on those relating to biodiversity through flora and fauna rescue programs, reforestation, environmental monitoring, soil protection and land slope stabilization, and waste management, among others. In projects outside of Mexico, including within the Panama Canal zone, we are also required to comply with environmental laws by applicable authorities. We believe we are in substantial compliance with environmental laws to which we are subject.

Sustainable Infrastructure for Development

In 2011, in an effort to measure and improve our sustainability performance, we began publishing an annual Sustainability Report providing a snapshot of our operations’ economic, environmental and social impacts. Our annual report expands upon and deepens our engagement with a diverse range of stakeholders—including investors, local communities in which we operate, employees and their families, suppliers and other business partners—by explaining how we respond to their expectations and interests. Since 2013 we have conducted our integrated activities in accordance with the guidelines of the Global Reporting Initiative (GRI) V4 and the International Integrated Reporting Council (IIRC) frameworks.

By creating and maintaining a culture of sustainability, we seek to achieve long-term business success that aligns with the interests and needs of other stakeholders. In the recent years we have sought to redouble our efforts related to our zero-tolerance policy towards corruption. We have developed an anticorruption program that involves training of our employees, testing employees about conflicts of interest, as well as specific training and follow-up in our procurement area. In January 2013, our Board of Directors approved our first Code of Ethics and Conduct for Providers, Contractors and Business Partners. For two years in a row, ICA was the only construction and engineering company of Latin America listed in the Dow Jones Sustainability Emerging Markets Index for 2014-2015. In 2014, we kept our commitments on sustainability as Global Compact signatories as members of the Council Network for Mexico ( Consejo de la Red de México ) and as volunteers in the emissions report following the guidelines of the Carbon Disclosure Project (CDP). We also chaired the Sustainability Subcommittee of the Mexican Stock Exchange ( Subcomité de Sustentabilidad de la Bolsa Mexicana de Valores ) and the Infrastructure Comission of the Business Coordination Council ( Consejo Coordinador Empresarial ) as members of the World Business Council for Sustainable Development. In order to promote sustainability and evaluate the quality of our projects, we started collaboration with the Zofnass Program for Sustainable Infrastructure of Harvard Design School. In 2014, two case studies were conducted on ICA’s projects: the Nuevo Necaxa-Tihuatlán Highway and the Mayab Highway. By analyzing these two cases, we sought to create guidelines for evaluating and improving the performance of sustainability matters in our projects. Additionally, in 2014, we also started a strategic alliance with the Network for Sustainability in Emerging Markets of the German Development Cooperation (GIZ) to share expertise and best practices relating to environmental assets.

Finally, our culture of sustainability has allowed us to focus on specific composite initiatives to be implemented in the short, medium and long term activities and to consolidate our sustainability strategy.

 

54


Table of Contents

C. ORGANIZATIONAL STRUCTURE

The following table sets forth our significant subsidiaries as of December 31, 2015, including principal activity, domicile and our ownership interest:

 

Subsidiary

   Principal
Activity
   Domicile      Ownership
Interest
(%)

Constructoras ICA, S.A. de C.V.

   Construction      Mexico          100

Controladora de Empresas de Vivienda, S.A. de C.V.

   Housing      Mexico          100

Controladora de Operaciones de Infraestructura, S.A. de C.V.

   Concessions      Mexico          100

Ingenieros Civiles Asociados, S.A. de C.V.

   Heavy urban and specialized construction      Mexico          100

Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.

   Airport operations      Mexico          37.5 (1)

 

(1) Directly and through our interest in SETA.

D. PROPERTY, PLANT AND EQUIPMENT

At December 31, 2015, approximately 95% of our total assets, including concessions, are located in Mexico. At December 31, 2015, the net book value of all land (excluding real estate inventories) and buildings, machinery and equipment, and investment properties and concessions was approximately Ps. 32,246 million (approximately U.S.$1,860 million). We currently lease machinery from vendors primarily under operating leases. For information regarding property in our Corporate and Other segment, see “Item 4. Information on our Company—Business Overview—Description of Business Segments—Corporate and Other.”

Our principal executive offices, which we lease, are located at Blvd. Manuel Avila Camacho 36, Col. Lomas de Chapultepec, Del. Miguel Hidalgo, 11000 Mexico City, Mexico. We own the property where our executive offices were formerly located at Mineria No. 145, 11800, Mexico City, Mexico.

We believe that all our facilities are adequate for our present needs and suitable for their intended purposes.

 

Item 4A. Unresolved Staff Comments

None.

 

Item 5. Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. Our consolidated financial statements have been prepared in accordance with IFRS. We organize our reportable segments based on internally reported financial segment information, which is presented to our management through business unit reports. Our management regularly reviews this information to aid in operational decision-making, including regarding resource allocation, and for performance evaluation.

For the years ended December 31, 2015, 2014 and 2013, we have five reportable segments: Civil Construction, Industrial Construction (representing our 50% interest in ICA Fluor), Airports, Concessions and Corporate and Other.

Overview

We are a Mexican company principally engaged in construction and the operation of infrastructure projects under long-term concession or service agreements. Approximately 69% of our revenue in 2015 was generated in Mexico. As a result, our results of operations are substantially affected by developments in Mexico and Mexican public spending on large infrastructure projects. Our results of operations also vary from period to period based on the mix of projects under construction, the contract terms relating to those projects, the volume of traffic on our highway concessions and in our airports, and conditions in the Mexican housing market, among other factors.

 

55


Table of Contents

In recent years, our results of operations have deteriorated as a result of a lower volume of construction work performed and declining margins across several of our business segments. As a result of our declining financial performance, we increasingly were required to fund our operations through additional indebtedness. In 2015, our operating results were further adversely affected by the depreciation of the peso relative to the dollar. By the end of 2015, these factors led to a liquidity crisis, which limited our ability to repay our indebtedness and make other required payments, including tax payments and payments to suppliers.

As of December 31, 2015, as a result of the developments described below, our Company’s short-term liabilities exceeded current assets by Ps. 25.6 billion and our Company had a stockholders’ deficit with respect to equity held by controlling interests of Ps. 3.0 billion. Additionally, we had net losses of Ps. 19.7 billion and Ps. 2.0 billion during the years ended December 31, 2015 and 2014, respectively. These results and the matters described below raise substantial doubt about our ability to continue as a going concern. Our Company’s financial statements have been prepared under the assumption that we will continue as a going concern, which assumes the realization of our assets and the settlement of our liabilities and obligations in the normal course of business. Consequently, the accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Lack of growth in our backlog, low customer base recovery, high fixed costs, and losses incurred in projects abroad and other businesses, such as housing, contributed to the imbalance in our short-term cash flow. This lack of liquidity has significantly affected the fulfillment of our obligations, resulting in delays in tax payments, payments to suppliers and payment of debt service.

Management of our Company has been implementing a series of initiatives aiming at allowing us to regain financial flexibility and improve the efficiency and productivity of our operations . Management is considering various options, including negotiations with its current bondholders and certain suppliers to restructure our debt and other obligations. We have engaged and expect to continue to engage in discussions with advisors, secured creditors, unsecured creditors and potential investors in order to evaluate potential restructuring strategies. Additionally, we are analyzing the feasibility of the sale of certain non-core assets, and the partial realization of investments to allow us to obtain access to liquidity sources. We retained financial advisors to advise us in evaluating debt-restructuring alternatives to implement a long-term solution to our capital structure and debt service requirements.

Recent Developments

Interest and Principal Payment Defaults. In order to preserve the necessary cash to continue our operations and as part of our operational and financial restructuring process, we suspended payments under our unsecured debt beginning in the fourth quarter of 2015:

 

   

In 2015, we did not make a U.S.$31 million scheduled interest payment due November 30, 2015 on our 2024 Notes. In 2016, we did not make a U.S.$6 million scheduled interest payment due January 25, 2016 on our 2017 Notes and we did not make a U.S.$22 million scheduled interest payment due February 4, 2016 on our 2021 Notes. Under the indentures governing the Senior Notes, the noteholders have the right to accelerate this debt.

 

   

Our defaults under the Senior Notes resulted in cross-defaults under certain other corporate debt of our Company starting in December 2015. As a result, certain creditors foreclosed on the collateral securing our corporate debt or initiated other remedial actions against us . As of the date of this report, we continue to suspend payment on unsecured debt in order to preserve liquidity and creditors have continued to foreclose on collateral guaranteeing secured debt. For more information, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”

 

   

We have been pursuing negotiations with financial creditors to restructure our debt.

Cost Reduction Initiatives and Organizational Changes. As part of the measures we are adopting to improve our financial position, we are pursuing a significant cost reduction plan, in addition to implementing certain organizational changes.

 

56


Table of Contents

We continue to delay payments to certain service suppliers and creditors and to delay payment of taxes. In addition, we are in the process of reducing our workforce, divesting non-productive assets and reducing the scope of our operations. Our workforce of 22,116 total employees (of which 9,898 are administrative staff) as of December 31, 2015 represents a reduction of 9,186 total employees and 2,295 administrative staff employees as compared to December 31, 2014. Our workforce of 18,069 total employees (of which 8,473 are administrative staff) as of April 30, 2016 represents a reduction of 14,647 total employees and 4,072 administrative staff employees as compared to April 30, 2014. Our Company is also preparing a strategic exit from our international businesses as well as its businesses related to housing and real estate.

 

   

We announced a series of operational changes, including the:

 

   

appointment of Guadalupe Phillips Margain as Chief Restructuring Officer; and

 

   

appointment of Luis Zárate Rocha as CEO and Pablo Garcia Aguilar as CFO, in addition to other changes in operating management.

 

   

In addition, we are prioritizing efficient utilization of the funds assigned to our projects.

Effects of Devaluation. Since the end of 2014, the Mexican peso has depreciated significantly against the U.S. dollar, which has resulted in an increase in the cost of servicing our U.S. dollar-denominated debt. Given the significant decline in our revenues, which are principally earned in Pesos, we are not able to enter into hedging arrangements to adequately protect against the increased exchange rate risk. Our financial condition and results of operations may continue to deteriorate if the peso continues to depreciate against the dollar during 2016.

A. OPERATING RESULTS

Certain U.S. Dollar amounts have been translated from Mexican pesos for convenience purposes at an exchange rate of Ps. 17.34 per U.S.$1.00, the free market exchange rate for Mexican pesos on December 31, 2015, as reported by Banco de Mexico.

Our operations are divided into the following five segments: (1) Civil Construction, (2) Industrial Construction, (3) Concessions, (4) Airports, and (5) Corporate and Other.

Consolidated Results of Operations for the Three Years Ended December 31, 2015

Total Revenues

Total revenues decreased 14% in the year ended December 31 2015 as compared to the year ended December 31, 2014. This decrease was primarily the result of (i) delays in the execution of works of certain projects in Mexico, including Barranca Larga – Ventanilla Highway, Mitla-Tehuantepec Highway, Nuevo Necaxa Tihuatlan Highway and the Kantunil- Cancun highway to Playa del Carmen; (ii) the deconsolidation in the fourth quarter of 2015 of the construction contracts held by San Martin in Peru, as a result of the reduction of our ownership from 51% to 31.2%; (iii) income recognized in 2014 from the initial recognition of market value of land in Los Faros, Panama; and (iv) the completion of several projects in Central and South America. This was partially offset by a 90% increase in revenue from Facchina, which was Ps. 5,112 million in the year ended December 31, 2015 as compared to Ps. 2,685 million in the year ended December 31, 2014, as a result of the inclusion of a full year of consolidation in 2015. Revenues in the Corporate and Other segment also decreased, due to the slowdown in the real estate business.

Total revenues increased 18% in the year ended December 31 2014 as compared to the year ended December 31 2013. This increase was primarily the result of the favorable performance of our Construction segment’s works contracted in Mexico, the consolidation effective in April 2014 of Facchina in the U.S., the high rates of vehicle traffic growth in the Concessions segment and the continued increases in passenger traffic in our Airports segment.

 

57


Table of Contents

The following table sets forth the revenues of each of our segments and divisions for each of the years in the three-year period ended December 31, 2015. The revenues of our Industrial Construction segment are not reflected in our consolidated revenues, but are incorporated in our consolidated results through our share in results of joint ventures and associated companies. See Note 41 to our consolidated financial statements.

 

     Year Ended December 31,  
     2015     2014     2013  
     (Millions of
Mexican
pesos)
    (Percentage
of Total)
    (Millions of
Mexican
pesos)
    (Percentage
of Total)
    (Millions of
Mexican
pesos)
    (Percentage
of Total)
 

Revenues:

            

Civil Construction

     Ps. 20,679        62     Ps. 25,868        73     Ps. 21,744        67

Industrial Construction

     11,958        36     6,128        17     5,079        17

Concessions

     7,311        22     7,595        23     6,767        21

Airports

     4,477        14     3,770        10     3,420        12

Corporate and Other

     653        2     1,456        4     872        3

Industrial Construction Eliminations

     (11,958     (36 )%      (6,128     (17 )%      (5,079     (17 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Eliminations

     4        0     (360     (1 )%      (445     (2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     Ps. 33,124        100     Ps. 38,329        100     Ps. 32,358        100
Fair value on initial recognition of real estate inventories      —          —          1,099        —          —          —     

Total

     Ps. 33,124        100     Ps. 39,428        —          Ps. 32,358        —     

During 2014, we recognized a gain of an adjustment to fair value of Ps. 1,099 million for the acquisition in 2014 by our Panamanian subsidiary, State Town Corporation, S.A., of a property located in Panama through an auction process for U.S.$49 million, and after we acquired the property we cancelled a past due receivable owed to us in connection with construction work on the property. The property is composed of the land and the foundations for the construction of three towers in Panama City. Our management determined that the property, including the foundations, should be designated as real estate inventory as it was considering developing a real estate project on the property at the time. At December 31, 2015, and related to our announced financing restructuring process, we no longer had a short-term plan to develop the land, and there, we wrote down inventories to net realizable value for Ps. 1,040 million, resulting in a total value of the land of Ps. 1,123 million (considering the effects of exchange rate on the inventory). See Note 10 to our consolidated financial statements. In connection with this transaction, we entered into a bank loan agreement with Global Bank for U.S.$40 million with a fixed interest rate of 7.5% and a maturity date of July 2016. This loan was guaranteed by our shares in State Town Corporation, S.A. and the real estate inventory described above is pledged as collateral.

Gross Profit (Loss)

Gross profit (loss) is calculated as the sum of construction revenues, concession revenues, and sales by assets and other, less their respective costs, and does not include the line item “fair value upon recognition of real estate inventories.”

Gross profit (loss) decreased by Ps 11,989 million to a gross loss of Ps. (3,798) million in the year ended December 31 2015, as compared to a gross profit of Ps. 8,192 million in the year ended December 31 2014. The decline in gross profit (loss) was mainly due to recognition in 2015 reserves for doubtful accounts receivable for Ps. 5,801 million, an adjustment in the determination of net realizable value of inventories of Ps. 1,560 million; an, and impairments to investment properties and concession assets of Ps. 2,403 million. See Note 2(b) to our consolidated financial statements. Our greatest gross profit increase was in the Airports segment. Gross profit (loss) as a percentage of total revenue decreased to (11)% in the year ended December 31 2015 compared to 21% in the year ended December 31 2014, primarily due to the aforementioned impairments.

Gross profit increased 17% to Ps. 8,192 million in the year ended December 31 2014 compared to Ps. 7,954 million in the year ended December 31 2013. The growth in gross profit was mainly due to higher volume of traffic in the Concessions segment and a growth in the passenger rate in the Airports segment. Our greatest gross profit increase was in both our Concessions and Airports segments. Gross profit as a percentage of total revenue decreased to 21% compared to 25% in the year ended December 31 2013, primarily due to construction contracts that were executed in the year ended December 31 2014 with a smaller margin.

 

58


Table of Contents

General Expenses

Selling, general and administrative expenses decreased 0.3% to Ps. 3,057 million in the year ended December 31, 2015 compared to Ps. 3,066 million in the year ended December 31 2014. Selling, general and administrative expenses as a percentage of total revenue increased to 9.2% in the year ended December 31 2015 compared to 7.8% in the year ended December 31 2014. The increase as a percentage of total revenue was due primarily to lower revenues generated during the year ended December 31 2015 as compared to revenues generated in the year ended December 31 2014, despite the stability in general expenses from 2014 to 2015.

Selling, general and administrative expenses increased 2% to Ps. 3,066 million in the year ended December 31 2014 compared to Ps. 3,012 million in the year ended December 31 2013. Selling, general and administrative expenses as a percentage of total revenue decreased to 7.8% in the year ended December 31 2014 compared to 9.3% in the year ended December 31 2013. The decrease as a percentage of total revenue was due primarily to greater revenues in the year ended December 31 2014 compared with revenues from the year ended December 31 2013 principally due to the incorporation of Ps. 2,685 million of revenues from Facchina.

Other Income and Expenses, Net

In the year ended December 31 2015, our net other income (expenses) was Ps. 458 million in net other income, compared to net other expenses of Ps. (181) million in the year ended December 31 2014. Net other income (expenses) in the year ended December 31,2015 was mainly comprised of (i) Ps. 507 million in losses as a result of restructuring costs related to severance payments, (ii) Ps. 128 million as a result of a gains from the deconsolidation of San Martin, which we ceased consolidating in October 2015 due to our loss of control over the entity, as our shareholding decreased from 51% to 31.2%, (iii) Ps. 112 million gain from the sales of Punta Condesa Group, (iv) Ps. 163 million of a gain from adjusting the contingent consideration for the acquisition of Facchina, (v) Ps. 209 million gain from the sale of equity method investments; and (vi) gains related to the sale of property, plant and equipment for Ps. 228 million.

In the year ended December 31 2014, our net other income (expenses) was Ps. (181) million, compared to net other income of Ps. 61 million in the year ended December 31 2013. Net other income (expenses) in the year ended December 31, 2014 is mainly comprised of (i) Ps. 194 million in additional consideration for the acquisition of San Martín Contratistas Generales, S.A., or San Martin, compared to Ps. 544 million in the year ended December 31 2013, (ii) Ps. 17 million in loss on sales of shares mainly related to the Aguas Tratadas del Valle de Mexico consortium (“ATVM”), compared to a Ps. 587 million gain in the year ended December 31 2013 related to the sale of RCO and (iii) Ps. 10 million in gain on sales of property, plant and equipment.

Operating Income (Loss)

The following table sets forth operating income or loss of each of our segments for each of the years in the three-year period ended December 31, 2015. The operating income of our Industrial Construction is not reflected in our consolidated operating income, but is incorporated in our consolidated results through our share in results of joint ventures and associated companies.

 

     Year Ended December 31  
     2015     2014     2013  
     (Millions of Mexican pesos)  

Operating Income (Loss):

      

Civil Construction

     Ps. (7,355     Ps. 1,457        Ps. 891   

Industrial Construction

     986        364        195   

Airports

     1,915        1,516        1,145   

Concessions

     135        3,318        3,448   

Corporate and Other

     (1,133     (341     (291

Industrial Construction Eliminations

     (986     (364     (195

Eliminations

     42        95        (189

Total

     Ps. (6,396     Ps. 6,044        Ps. 5,003   
  

 

 

   

 

 

   

 

 

 

Operating margin

     (19 )%      15     15

 

59


Table of Contents

Operating income (loss) decreased by Ps. 12,440 million, from an operating income of Ps. 6,044 million for the year ended December 31, 2014 to an operating loss of Ps. (6,396) million for the year ended December 31, 2015. This decrease was driven primarily by the factors discussed above within gross profit (loss) related to adjustments for the allowance for doubtful accounts, determination of net releasable value of inventories and impairments to investment properties and concession assets, the decrease in revenue as a result of the slowdown in various projects as well as adjustments for impairments of assets, coupled with the fact that certain construction projects adjusted their margins at year end.

Operating income increased by 21% for the year ended December 31, 2014 from the year ended December 31, 2013. This increase was driven primarily by an adjustment to fair value on initial recognition of real estate inventories with respect to the Panama City property. The adjustment, which took into account the characteristics and location of the property, was for Ps. 1,099 million, and is presented in fair value on initial recognition of real estate inventories in our consolidated statement of results and other comprehensive income (loss).

Civil Construction

The following table sets forth the revenues and operating income of the Civil Construction segment for each of the years in the three-year period ended December 31, 2015.

 

     Year Ended December 31,  
     2015     2014     2013  
     (Millions of Mexican pesos)  

Revenues

     Ps. 20,679        Ps. 25,868        Ps. 21,744   

Fair value on initial recognition of real estate inventories

       1,099        —     

Operating income (loss)

     (7,355     1,457        891   

Operating margin

     (36 )%      6     4

Revenues. The 20% decrease in the Civil Construction segment’s revenues in the year ended December 31, 2015 from the year ended December 31, 2014 is principally due to (i) delays in the execution of works of certain projects in Mexico, including Barranca Larga – Ventanilla Highway, Mitla-Tehuantepec Highway and the Lazaro Cardenas Port Terminal; (ii) the deconsolidation of construction and mining contracts held by San Martin in Peru in October of 2015, as a result of the reduction in our share ownership of San Martin from 51% to 31.2%; (iii) income recognized in 2014 derived from the initial recognition of market value of land in Los Faros, Panama; and (iv) the completion of several projects in Central and South America. This decrease was partially offset by increased revenues from Facchina from Ps. 2,685 million in the year ended December 31, 2014 to Ps. 5,112 million in the year ended December 31, 2015. The following six projects together contributed 71% of revenues in this segment in 2015: Facchina, Mitla – Tehuantepec Highway, certain San Martin projects, Lázaro Cárdenas Port Terminal, Barranca Larga Ventanilla Highway and Palmillas—Apaseo El Grande Toll Road.

The 19% increase in the Civil Construction segment’s revenues in 2014 from 2013 is principally due to the inclusion of the amounts related to the Facchina acquisition in April 2014, which contributed 65% of this increase. The remaining increase was principally related to the revenues from the Mitla-Tehuantepec project. The following six projects together contributed 52% of revenues in 2014: Mitla-Tehuantepec, Barranca Larga Ventanilla, Avenida Domingo Diaz, Northern Corridor, Facchina and certain projects in the San Martin subsidiary.

Additionally, during 2014, the Civil Construction segment recognized a gain of Ps. 1,099 million upon the acquisition of a property in Panama, acquired in exchange for a past due receivable owed to us in connection with the construction work on the property.

 

60


Table of Contents

Operating Income . Operating income for the Civil Construction segment decreased by Ps. 8,812 million to an operating loss of Ps. (7,355) million in the year ended December 31 2015 as compared to operating income of Ps. 1,457 million in the year ended December 31 2014, primarily due to (ii): the deconsolidation of construction and mining contracts held by San Martin in Peru in October 2015, as a result of the reduction in our share ownership of San Martin from 51% to 31.2%, due to recognition in 2015 of reserves for doubtful accounts receivable for Ps. 5,801 million.

Operating income for the Civil Construction segment increased by 64% in the year ended December 31, 2014 from the year ended December 31, 2013, primarily due to the loss on sale of shares for an amount of Ps. 544 million in the year ended December 31, 2013, which reduced the operating margin, as well as provisions made in the year ended December 31, 2013, for doubtful accounts receivable.

Concessions

The following table sets forth the revenues and operating results of our Concessions segment for each year in the three-year period ended December 31, 2015.

 

     Year Ended December 31,  
     2015     2014     2013  
     (Millions of Mexican pesos)  

Revenues

     Ps. 7,311        Ps. 7,595        Ps. 6,767   

Operating Income

     135        3,318        3,448   

Operating Margin

     2     44     51

The following table sets forth the material revenue streams in our Concessions segment for each year in the three-year period ended December 31, 2015:

 

     Year Ended December 31,  
     2015      2014      2013  
     (Millions of
Mexican
pesos)
     (Percent
of Total)
     (Millions  of
Mexican

pesos)
     (Percent
of Total)
     (Millions of
Mexican
pesos)
     (Percent
of Total)
 

Tolls

     Ps. 2,293         31%         Ps. 2,059         27%         Ps. 2,015         30%   

Construction

     849         12             1,126         15             941         14      

Financing

     3,484         48             3,566         47             3,155         47       

Other

     685         9             845         11             655         10      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     Ps. 7,311         100%         Ps. 7,596         100%         Ps. 6766         100%   

Revenues in the Concessions segment are generated from various sources, as noted in the table above. Tolls represent the collection of fees from the operation of our concessions, which generally stems from use of toll roads, fees for the availability and use of toll-free roads and fees by volume of treated water delivered to municipalities. Construction revenues are comprised of construction on our concession assets pursuant to IFRS Interpretations Committee Interpretation No. 12 (“IFRIC 12”), Concession Arrangements . The first phase of development of a concession is the construction or rehabilitation of the asset, after which the operation and maintenance phase takes place over a specified period. To carry out the construction phase of a project, our respective concessionaire subsidiary subcontracts construction, entering into an EPC contract with a construction company. If such construction company is a related party that we consolidate, those construction revenues are recognized by our construction subsidiary in the Civil Construction segment. In addition, because our concessionaire subsidiary has entered into a construction and operating agreement with the grantor of the concession, it also recognizes construction revenues within the Concession segment pursuant to IFRIC 12. Upon consolidation, the construction revenues recognized by our concessionaire subsidiary are eliminated from the concession segment such that solely construction revenues recognized pursuant to IFRIC 12 are recognized only in the Civil Construction segment. However, segment results in our consolidated financial statements for both the Civil Construction and Concession segments include the related construction revenues. The information in the tables herein solely reflects external revenues and thus includes intercompany eliminations. For the years ended December 31, 2015, 2014 and 2013, intersegment revenues as a result of the above accounting treatment for construction services accounted for

 

61


Table of Contents

Ps. 2,599 million, or 36%, Ps. 1,856 million, or 24% and Ps. 2,349 million, or 35%, respectively, of our Concessions segment revenues. The increase in intersegment revenues in the year ended December 31, 2015 was principally due to the fact that the Barranca Larga Ventanilla Highway and Palmillas - Apaseo el Grande Toll Road projects were in a more advanced construction phase as compared to the year ended December 31, 2014. The decrease in intersegment revenues in the year ended December 31, 2014 was principally due to the completion of the construction stages of several concessioned projects, such as, La Piedad Bypass and the Rio Verde – Ciudad Valles Highway. The decrease in intersegment revenues in the year ended December 31, 2013 was principally due to a decrease in intersegment contracts between our construction company and our concession companies, principally due to the completion of construction work under the SPC contracts in the year ended December 31, 2012.

Our concessionaire subsidiary may also enter into an EPC contract with a third party, as is the case of construction of rights of way and environmentally related construction such as environmental impact assessments. In such cases, our construction subsidiary does not perform any construction services, and therefore does not recognize any construction revenues; our concessionaire subsidiary, however, continues to recognize construction revenues pursuant to the guidance in IFRIC 12, which are disclosed in the table above.

The Concessions segment also contains financing income and other income. Financing income is composed of two sources: (i) the reimbursement of the cost of financing obtained to build infrastructure assets granted under concession arrangements and (ii) interest income earned on concession assets accounted for as long-term accounts receivable. Income from other sources is composed primarily of conservation and maintenance of highways and construction income related to construction by third parties.

Revenues. The Concessions segment’s revenue was Ps. 7,311 million in the year ended December 31, 2015. The 4% decrease in revenue over 2014 was due to the decrease in finance income related to Rio de los Remedios – Ecatepec, SPC Projects and Kantunil – Cancun Highway . The revenues described above are not eliminated because they are not consolidated in the Civil Construction segment.

The Concessions segment’s revenue was Ps. 7,595 million in the year ended December 31, 2014. The 12% increase in revenue over 2013 was due to an increase in finance income related to the Rio de los Remedios Highway, Barranca Larga Ventanilla Highway and Palmillas – Apaseo El Grande Toll Road projects, as well as an increase in construction revenues recognized in the Concessions segment related to the Scenic Bypass. The revenues described above are not eliminated because they are not consolidated in the Civil Construction segment.

The segment had eight highways, two tunnels, four concessioned water projects, two social infrastructure projects, and one energy project as of December 31, 2015. Of these 16 concessions, 11 were operational, four were under construction and one under development phase at year end. The source of revenues in the Concessions segment depends on the mix of concessions under construction versus in operation and the nature of those concessions (financial versus intangible) as well as our active management of our investments in the segment, including whether we hold them to the end of the term or sell all or part of our interest in them. Therefore, revenue streams may vary from year to year. For example we have recently experienced a trend of increased construction revenues and financial income in this segment, as we enter into new concessions in the construction phase, which are classified as financial, as opposed to intangible, assets. This trend may change as a result of the foregoing factors.

Operating Income. The Concessions segment reported a 96% decrease in operating income for the year ended December 31, 2015 compared to the year ended December 31, 2014, principally due to the recognition of an impairment on the investment in the Barranca Larga—Ventanilla highway concession in the amount of Ps. 2,209 million. Cost overruns stemming from social and environmental issues as well as updated estimated traffic studies have caused the project to be financially unviable; accordingly, most of the construction on the project has been suspended. Currently, we are analyzing different alternatives to generate financial viability for the project. Additionally, the account receivable for the Rio de los Remedios—Ecatepec projects was impaired by Ps. 1,021 million pursuant to a change of estimated profitability. Please see “Item 4. Information on The Company – B. Business Overview – Description of Business Segments – Concessions.”

 

62


Table of Contents

The Concessions segment reported a 5% increase in operating income for the year ended December 31, 2014 compared to the year ended December 31, 2013, principally due to an increase in segment revenues related to finance, construction and operation in certain highways discussed above, as well as a decrease in general expenses margins primarily to decreased administrative cost partially offset by an increase in costs principally related to subcontractors and suppliers. The changes described above are related primarily to increases in operating income from the Rio Verde Ciudad Valles Highway, the La Piedad bypass and the new branch of the Kantunil-Cancun toll road, due to the fact that these concessions commenced operations in the fourth quarter of 2013.

Airports

The following table sets forth the revenues and operating results of our Airports segment for each year in the three-year period ended December 31, 2015.

 

     Year Ended December 31,  
     2015     2014     2013  
     (Millions of Mexican pesos)  

Revenues

     Ps. 4,477        Ps. 3,770        Ps. 3,420   

Operating income

     1,915        1,516        1,145   

Operating margin

     43     40     33

Revenues.

The Airports segment’s revenues increased by 19% in the year ended December 31, 2015 from the year ended December 31, 2014, primarily as a result of an increase in both aeronautical and non-aeronautical revenues. The sum of aeronautical and non-aeronautical revenues in the year ended December 31, 2015 increased by 21.1% as compared to the year ended December 31, 2014.

Aeronautical revenues increased by 19.8% in the year ended December 31, 2015 from the year ended December 31, 2014, primarily due to an increase in passenger charges from Ps. 2,068 million in the year ended December 31, 2014 to Ps. 2,533 million in the year ended December 31, 2015. This increase in passenger charges was attributable to a 15.2% increase in passenger traffic from 14.7 million in 2014 to 16.9 million in the year ended December 31, 2015.

Non-aeronautical revenues increased by 24.9% from Ps. 890 million in the year ended December 31, 2014 to Ps. 1,111 million in the year ended December 31, 2015, due primarily to car parking revenues, which increased by 24.3% from Ps. 146 million in the year ended December 31, 2014 to Ps. 181 million in 2015, OMA Carga operations, which increased by 127.1% from Ps. 47 million in the year ended December 31, 2014 to Ps. 107 million in 2015, baggage screening revenues, which increased by 26.4% from Ps. 79 million in 2014 to Ps. 100 million in the year ended December 31, 2015, food and beverage revenues, which increased by 24.7% from Ps. 54 million in the year ended December 31, 2014 to Ps. 67 million in the year ended December 31, 2015, and advertising revenues, which increased by 11.3% from Ps. 87,420 in the year ended December 31, 2014 to Ps. 97,255 in the year ended December 31, 2015.

Total terminal passenger traffic volume increased 15.2% in the year ended December 31, 2015 compared to the year ended December 31, 2014. Domestic terminal passenger traffic volume increased 14.6%, while international terminal passenger traffic volume increased 16.5%. The main percentage increases in total terminal passenger traffic volume (excluding transit passengers) in the year ended December 31, 2015 as compared to the year ended December 31, 2014 were at the Torreon (with a 45.8% increase), Durango (with a 23.4% increase), San Luis Potosi (with an 18.9% increase) and Monterrey (with an 18.7% increase) airports, while the Monterrey airport had the greatest absolute increase in total terminal passenger traffic volume.

The Airports segment’s revenues increased by 10% in the year ended December 31, 2014 from the year ended December 31, 2013, primarily as a result of increase in revenue from an increase in both aeronautical and non-aeronautical revenues. The sum of aeronautical and non-aeronautical revenues in the year ended December 31, 2014 increased by 12% as compared to the year ended December 31, 2013.

 

63


Table of Contents

Aeronautical revenues increased by 12% in the year ended December 31, 2014 from the year ended December 31, 2013, primarily due to an increase in passenger charges from Ps. 1,854 million in the year ended December 31, 2013 to Ps. 2,068 million in the year ended December 31, 2014. This increase in passenger charges was attributable to a 11% increase in passenger traffic from 13.3 million in 2013 to 14.7 million in the year ended December 31, 2014.

Non-aeronautical revenues increased by 12% in the year ended December 31, 2014 from the year ended December 31, 2013, primarily due to car parking revenues, which increased 14% from Ps. 128 million in the year ended December 31, 2013 to Ps. 146 million in 2014, hotel services revenues, which increased 11% from Ps. 177 million in the year ended December 31, 2013 to Ps. 196 million in the year ended December 31, 2014, baggage-screening revenues, which increased 23% from Ps. 64 million in the year ended December 31, 2013 to Ps. 79 million in the year ended December 31, 2014, food and beverage revenues, which increased 16% from Ps. 46 million in the year ended December 31, 2013 to Ps. 54 million in the year ended December 31, 2014, and advertising revenues, which increased 9% from Ps. 80 million in the year ended December 31, 2013 to Ps. 87 million in the year ended December 31, 2014.

Total terminal passenger traffic volume increased 10.6% in the year ended December 31, 2014 compared to 2013. Domestic terminal passenger traffic volume increased 10.8%, while international terminal passenger traffic volume increased 9%. The main percentage increases in total terminal passenger traffic volume (excluding transit passengers) in the year ended December 31, 2014 as compared to the year ended December 31, 2013 were at the San Luis Potosi (with a 43% increase), Reynosa (with a 20% increase), Tampico (with a 13% increase) and Torreon (with a 12% increase) airports, while the Monterrey airport had the greatest absolute increase in total terminal passenger traffic volume.

Operating Income. The Airports segment reported a 26% increase in operating income for the year ended December 31, 2015 compared to the year ended December 31, 2014, mainly as a result of the increase in total revenues.

The Airports segment reported a 32% increase in operating income for the year ended December 31, 2014 compared to the year ended December 31, 2013, mainly as a result of the increase in total revenues.

Industrial Construction

The Industrial Construction segment is comprised of our 50% equity interest in ICA Fluor. The results of the Industrial Construction segment are reflected in joint ventures and associated companies. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Share in Results of Joint Ventures and Associated Companies.”

Corporate and Other

The Corporate and Other segment includes our housing inventories, including our horizontal housing assets, which, due to their relative size, are no longer presented as a stand-alone segment. The segment also includes the administrative operations of our holding and subholding companies, including functions that are not directly managed by our other business segments. The following table sets forth the revenues and operating income of the Corporate and Other segment for each year in the three-year period ended December 31, 2015.

 

     Year Ended December 31,  
     2015     2014     2013  
     (Millions of Mexican pesos)  

Revenues

     Ps. 653        Ps. 1,457        Ps. 872   

Operating loss

     (1,133     (341     (291

% Margin

     (173 )%      (23 )%      (33 )% 

 

64


Table of Contents

Revenues. The Corporate and Other segment’s revenues decreased by 55% in the year ended December 31, 2015 from the year ended December 31, 2014, principally due to the divestments of real estate we have undertaken, such as the sale of our Grupo Punto Condesa for proceeds in the amount of Ps. 500 millon, as part of a short-term strategy to focus on our operations in the construction segment and pay down certain indebtedness The Corporate and Other segment’s revenues increased by 67% in the year ended December 31, 2014 from the year ended December 31, 2013, principally due to an increase in real estate and property sales principally related to reactivation in our low income housing developments as well as continued real estate divestment.

Operating Loss. The Corporate and Other segment’s operating loss increased to a loss of Ps. (1,133) million in the year ended December 31, 2015 as compared to a loss of Ps. (341) million in the year ended December 31, 2014, which is mainly due to the recognition of a reduction in value in the real estate inventory and assets available for sale of Ps. 1,030 million, taking into account the sales forecasts, the current economic environment, the current business plan, and the restructuring plan in process.

The Corporate and Other segment’s operating loss increased to Ps. 341 million in the year ended December 31, 2014 from a loss of Ps. 291 million in the year ended December 31, 2013, which is due to the recognition of an impairment of certain real estate inventories for Ps.114 million.

Backlog

The following table sets forth, at the dates indicated, our backlog of Civil Construction, mining services and other services contracts, which are consolidated (San Martin mining services and construction contracts through September 2015), and joint venture and associated company contracts, which are unconsolidated (and include San Marting mining services and construction contracts beginning in September 2015). Our distressed financial capacity may adversely affect our ability to win awards. The amounts included in the table below for joint venture and associated company backlog represent the full amounts of the related contracts.

 

     As of December 31,  
     2015      2015      2014      2013  
     (Millions of
U.S. dollars)
     (Millions of Mexican pesos)  

Civil Construction Backlog

   U.S.$  1,867         Ps. 32,380         Ps. 36,957         Ps. 30,658   

Mining Services Backlog

     —           —           4,770         4,949   

Other Services Backlog

     5         91         337         751   

Joint Venture and Associated Company Backlog

     1,855         32,163         21,230         10,864   

Civil Construction Backlog

Total Civil Construction segment backlog at December 31, 2015 decreased 12% compared to December 31, 2014, reaching Ps. 32,380 million primarily due to the increase in the execution of works of certain projects, mainly concession projects such as the Palmillas - Apaseo El Grande Highway and the Mitla - Tehuantepec Highway, reductions related to certain projects such as the Barranca Larga Ventanilla Highway and to a lesser extent, the deconsolidation of San Martin in Peru.

Total Civil Construction segment backlog at December 31, 2014 increased 21% compared to December 31, 2013, reaching Ps. 36,957 million primarily due to the incorporation of Ps. 3,299 million (U.S.$224 million) in backlog of the Facchina construction projects at December 31, 2014, which represents 52% of the increase in this backlog.

 

65


Table of Contents

The table below sets forth the nine projects that represented approximately 87% of backlog in the Civil Construction segment as of December 31, 2015.

 

     Amount      Estimated Completion Date    % of Civil 
Construction Backlog
 
   (Millions of
Mexican pesos)
             

Civil Construction Backlog

        

Monterrey Aqueduct VI

     4,688       36 months after commencement of construction      14

Santa Maria Dam

     4,125       Third quarter of 2018      13

Facchina

     3,612       -      11

Palmillas – Apaseo El Grande Toll Road

     3,398       Fourth quarter of 2016      10

Mitla-Tehuantepec Highway

     Ps. 2,822       Fourth quarter of 2016      9

Mexico – Toluca train

     2,397       Fourth quarter of 2017      7

Churubusco – Xochiaca Tunnel

     2,219       Fourth quarter of 2017      7

Eastern Discharge Tunnel

     2,196       Fourth quarter of 2018      7

Sonora State Package Highways

     1,392       Second quarter of 2019      4

Guatemala penitentiary

     1,226       Second quarter of 2016      4

As of December 31, 2015 approximately 16% of Civil Construction segment backlog was attributable to construction projects outside Mexico, and public sector projects represented approximately 81% of our total Civil Construction backlog.

Our book and burn index (defined as the ratio of new Civil Construction contracts, plus net Civil Construction contract additions to existing contracts, to executed Civil Construction works) was 0.7 in 2015 compared to 1.4 in 2014. New contract awards and net increases to existing contracts during 2015 were lower than the execution of projects during the year.

Mining and Other Services Backlog

As a result of the deconsolidation of San Martin, as of December 31, 2015, our mining backlog is no longer presented in our consolidated backlog. However, it is presented as part of the backlog of Associated and Joint Venture companies. The other services contracts correspond to contracts for machinery and equipment leasing of Ps. 91 million, as compared to Ps. 337 million in 2014.

Total mining services and other backlog at December 31, 2014 decreased compared to December 31, 2013, primarily due to the fact that the rate of completion of projects was higher than the rate of our acquisition of new contracts.

Joint Venture and Associated Company Backlog

Our joint venture and associated company backlog at December 31, 2015 increased compared to December 31, 2014, reaching Ps. 32,163 million at December 31, 2015, from Ps. 21,230 million at December 31, 2014, primarily due to the incorporation of San Martin’s backlog, our associated entity in Peru, both for its construction contracts such as mining, as well as the addition of the new contract 4A package in Tula from ICA Fluor for Ps. 18,932 million.

Our total joint venture and associated company backlog at December 31, 2014 increased compared to December 2013, reaching Ps. 21,230 million, primarily due to the new contracts of ICA Fluor such as the Tula Refinery Phase II of Ps. 18,339 million, the Ramones II Sur Gas Pipeline of Ps. 9,379 million and the well pad modules for Shell Canada of Ps. 3,549 million as well as net contract additions.

 

66


Table of Contents

Financing Cost, Net

The following table sets forth the components of our net financing costs for each year in the three-year period ended December 31, 2015.

 

     Year Ended December 31,  
     2015      2014      2013  
     (Millions of Mexican pesos)  

Interest expense

     Ps. 6,840         Ps. 6,170         Ps. 4,102   

Interest income

     (327      (481      (500

Exchange (gain) loss, net

     4,740         3,161         357   

Loss (gain) on financial instruments

     (287      580         326   
  

 

 

    

 

 

    

 

 

 

Financing cost, net (1)

     Ps. 10,966         Ps. 9,430         Ps. 4,285   

 

  (1) Does not include net financing costs of Ps. 688 million, Ps. 692 million and Ps. 616 million in 2015, 2014 and 2013, respectively, that are included in cost of sales. See Note 37 to our consolidated financial statements.

Net financing costs in the year ended December 31, 2015 reached Ps. 10,966 million. The 16% increase in net financing costs in the year ended December 31, 2015 from the year ended December 31, 2014 was mainly due to exchange losses from the depreciation of the Mexican Peso against the U.S. dollar, and increased interest expenses as a result of the depreciation of the Mexican Peso against the U.S. Dollar, which were partially offset by gains in the valuation of financial instruments.

Net financing costs in 2014 reached Ps. 8,454 million. The 150% increase in net financing costs in the year ended December 31, 2014 from the year ended December 31, 2013 was mainly due to exchange losses from the depreciation of the Mexican peso against the U.S. dollar; interest expense as a result of the early amortization of capitalized costs for the prepayment of U.S. $200 million of our 2017 notes, and from the effect of the calculation of the net present value of the liability resulting from the fiscal deconsolidation that occurred in 2013 as a result of changes in the tax consolidation regime.

Interest expense increased by 11% in the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to the depreciation of the mexican peso against the U.S. dollar, as interest on our bonds are denominated in dollars.

Interest expense increased by 50% in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the accelerated amortization of placement expenses on our repurchased notes, the prepayment premium offered to holders, commissions, and the early amortization of the capitalized costs; the effect of the calculation of the net present value of the liability resulting from the fiscal deconsolidation that occurred in 2013 as result of changes in the tax consolidation regime; and the cost of early termination of derivatives related to the La Piedad Bypass and the Rio Verde – Ciudad Valles highway project financings.

Interest income decreased by 32% in the year ended December 31, 2015 in part due to a decrease in excess cash held for operation.

Interest income decreased by 4% in the year ended December 31, 2014 in part due a decrease of excess cash held for the operation which is partially offset partly by variations in bank interest rates.

Our total debt as of December 31, 2015 increased 7% compared to December 31, 2014, primarily as result of the depreciation of the Mexican peso against the U.S. dollar, and increased borrowing in our Concessions segment.

Our total debt as of December 31, 2014 increased 39% compared to December 31, 2013, primarily as result of the depreciation of the Mexican peso against the dollar, and increased borrowing in our Concessions, Airports and Corporate and Other segments.

 

67


Table of Contents

At December 31, 2015 and March 31, 2016 we had U.S.$ 32,140 million and U.S.$ 27,341 million, respectively, of debt issued or guaranteed as joint obligor or guarantor by our parent company.

At December 31, 2014 and March 31, 2015, we had U.S.$3,285 million and U.S.$3,336 million, respectively, of debt issued or guaranteed as joint obligor or guarantor by our parent company.

At December 31, 2015, 2014 and 2013, 45%, 45% and 35% respectively, of our total debt was denominated in currencies other than Mexican pesos, principally U.S. dollars. We may in the future incur additional non-peso denominated indebtedness. Declines in the value of the Mexican peso relative to such other currencies could both increase our interest costs and result in foreign exchange losses. Conversely, an increase in the value of the Mexican peso relative to such other currencies could have the opposite effect.

Share in Results of Joint Ventures and Associated Companies

Our share in joint ventures and associated companies includes the operations ICA Fluor; our environmental services affiliate PMA Mexico (sold in December 2015), which operates municipal potable water treatment and supply, sewage, waste water treatment and other waste management systems; our real estate affiliate Los Portales S.A.; our affiliate Actica San Martin (starting in October 2015), and the Facchina joint ventures, among others. Our Industrial Construction segment, comprised of the ICA Fluor joint venture, accounted for 74%, 41% and 62% of our total share in results of joint ventures and associated companies as of December 31, 2015, 2014 and 2013, respectively.

The following table sets forth our share in results of unconsolidated joint ventures and associated companies by segment for each year in the three-year period ended December 31, 2015.

 

     Year Ended December 31,  
     2015      2014      2013  
     (Millions of Mexican pesos)  

Civil Construction

     Ps. 137         Ps. 94         Ps. 180   

Industrial Construction

     44         (3      67   

Concessions

     284         123         21   

Corporate and Other

     356         335         103   
  

 

 

    

 

 

    

 

 

 

Total

     Ps. 821         Ps. 549         Ps. 350   

We include the results of our investments in the following associated companies and joint ventures in our Civil Construction segment: Grupo Rodio Kronsa (sold in the fourth quarter of 2015), Constructoras de Infraestructura de Agua del Potosí, Infraestructura y Saneamiento Atotonilco, Aquos El Realito, Administracíon y Servicios, the Atotonilco water treatment plant, the Acapulco Scenic Bypass, three of the Facchina’s joint venture projects, the Consortium for maintenance of oil pipelines in southern Colombia and the Construction Consortium for Line 3 of the metro in Chile, and beginning in the fourth quarter of 2015, the San Martin investment.

We include our share of the results of the following associated companies and alliances in the Concessions segment: PMA Mexico (sold in the fourth quarter of 2015), Autovia Nuevo Necaxa – Tihuatlan, Autovia Mitla – Tehuantepec, Renova – Atlatec, Suministro de Agua de Queretaro and El Realito.

We include the results of our investments in the following companies in the Corporate and Other segment: Los Portales, Fideicomiso Banco Invex, S.A. Reserva Escondida Trust (sold in the fourth quarter of 2015) Trust and Actica.

We include the results of our investment in ICA Fluor in the Industrial Construction segment.

Our share of income of unconsolidated associated companies represented a gain of Ps. 821 million in the year ended December 31, 2015 as compared to Ps. 549 million in the year ended December 31, 2014, primarily due to an increase in net income from ICA Fluor, PMA Los Portales y Autovia Mitla – Tehuantepec, among others. Our share of income of unconsolidated associated companies represented a gain of Ps. 549 million in the year ended December 31, 2014 as compared to Ps. 350 million in the year ended December 31, 2013, primarily due to the addition of Ps. 78 million in joint venture projects of Facchina, as well as an increase in net income from PMA Mexico and SAQSA.

 

68


Table of Contents

With regard to ICA Fluor in particular, our share in results of our investment in ICA Fluor increased 173% in the year ended in December 31, 2015 from a loss in the year ended December 31, 2014 and increased 27.4% in the year ended December 31, 2014 from the year ended December 31, 2013. ICA Fluor’s revenues increased 95% in the year ended December 31, 2015 from the year ended December 31, 2014 principally due to the high volume of activity in Tula Coker plant and Los Ramones Sur gas pipeline projects. ICA Fluor’s revenues increased by 21% in the year ended December 31, 2014 from the year ended December 31, 2013 principally due to the high volume of activity in the Los Ramones Sur gas pipeline project, which had total revenues of Ps. 2,699 million during the year ended December 31, 2014, partially offset by the lower margins in this project. ICA Fluor’s operating income increased by 171% in the year ended December 31, 2015 from the year ended December 31, 2014, principally due to maintaining administrative costs at levels similar to the year ended December 31, 2014, coupled with a significant increase in revenue. ICA Fluor’s operating income increased by 99% in the year ended December 31, 2014 from the year ended December 31, 2013, principally due to maintaining administrative costs at levels similar to the year ended December 31, 2013, in addition to a significant increase in revenue.

Tax

In December 2013, the Mexican Congress approved a tax reform that became effective on January 1, 2014. The previous fiscal consolidation regime, which had permitted a parent company to report taxes on a consolidated basis, including those of majority-owned subsidiaries, was eliminated. Additionally, the tax reform eliminated the IETU regime and planned reductions in the statutory income tax rate were eliminated, such that the tax rate will continue at 30%.

In 2014, a new optional tax regime (the “Optional Regime for Groups of Companies”) was approved for companies that meet conditions and requirements similar to the previous regime of consolidation. This new optional tax regime allows qualifying companies , under certain rules, to defer a portion of income tax for up to three years through the determination of an integration factor, which is applied individually by all companies in the group to determine the income tax payable.

We chose to join the new Optional Regime for Groups of Companies of 2014, as allowed by the Income Tax Law of 2014, after submitting to the tax authorities the corresponding notice. We opted in this regime to take advantage of the minimum deferral available for the current fiscal year and potential deferrals in the future.

Tax liabilities due to the effects of deconsolidation as of December 31, 2013 will continue to be paid under the terms of the previous tax law. As of December 31, 2015 our estimated total liability for tax deconsolidation was Ps. 3,845 million, of which amount we have recorded Ps. 1,228 million as short-term and Ps. 2,617 million as a long-term liability (net of discounting for present value). As of December 31, 2014, we recorded Ps. 3,881 million of tax liability from deconsolidation, of which Ps. 182 million were recorded as short-term and Ps. 3,699 million were recorded as a long-term liability. See Note 28 to our consolidated financial statements.

As a result of the repeal of the IETU, the deferred IETU tax liability that we had recognized of Ps. 512 million in 2013 was cancelled for accounting purposes as of the date of the promulgation of the tax reform. See Note 28 to our consolidated financial statements.

In 2015, we recorded consolidated net tax of Ps. 3,223 million. As of December 31, 2015, we recorded a deferred income tax asset of Ps.3,333 million, comprised of temporary differences of Ps.3,331 million (including a benefit from deductible temporary differences on items included in other comprehensive income for Ps.161 million) and IMPAC recoverable of Ps.2 million. Additionally, we recorded a net deferred ISR liability of Ps.2,866 million, comprised mainly of Ps.2,694 million of taxable temporary differences and Ps.172 million of taxable temporary differences on items included in other comprehensive income. Our effective tax rate was (19.49%) in 2015. The 45.96% increase over 2014 was due primarily to deferred tax assets not recognized in 2014 of Ps. 7,288 million (44.06%). The effective tax rate differed from the statutory rate in 2015 by 49.49% due to the net effect of inflation, non-deductible expenses, tax losses updated with the inflation, investment in concessions, deferred tax assets not recognized previously and the effects of the difference in rates of foreign subsidiaries.

 

69


Table of Contents

In 2014, we recorded consolidated net tax benefits of Ps. 751 million, which included income tax benefits of Ps. 1,034 million and tax credits for foreign taxes paid of Ps. 2 million. As of December 31, 2014, we recorded a deferred income tax asset of Ps. 6,164 million, comprised of temporary differences of Ps.6,106 million (including a benefit from deductible temporary differences on items included in other comprehensive income for Ps. 30 million), Ps. 55 million related to tax credits for foreign taxes paid and IMPAC recoverable of Ps. 2 million. Additionally, we recorded a net deferred income tax liability of Ps. 2,616 million, comprised mainly of Ps. 2,601 of taxable temporary differences and Ps. 15 million of taxable temporary differences on items included in other comprehensive income. Our effective tax rate was 26.47% in 2014. The 6.71% increase over 2013 was due primarily to the cancellation in 2013 of Ps. 512 million of deferred IETU tax liability (74.45%), the recovery of Ps. 125 million in taxes on assets (14.75%) (Asset Tax, or IMPAC) in 2013, due to the net effect of inflation Ps. 231 million (21.72%) and the effects of the difference in rates of foreign subsidiaries Ps. 191 million (17.88%). The effective tax rate differed from the statutory rate in 2014 by 3.53% due to the net effect of inflation, non-deductible expenses, the effects of unrecognized tax benefits, investments in joint ventures and associated companies and the effects of the difference in rates of foreign subsidiaries.

In 2013, we recorded consolidated net tax benefits of Ps. 354 million, which included income tax of Ps. 137 million and IETU benefits of Ps. 491 million. As of December 31, 2013, we recorded a deferred income tax asset of Ps. 4,546 million comprised of net deductible temporary differences of Ps. 4,199 million, Ps. 250 million related to tax credits for foreign taxes paid and IMPAC recoverable of Ps. 97 million. Additionally, we recorded a net deferred ISR liability of Ps. 2,075 million mainly of Ps. 2,126 of taxable temporary differences and Ps. 51 million of benefit of taxable temporary difference on items included in other comprehensive income. Our effective tax rate was (33.18)% in 2013. The (29.43)% increase over 2012 was due primarily due to of Ps. 703 million the effects of the difference in rates of subsidiaries (75.75%), due to the net effect of inflation of Ps. 513million (55.30%) and IETU tax liability of Ps. 89 million (9.55%).

The statutory tax rate in Mexico is 30%. Generally, the differences between effective tax rates and statutory tax rates are due to different rates for foreign subsidiaries, the effects of inflation and exchange rate fluctuations.

As of December 31, 2015, we assessed the probability for recovery of tax loss carry forwards, and decided to exclude from the determination of deferred taxes an amount of Ps.19,166 million. Until December 31, 2014 such tax losses were included in this determination, this led to the cancellation of Ps.5,750 million of deferred income tax assets in conjunction with our restructuring analysis. However, we maintain our right to redeem this tax loss, which has a term ranging between 6 and 10 years. See Note 28 to our financial statements.

Additionally we have been working with the Mexican tax authority to resolve any payments delays through in-kind payments or otherwise. See Note 22 (4) to our consolidated financial statements

As of December 31, 2015, the outstanding tax payment amounts is Ps. 973 million.

Net Income

We reported a consolidated net loss of Ps.(19,764) million in the year ended December 31, 2015, compared to consolidated net loss of Ps.(2,086) million in the year ended December 31, 2014, representing an increase in net loss of 848%.

We reported a consolidated net loss of Ps. 2,086 million in the year ended December 31, 2014, compared to consolidated net income of Ps. 1,422 million in the year ended December 31, 2013, representing a decrease of 247%.

Net income of non-controlling interest was Ps. 659 million in the year ended December 31, 2015 and Ps. 937 million in the year ended December 31, 2014. Net loss of controlling interest was Ps.(20,423) million in the year ended December 31, 2015 and net income of controlling interest was Ps. 3,024 million in the year ended December 31, 2015.

 

70


Table of Contents

Net income of non-controlling interest was Ps. 937 million in the year ended December 31, 2014 and Ps. 999 million in the year ended December 31, 2013. Net loss of controlling interest was Ps. 3,024 million in the year ended December 31, 2014 and net income of controlling interest was Ps. 424 million in the year ended December 31, 2013.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with IFRS, including its amendments and interpretations, as issued by IASB.

Below is a description of the principal critical accounting policies which require the significant use of estimates and the judgment of management based on their experience and current events, as well as a description of the respective accounting internal control.

Accounting for Construction Contracts

Accounting Policy

Revenue is recognized to the extent that it is probable that the economic benefits associated with the transaction will flow to the company. Revenue is measured at the fair value of the consideration received or receivable and represents the amounts receivable for goods and services provided in the normal course of activities. Revenues are reduced for estimated customer returns, rebates and other similar allowances.

For accounting purposes, we recognize revenue from construction contracts using the percentage of completion method, based on the cost incurred method, taking into account the development of activities considering total costs and revenues estimated at the end of the project, established in International Accounting Standard 11 “Construction Contracts” (“IAS 11”). The percentage of completion method provides an understanding of the performance of the project in a timely manner, and appropriately presents the legal and economic substance of the contracts. Under this method, revenue from the contract is compared against the costs incurred by the contract, based on percentage-of-completion, which determines the amount of revenue, expenses and income that can be attributed to the portion of work completed.

The base revenue utilized to calculate percentage of profit includes the following: (i) the initial amount established in the contract, (ii) additional work orders requested by the customer, (iii) changes in the considered yields, (iv) the value of any adjustments (for inflation, exchange rates or changes in prices, for example) agreed to in the contract, (v) the decrease in the original contract value and agreements in contracts (vi) claims and conventional penalties, and (vii) completion or performance bonuses, as of the date on which any revision takes place and is effectively approved by the customers.

In order to determine the basis for costs used to calculate the percentage of completion in accordance with the costs incurred method, we consider the following: (i) the costs directly related to the specific contract, (ii) indirect costs related to the general contract activity that can be identified with a specific contract; and (iii) any other costs that may be transferred to the customer under the contract terms. The costs directly related to the specific contract include all direct costs such as materials, labor, subcontracting costs, manufacturing and supply costs of equipment carried out in independent workshops, start-up costs and depreciation. Indirect costs identified that are assignable to the contract include indirect labor, payroll of technical and administrative personnel, construction site camps and related expenses, quality control and inspection, internal and external contract supervision, insurance costs, bonds, depreciation, amortization, repairs and maintenance.

Costs which are not included within contract costs are: (i) any general administrative expenses not included under any form of reimbursement in the contract; (ii) selling expenses; (iii) any research and development costs and expenses not considered reimbursable under the contract; and (iv) the depreciation of machinery and equipment not used in the specific contract even though it is available on hand for a specific contract, when the contract does not allow revenue for such item. In addition, work performed in independent workshops and construction in-process are also excluded and are recorded as assets when they are received or used under a specific project.

 

71


Table of Contents

Variations in the scope of construction works may arise due to several factors, including: improvements in the construction process due to reduced supplies or runtime, local regulatory changes and changes in the conditions for the execution of the project or its implementation, design changes requested by the customer and the geological conditions not included in the original plan. Additionally, and in order to identify possible changes in contracts, we have implemented a method whereby these changes can be identified and reported, and whereby the amounts can be quantified and approved and the changes implemented efficiently on projects. A variation in contract revenue is recognized when (a) it is probable that the changes will be approved and the amount of revenue resulting from the change, (b) the amount of revenue can be reliably measured and (c) and it is probable that the economic benefits flow to the entity. Claims or incentives for early completion are recognized as part of the revenue of a contract, provided that there is sufficient evidence that the customer will authorize payment for these items. Consequently, claims and incentives are included in contract revenue only when (a) negotiations have reached an advanced stage such that it is probable that the customer will accept the claim, and (b) the probable amount to be accepted by the customer can be reliably determined. With respect to incentive payments, revenues are recognized only when the execution of the contract is significantly advanced to conclude that the specified standards of performance will be achieved or exceeded and the amount of the incentive payment can be reliably measured.

Costs incurred for change orders based on customers’ instructions which are still awaiting definition and price authorization are recognized as assets within the caption “cost and estimated earnings in excess of billings on uncompleted contracts.”

For those funded projects in which financing revenue are included as part of the selling price, only borrowing costs directly related to the acquisition or construction of the asset, less the realized yields by the temporary investment of such funds and the exchange loss, to the extent it is an adjustment to interest costs, are attributed to the contract costs. The borrowing costs that exceed the estimates and cannot be passed on to the customers are not part of contract costs. In these types of contracts, the collection of the contract amount from the client may take place at the completion of the project. However, periodic reports of the advance of the project to date are provided to and approved by the client, which serve as the basis so that we can continue to obtain financing for the project.

When a contract includes construction of various facilities, construction of each facility is treated as a separate profit center when: (i) separate proposals have been submitted for each facility; (ii) each facility has been subject to separate negotiation and we and the customer have been able to accept or reject that part of the contract relating to each asset; (iii) the costs, revenues and profit margin of each asset can be identified.

A group of contracts, whether with one or several clients, are treated together as one unique center of profit when: (i) the group of contracts have been negotiated together as a unique package; (ii) the contracts are so closely interrelated that they are effectively part of a single project with an overall profit margin; and (iii) the contracts are executed simultaneously or in a continuous sequence.

The estimated profit of various profit centers cannot offset one another. We ensure that when several contracts integrate a profit center, its results are properly combined.

Under the terms of various contracts, revenue recognized is not necessarily related to the amounts billable to customers.

The line item “Cost and Estimated Earnings in Excess of Billings on Uncompleted Contracts” included in the heading of “Customers”, originates from construction contracts and represents the difference between the costs incurred plus recognized profit (or less any recognized losses) and less certifications made for all contracts in progress, in excess of the amount of the certificates of work performed and invoiced. Any amounts received before work has been performed are included in the consolidated statement of financial position as a liability, as advances from customers. Amounts invoiced from the performed work but not yet paid by the customer are included in the consolidated statement of financial position as billing contracts and other receivables.

 

72


Table of Contents

Internal Control

As part of the planning process of a construction contract before commencing any project, we review the principal obligations and conditions of the specific contract for the purpose of reasonably estimating (i) the projected revenue, (ii) the costs to be incurred in the project, (iii) the gross profit of the project. We determine the method by which to accurately measure the executed work based on this review, and in conjunction with an analysis, based on each contract, of the legal and economic rights for the receipt of payment for the work performed.

The decision of whether or not to participate in a project is made collectively with representatives of the technical, legal, financial and administrative areas, which considers an analysis of the customer’s economic solvency and reputational standing, the legal framework, the availability of resources, the technological complexity of the project, the obligations and rights assumed, the economic, financial and geological risks, and the possibility of mitigation of risks, as well as the analysis of each contract. Our policy is to avoid contracts with material risks, unless such risks may be mitigated or transferred to the customers, suppliers and/or subcontractors.

In contracts involving performance guarantees related to the equipment on which the performance of the project depends, the decision to participate will depend on, among other factors, our ability to transfer the risks and penalties related to these guarantees to the suppliers and/or subcontractors.

In contracts involving guarantees related to timely delivery, we generally plan the project to take into consideration the risk of delay and allow sufficient time for the timely completion of the project in spite of unavoidable delays.

Projects are executed in accordance with a work program determined prior to commencement of the project, which is periodically updated. The work plan includes the description of the construction to be performed, the critical execution route, the allocation and timeliness of the resources required and the project’s cash flow forecast.

The construction contracts into which we enter are generally either (i) unit price or (ii) fixed price (either lump sum or not-to exceed). The evaluation of the risks related to inflation, exchange rates and price increases for each type of contract depends on if the contract is a public works contract or is with the private sector.

In unit price contracts in the private sector, the customer generally assumes the risks of inflation, exchange-rate and price increases for the materials used in the contracts. Under a unit price contract, once the contract is signed the parties agree upon the price for each unit of work. However, unit price contracts normally include escalation clauses whereby we retain the right to increase the unit price of such inputs as a result of inflation, exchange-rate variations or price increases for the materials, if any of these risks increases beyond a percentage specified in the contract.

For unit price contracts related to public works, in addition to escalation clauses, in Mexico the “Public Works and Services Law” establishes mechanisms to adjust the value of such public unit-price contracts for cost increases. The Public Works and Services Law provides the following mechanisms for the adjustment of unit prices in unit-price contracts: (i) a review of individual unit prices for which adjustment may be possible; (ii) review of unit prices by group where the estimated amount of work remaining to be performed represents at least 80% of the total amount of remaining work under the contract; and (iii) for those projects in which the relationship between the input and the total contract cost is established, an adjustment to reflect the increased cost may be made based on such proportion. The application of these mechanisms is required to be specified in the relevant contract.

In lump sum contracts, not-to-exceed contracts or contracts where there are no escalation clauses in which we undertake to provide materials or services at fixed unit prices required for a project in the private sector, we generally absorb the risk related to inflation, exchange-rate fluctuations or price increases for materials. However, we seek to mitigate these risks as follows: (i) when the bid tender is prepared, such risks are included in determining the costs of the project based on the application of certain economic variables which are provided by recognized economic analysis firms; (ii) contractual arrangements are made with the principal suppliers, among which advance payments are made to ensure that the cost of the materials remains the same during the contract term; and (iii) the exchange-rate risk is mitigated by contracting suppliers and subcontractors in the same currency as that in which the contract is executed with the customer.

 

73


Table of Contents

For those risks that cannot be mitigated or which surpass acceptable levels, we carry out a quantitative analysis in which we determine the probability of occurrence of the risk, measure the potential financial impact, and adjust the fixed price of the contract to an appropriate level.

For fixed price contracts in the public sector, the Public Works and Services Law protects the contractors when adverse economic conditions arise that could not have been anticipated at the time of awarding the contract and thus were not considered in the initial contract bid. The Public Works and Services Law allows the Controller’s Office ( Secretaria de la Funcion Publica ) to issue guidelines through which public works contractors may recognize increases in their initial contract prices as a result of adverse economic changes.

In recent years, our construction contracts have been increasingly of the fixed price type or mixed price contracts in which a portion of the contract is at fixed price and the rest at unit prices. While we have entered into contracts with unit pricing in the last three years, we believe that fixed price contracts are more prevalent in the construction market and the contracts that we enter into in the future will reflect this shift to fixed price contracts.

Furthermore, we expect that due to the financing trends, future contracts related to concessions, infrastructure construction and industrial construction will restrict adjustments to the contract price for additional work performed as a result of incorrect contract specifications.

In order to be able to apply percentage-of-completion method, the following requirements must be met: (i) the contract must clearly specify the legal rights related to the goods or services to be provided and to be received by the parties, the consideration to be exchanged and the terms of the agreement; (ii) our legal and economic right to receive the payment for the work performed as the contract is executed must be specified; (iii) the expectation must be that both the contractor and the customer will fulfill their respective contractual obligations; and (iv) based on the construction budget and contract, the total amount of revenue, the total cost to be incurred and the estimated profit can be determined.

The estimations are based on the terms, conditions and specifications of each specific contract, including assumptions made by management of the project in order to ensure that all costs attributable to the project were included.

Periodically, we evaluate the reasonableness of the estimates used in the determination of the percentage of completion. Cost estimates are based on assumptions, which can differ from the actual cost over the life of the project. Accordingly, estimates are reviewed periodically, taking into account factors such as price increases for materials, the amount of work to be done, inflation, exchange-rate fluctuations, changes in contract specifications due to adverse conditions and provisions created based on the construction contracts over the project duration, including those related to penalties, termination and startup clauses of the projects and the rejection of costs by customers, among others. If, as a result of this evaluation, there are modifications to the revenue or cost previously estimated, adjustments are made for the percentage of completion and if there are indications that the total estimated cost of the project exceeds expected revenues, a provision is recognized for estimated contract loss in the period in which it is determined. The estimated revenues and estimated costs may be affected by future events. Any change in these estimates may affect our results.

In addition to our technical and operational processes, our construction operations include legal and economic factors that help us to determine the probability that economic benefits will flow to us from claims and work executed:

 

   

Construction contracts in which we participate are typically governed by the civil law of various jurisdictions that recognize a contractor’s right to receive payment for work performed. The buyer is the legal owner of the works in execution while they are in-process, and the contractor (ICA) is entitled to payment for work performed, even though payment may not occur until the completion of the contract. The typical terms of our contracts also provide for our right to receive payment for work performed.

 

74


Table of Contents

We also have established procedures that support the requirements of work performed for our customers, such as the work log, authorizations of the physical progress by the supervisor of the customer, construction contracts and their addendums and/or amendments. The reconciliation and recognition of the work performed and the definition of prices are slower.

 

   

A significant portion of our contracts entered into with the public sector are with the state governments or government offices, which have a slower process of authorization of work performed, due to the fact that a change in the elected federal government also may cause changes in the administrations of the institutions granting us our public sector contracts.

We evaluate credit risk before the presentation of the offer. For public clients, we evaluate the origin of the funds, whether they are federal or state funds or whether they will come from a financing. At the same time, we evaluate the payment history of such client. In this way, we assure that there is an initial budget for the project. For private clients, we also evaluate their payment history and the origin of the funds for the project. The explanation of the credit risk is reviewed and approved by the committees of our senior management.

In addition, we periodically evaluate the reasonableness of our accounts receivable. In cases when an indication of collection difficulty exists, allowances for bad debts are created and charged to results in the same period. The allowance is determined based on management’s best judgment in accordance with prevailing circumstances at that time, modified by changes in circumstances. Our policy is not to recognize an allowance for doubtful accounts on contracts that require the customer to pay for the work not as it is performed, but only when the project is completed unless there are sufficient indicators that such receivable will not be collectible.

Occasionally, claims are initiated against project clients for additional costs that went above the contract price, or for amounts not includes in the original contract price, include orders to make changes to the project. These types of claims occur as a result of certain issues, such as delays attributed to the client, unit prices that are higher than expected, or changes to the scope of the initial project, that result in, directly and indirectly, additional costs. Frequently, these claims can serve as matters in long arbitration disputes, litigation, or proceedings with external experts, and, often, it may be difficult to predict with precision when these claims will be definitively resolved. When these types of matters occur and there are pending claims without resolution, we may invest significant amounts of working capital into the project in order to cover the excess costs while the claim in question is being resolved. With respect to change orders in particular, we may agree with the client with regards to the scope of the work that will be completed without agreeing on the price. In this case, it may be necessary to seek external experts and those external experts may provide valuations that are unfavorable to us, which we would be unable to control.

Construction backlog takes into account only those projects over which we have control. We consider ourselves to have control when we have a majority participation in the project, when we are assigned leadership and we have the power to make decisions over the relevant operating and financial decisions of the entity that holds the construction project. In a case in which there is contractual joint control, the percentage of the contract is incorporated in the backlog according to our participation in the association and our rights regarding liabilities and obligations regarding liabilities, as defined in IFRS 11 “Joint Arrangements.” For disclosure purposes only and separately, we include the backlog of joint ventures and associated companies, which are accounted for using the equity method. See Note 8(b) to our consolidated financial statements.

Long-Lived Assets

The long-lived assets that we have refer to property, machinery and equipment and concessions granted by the Mexican government and foreign governments for the construction, operation and maintenance of highways, bridges and tunnels, airport administration and municipal services.

The investment in concessions is classified either as an intangible asset, a financial asset (account receivable) or a combination of both based on the terms of service concession agreements.

 

75


Table of Contents

A financial asset is originated when an operator constructs or makes improvements to the infrastructure and the operator has an unconditional right to receive a specific amount of cash or other financial asset during the contract term. An intangible asset is originated when the operator constructs or makes improvements and is allowed to operate the infrastructure for a fixed period after the construction ends. In this case the operator’s future cash flows have not been specified, because they may vary depending on the use of the asset and they are therefore considered contingent.

A combination of both – a financial asset and an intangible asset – is originated when the return/profit for the operator is partially provided by a financial asset and partially by an intangible asset.

We recognize and measure contractual obligations for major maintenance of infrastructure in accordance with IAS 37. We believe that periodic maintenance plans for infrastructure, whose cost is recorded in expenses in the period in which the obligation arises, are sufficient to maintain the concession in good operating condition, in accordance with the obligations specified by the grantor and to ensure the delivery of the related infrastructure in good operating use at the end of the term of the concession, ensuring that no additional significant maintenance costs will arise as a result of the reversion to the grantor. For airports the estimated major maintenance costs are based on the master development plan, which is reviewed and updated every five years.

When the effect of the time value of money is material, the amount of the provision equals the present value of the expenditures expected to be required to settle the obligation. Where discounting is used, the carrying amount of the provision increases in each period to reflect the passage of time and this increase is recognized as a borrowing cost. After initial recognition, we review provisions at the end of each reporting period and we adjust them to reflect current best estimates.

Adjustments to provisions arise from three sources: (i) revisions to estimated cash flows (both in amount and timing); (ii) changes to present value due to the passage of time; and (iii) revisions of discount rates to reflect prevailing current market conditions. In periods following the initial recognition and measurement of the maintenance provision at its present value, the provision is revised to reflect estimated cash flows being closer to the measurement date. The unwinding of the discount relating to the passage of time is recognized as a financing cost and the revision of estimates of the amount and timing of cash flows is a reassessment of the provision and charged or credited as an operating item within the consolidated statements of income and other comprehensive income.

Accounting Policy

Upon transition to IFRS, we elected to value certain land, buildings and major machinery and equipment at their fair value, using values calculated by appraisers, representing deemed cost for those assets. Subsequent to initial adoption of IFRS, and in accordance with IAS 16 and IAS 38, with respect to land, buildings and major machinery, equipment and concession investments, we apply a historical cost model, which consists of recording acquisitions at their acquisition or construction cost, or at fair value in the case of goods acquired through contributions, donations or in payment of debt.

For certain investments in concessions, a financial asset is recorded at fair value and is subsequently valued at amortized cost by calculating interest through the effective interest method at the date of the financial statements, based on the yields determined for each of the concession contracts. Interest income on financial assets from concessions are recognized within revenues, as they form part of our ordinary operations and as such, form part of the general objective of the concession activity, carried out regularly and thereby providing revenues on a routine basis.

Investments in concessions which result in the recognition of an intangible asset, are recorded at their acquisition value or construction cost. The comprehensive cost of financing accrued during the construction period is capitalized.

Expenditures for property, machinery and equipment are capitalized and valued at acquisition cost.

 

76


Table of Contents

Depreciation is recognized so as to write off the cost or deemed cost of assets (other than freehold land and properties under construction).

We calculate depreciation on our fixed assets, such as buildings, furniture, office equipment and vehicles, using the straight-line method over the useful life of the asset, taking into consideration the related asset’s residual value. Depreciation begins in the month in which the asset is available for use. The depreciation of machinery and equipment is calculated according to the units of production method (machine hours used in regard to total estimated usage hours of the assets during their useful lives, which range from 4 to 10 years). Depreciation begins in the month in which the asset is placed in service. In investment in concessions, amortization as in the case of our investment in highways and tunnel concessions involving the use of facilities over the period of the concession is calculated by the units of production method. In the case of water treatment plants we consider treated water volumes. At the airport concessions, amortization is determined by considering the term of the concession, which is 50 years.

Financing costs incurred during the construction and installation of buildings and machinery and equipment are capitalized.

We review residual values, useful lives and depreciation methods at the end of each year and adjusted prospectively if applicable. If the depreciation method is changed, this is recognized in retrospectively.

Depreciation of property, machinery and equipment is recognized as part of the cost of sales of those assets which are in use and generate income. Depreciation of equipment used by our management is recognized in general expenses. Land and construction in progress are not depreciated.

We periodically evaluate the impairment of long-lived assets, in order to determine whether there is evidence that those assets have suffered an impairment loss. If impairment indicators exist, the recoverable amount of assets is determined, with the help of independent experts, to determine the extent of the impairment loss, if any. When it is not possible to estimate the recoverable amount of an individual asset, we estimate recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, we reduce the carrying amount of the asset (or cash-generating unit) to its recoverable amount. An impairment loss is recognized immediately in profit or loss. When an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

The maintenance costs of airports, which are approved in the master development plan, are provisioned with a charge to results of the year; in the other concessions, the provision is created with a charge to results of the year for the amount which is expected to be disbursed.

Internal Control

Discount rates used to determine the value in use, which is the present value of discounted future net cash flows, are determined in real terms by calculating the weighted average cost of capital for each cash-generating unit, which in turn is calculated by estimating the cost of equity and the cost of debt incurred for each cash-generating unit. The cost of equity is calculated using the capital asset pricing model, which uses the beta coefficients of

 

77


Table of Contents

comparable public companies in local and international markets. The cost of incurred debt is calculated based on the terms of debt currently outstanding for projects in-process as well as existing financial market conditions. The method we use to calculate the recoverable value of our cash-generating units takes into account the particular circumstances of the assets, including the terms and conditions of each concession, machinery and equipment involved, and intangible assets.

We evaluate indicators of impairment as part of the process to determine the recoverable values of cash-generating units. The indicators of impairment considered for these purposes include, among others, 1) the operating losses or negative cash flows in the period if they are combined with a history or projection of losses, 2) depreciation and amortization charged to results which, in percentage terms, in relation to revenues, are substantially higher than those of previous years, 3) the effects of obsolescence, 4) reduced demand for the services rendered, 5) competition and other economic and legal factors. The mechanism to calculate the recovery value is based on the specific circumstances of the concessions, machinery and intangibles. In the case of the concessioned routes, the projected revenues consider the projected vehicle flows, and assumptions and estimates are used relative to population growth and the peripheral economy of the concessioned route, temporary reductions in vehicle flows due to rate increases, commercial strategies to boost their use, among others, which may be determined and adjusted depending on the actual results obtained.

In addition, as part of the process to determine the recoverable values of our cash-generating units, when there are indicators of impairment, we perform sensitivity analyses that measure the effect of key performance variables on projected net cash flows, considering the most probable outcomes of those variables. The critical variables used in our sensitivity analyses for the determination of recoverable value consider those variables that create value in each of our projects. These include (i) operating revenues, (ii) costs of operation and (iii) macroeconomic conditions, including foreseeable changes in interest rates. Our analyses also include contractually agreed-upon values related to maintenance and other investments when we are contractually bound to incur such investments in certain projects. Variations in discount rates are taken into account considering general changes in market interest rates and are applied to three possible scenarios with respect to projections of revenues: an optimistic case, a probable case (base case) and a pessimistic case. We consider that this range of outcomes is sufficiently broad to help us analyze the limits of the value of each critical variable and can also be broad enough for us to effectively consider projects that are in their mature phase. Variations are considered with respect to individual variables as well as with respect to “cross variations” where we apply simultaneous changes to combined variables.

Periodically, we analyze and document if there is evidence of impairment indicators.

Types of Long-Lived Assets

Depending upon their operating status, projects related to long-lived assets or cash-generating units can either be in the construction phase or operating phase. Projects in the construction phase are composed of investments in the process of being executed (constructed), whereas projects in the operating phase involve operating risks.

In the case of highways, we participate in two main project types: concessions and public-private partnerships (PPPs). The main difference between these categories is that revenues for PPP projects are paid directly by the government (not users) and include fixed revenues in addition to variable revenues, which we believe improves our revenue profile and risk exposure arising from our highways portfolio. Projected variable revenue scenarios are taken from studies that forecast traffic volume, which we use as a base from which to determine future cash flows. These forecasts also take into account anticipated changes in toll levels and are prepared using statistical models based on historic behavior for each project. Operating expense projections are developed by the individuals in charge of the project operation. Projections for investment commitments are considered when such commitments are contractually required under the concession agreement. Projections are reviewed by operating committees and by the trusts in which both the governmental authorities and the project’s lenders participate.

In water treatment and transportation projects, the structure of the project differs only in that the service is not provided directly to the public at large, but instead to governmental entities for water and drainage systems. In these types of projects, revenues and expenses are related both to the demand for the services by the population as a whole and the operating capacity of the project. Typically revenues include a fixed component to recover investment and fixed operating and maintenance costs, as well as a variable component that depends on the volume of water processed. The sensitivity analysis in these cases is based primarily on population growth, which is the most decisive factor for a future service demand.

 

78


Table of Contents

Our airport projects are regulated by five-year master plans negotiated with the Mexican government, in which our future investment commitments are established and in which the maximum tariff we can charge per passenger is set. These are high-volume projects in which the variable that most affects the value in use is revenue. The sensitivity analyses for these projects are based on different scenarios of passenger traffic and ability to recover the maximum tariff.

Our estimates for all projects may be based on assumptions that differ from, and may be adjusted according to, actual use.

Income Tax

Accounting Policy

We determine and recognize income tax expense as the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of income and other comprehensive income because of items of income or expense that are taxable or deductible in periods different from when they are recognized in accounting profit or for items that are never taxable or deductible.

In December 2013, Congress approved the Mexican Tax Reform with among other things, eliminated the flat tax (“IETU”) and the tax consolidation regime. As a result of the elimination of the IETU, for accounting purposes we cancelled our existing deferred IETU recorded at the date of the Mexican Tax Reform. With regard to the previous tax consolidation regime, a deconsolidation option was established for groups that consolidated under that regime, discussed further below. Three alternatives for calculating deferral of. the tax payment stemming from the effects of deconsolidation as of December 31, 2013 were provided, as was a fractional payment scheme over the next five years.

As a result of the elimination of the tax consolidation regime, we and our subsidiaries have the obligation to pay tax related to the deconsolidation, which was deferred in accordance with the previous tax law. The tax was determined from the date of deconsolidation and will be payable in accordance with the options provided in the Income Tax Law issued in 2014 and over a 10-year period beginning in 2014, according with the tax reform of 2009, as described below.

A new optional tax regime, a “regime of fiscal integration” was introduced those groups of companies that meet conditions and requirements similar to the previous consolidation regime. The main features of this regime are as follows: (i) a minimum controlling interest of 80% in the voting shares of integrated companies is required by the integrating entity, (ii) it allows the deferral of a portion of income tax up to three years, establishing strict controls in current income tax and paid at the individual level, (iii) tax loss carryforwards from integrated or integrative companies which belong to previous periods may not be incorporated into the regime (only tax loss carryforwards which are generated from the enactment date of the change in the tax law may be incorporated into this regime), and (iv) an integrating factor is determined which is applied by all companies in the group, individually, to determine the income tax payable and amount to be deferred income tax over three years.

We elected to be in the new optional fiscal integration regime for group companies beginning in 2014, as permitted by the 2014 Income Tax Law, having presented the appropriate notice to the tax authorities.

Pursuant to Section XVIII of the transitional ninth article of the 2014 tax reform, and because we were a holding company through December 31, 2013 and as of that date were subject to the payment schedule contained in section VI of article four of the transitional provisions of the Income Tax Law published in the Official Gazette of the Federation on December 7, 2009, or Article 70-A of the Income Tax Act 2013 which was subsequently abrogated by the 2014 Tax Reform, we are required to continue to make payments, under the deferred payment schedule, that were generated from fiscal consolidation rules in the previous 2009 Mexican Tax Reform (discussed below).

 

79


Table of Contents

We determine the tax provisions of foreign subsidiaries based on taxable income of each individual company.

We recognize the deferred income taxes from the applicable temporary differences resulting from comparing the accounting and tax values of assets and liabilities plus any future benefits from tax loss carryforwards. Except as mentioned in the following paragraph, we recognize deferred tax liabilities for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the expected benefit of tax losses. We review the carrying amount of deferred tax assets at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

We recognize deferred tax liabilities for taxable temporary differences associated with investments in subsidiaries, except where we are able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

We measure our deferred tax assets and liabilities at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which we expect, at the end of the reporting period, to recover or settle the carrying amount of our assets and liabilities.

We recognize current and deferred taxes as income or expense in profit or loss, except when it relates to items recognized outside of profit or loss, as in the case of other comprehensive income, stockholders’ equity items, or when the tax arises from the initial recognition of a business combination, in which case we recognize the tax in other comprehensive income as part of the equity item in question or, in the recognition of the business combination, respectively.

We presume that for the purposes of measuring deferred tax liabilities and deferred tax assets for investment properties that are measured using the fair value model, the carrying amounts of such properties, will be recovered entirely through sale, unless the presumption is rebutted. The presumption is rebutted when the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. We reviewed our investment property portfolios and concluded that none of our investment properties are held under a business model whose objective is to consume substantially all of the economic benefits embodied in the investment properties over time, rather than through sale. Therefore, we have determined that the “sale” presumption set out in the amendments to IAS 12 is not rebutted.

Derivative Financial Instruments

We enter into derivative financial instruments to hedge our exposure to interest rate and foreign currency exchange risk including foreign currency forward contracts, interest rate swaps and combined interest rate and foreign exchange swaps (cross currency swaps), related to the financing for our construction and concessions projects.

Accounting Policy

We recognize initially the derivatives at fair value at the date the derivative contract is entered into and subsequently, we remeasure them at fair value at the end of each reporting period. Fair value is determined based on recognized market prices. When the derivative is not listed on a market, fair value is based on valuation techniques accepted in the financial sector. Valuations are conducted quarterly in order to review the changes and impacts on the consolidated results.

 

80


Table of Contents

We recognize the resulting gain or loss from remeasurement to fair value in profit or loss unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

A derivative with a positive fair value is recognized as a financial asset; a derivative with a negative fair value is recognized as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is greater than 12 months and it is not expected to be realized or settled within 12 months. We present other derivatives as current assets or current liabilities.

Hedge accounting

At the inception of the hedge relationship, we document the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, we document whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item.

When the related transaction complies with all hedge accounting requirements, we designate the derivative as a hedging financial instrument (either as a cash flow hedge, a foreign currency hedge or a fair value hedge) at the time we enter into the contract. The decision to apply hedge accounting depends on economic or market conditions and economic expectations in the national or international markets. When we enter into a derivative for hedging purposes from an economic perspective, but such derivative does not comply with all the requirements established by IFRS to be considered as hedging instruments, the gains or losses from the derivative financial instrument are recorded in the results of the period in which it occurs. Our policy is not to enter into derivative instruments for purposes of speculation but certain instruments that we contract do not qualify to be accounted for as hedging instruments and are considered for accounting purposes as trading instruments and the fluctuation in fair value is recognized in the financial results of the period in which they are measured.

Effectiveness tests of derivatives that qualify as hedging instruments from an accounting perspective are performed at least once every quarter and every month, if there is a significant change.

For cash flow hedges (including interest rate swaps and interest rate options) and foreign currency hedges designated as foreign currency cash flow hedges and including exchange rate instruments, foreign currency swaps and foreign currency options, we recognize the effective portion within statement of comprehensive income as a component of other comprehensive income. We recognize the ineffective portion immediately in the interest income or expense of the period.

Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to results in the periods when the hedged item is recognized in results, in the same line item in the statement of income and other comprehensive income where the hedged item is recognized. However, when a forecasted transaction that is hedged gives rise to the recognition of a non-financial asset or a non-financial liability, the gains and losses previously accumulated in equity are transferred from equity and are included in the initial measurement of the cost of the non-financial asset or non-financial liability.

Interruption of hedge accounting

Hedge accounting is discontinued when we revoke the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any accumulated gain or loss on the hedging instrument recognized in other comprehensive income remains there until the hedged item affects results. When a forecasted transaction is no longer expected to occur, the accumulated gain or loss is reclassified immediately to results.

 

81


Table of Contents

Fair value hedges

The change in the fair value of the hedging instruments and the change in the hedged item attributable to the hedged risk are recognized in the line item in the statement of income and other comprehensive (loss) income relating to the hedged item.

Internal Control

Our activities are exposed to different economic risks which include (i) market financial risks (interest rate, foreign currency and pricing), (ii) credit risk, and (iii) liquidity risk.

We try to minimize the potential negative effects of the aforementioned risks in financial performance through different strategies. We use financial derivatives to hedge those exposures to the financial risks of operations recognized in the statement of financial position (recognized assets and liabilities), as well as firm commitments and forecast transactions which are probable to occur.

We only contract hedge financial derivatives to reduce uncertainty in the returns on projects. The financial derivatives which we enter into may be designated for accounting purposes as hedging instruments or as trading instruments, without affecting our objective of mitigating the risks to which we are exposed in the projects.

In interest rate hedges we enter into the instruments in order to fix interest rates and thus make the projects more feasible. We enter into exchange rate hedge instruments to reduce the exchange rate risk in projects whose labor costs and inputs are incurred in a currency different from that of their financing source. We enter into the financing in the same currency as that of the payment source.

The contracting of financial derivatives is in most cases related to project financing, for which reason it is quite common that the same institution (or its affiliates) which provided the financing also acts as the counterparty. This includes instruments which cover fluctuations in the interest rate and the exchange rate. In both cases, the derivatives are contracted directly with the counterparties.

Our internal control policy establishes that the contracting of credit and of the risks involved in the projects requires a collective analysis by representatives from the finance, legal, administration and operations departments, before they can be authorized. As part of such analysis we also evaluate the use of derivatives to hedge financing risks. Based on internal control policy, the contracting of derivatives is the responsibility of the finance and administration departments once the aforementioned analysis is concluded.

When evaluating the use of derivatives to hedge financing risks, we conduct sensitivity analyses of the different possible levels of the relevant variables, in order to define the economic efficiency of each of the different alternatives available to hedge the risk measured. We compare the obligations and/or conditions of each alternative in order to define the best one. Furthermore, we conduct effectiveness tests with the support of an appraisal expert to determine the treatment applicable to the financial instrument once it is entered into.

We maintain a policy of entering into financial instruments at the project level, and we do not enter into instruments involving margin calls or additional credit contracts to those authorized by our committees responsible for their performance, as no additional sources of liquidity are designated for those types of instruments. In those projects requiring collateral, the policy is that the necessary deposits are made initially or letters of credit (contingent) are established at the time they are entered into, in order to limit project exposure.

See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Derivative Financial Instruments.”

 

82


Table of Contents

Other Policies

Accounting for Real Estate Sales

Accounting Policy

We recognize revenues derived from sales of low income housing, residential environment, and real estate in accordance with International Financial Reporting Interpretations Committee “Agreements for the Construction of Real Estate” (or IFRIC 15) and IAS 18, the house or real estate development is completed and, when the risks and benefits of the housing have been transferred to the buyer, which occurs upon passage of title to the buyer.

For sales of developments in which financial resources are obtained from financial institutions, revenue is recognized only when the properties are completed, the respective financing is received and the deed had been finalized. When we provide financing, revenue is recognized upon the execution of the deed of delivery-receipt, which is the moment upon which the risks, benefits, rights and obligations of the property have been transferred to the buyer and only when is probable that the economic benefits associated with the transaction will flow to us. We retain neither ongoing management involvement in the property sold in the degree to which usually is associated with an owner, except for the reservation of title, which is released at the time the price has been paid in full and the deed is ultimately processed.

Our real estate inventories are divided into two large segments: land held for development and inventories in-process (which include both houses under construction and unsold finished houses).

Housing and housing development costs comprise at the cost of the acquisition of land, improvements and condition thereof, permits and licenses, labor costs, materials and direct and indirect costs. Borrowing costs incurred during the construction period are capitalized.

Land to be developed over a period of more than 12 months is classified under non-current assets and is recorded at acquisition cost.

The valuation of inventory, the control of the cost of sales and the related profit are recognized through a cost budgeting system. The cost budgeting system is reviewed quarterly and updated periodically when modifications are made to sales price or cost estimates of construction and development of the home. Variations in the original cost budget that require a change in value of inventory are applied to results in the period in which they are determined. Inventory costs include (i) the cost of land, (ii) rights, licenses, permits and other project costs, (iii) housing development costs, construction and infrastructure costs, (iv) financial cost incurred during the construction period and (v) administration and supervision of real estate. The costs related to real estate projects that are capitalized during development of the project and are applied to cost of sales in the proportion in which revenues are recognized.

Internal Control

To determine any possible impairment of our land held for development, we carry out appraisals every two years or more frequently when events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the valuation is less than the carrying value of the inventory, an impairment loss is recorded in results of the period in which the impairment was determined.

If circumstances that previously caused the reduction no longer exist or when there is clear evidence of an increase in net realizable value due to a change in economic circumstances, the previously recognized impairment is reversed.

With respect to inventory in-process, approximately 84% of homes under construction and unsold finished homes are within the low-income sector, while the remainder is within the moderate-income sector. With respect to homes in the low income sector, sales of such homes are generally financed by government-sponsored housing fund programs, which provide financial aid to customers to stimulate home purchases in this sector. Prices of homes in

 

83


Table of Contents

this sector are generally regulated by such government programs, thereby limiting our flexibility to establish sale prices. Sale prices in this sector are therefore sensitive to the availability of funding offered by the government under such programs as well as conditions prevailing in the Mexican economy, which in turn can be affected by global economic conditions. However, through 2014, we have not historically experienced significant fluctuations in sales in this sector and have been able to maintain a stable gross margin of between 30% and 35%. Despite the global financial crisis, Mexican governmental policies supporting housing development have continued, albeit at a slower pace. Although we expect that trend to continue, any strict price controls put in place by the Mexican federal government or inherent from adverse economic conditions in Mexico that exceed our current operating margin could cause an impairment with respect to housing in this sector.

With respect to homes in the moderate-income sector, we perform a review of estimated revenues and costs on a quarterly basis for the projects currently in progress, in order to evaluate the sector’s operating margin. Additionally, on an annual basis, we perform formal impairment tests based on discounted cash flow projections and to determine the expected rates of returns of the project. Such cash flow projections incorporate actual revenues and costs through the date of the evaluation as well as estimated future investments we expect to incur to complete and sell the project. Revenues are projected based on the current selling price of the home, considering any discounts that we may offer.

Selling prices for the moderate-income sector are based on market studies of what a willing buyer would pay, comparable prices for similar projects in the areas in which we develop and the general economic conditions in Mexico. We only offer discounts on sale prices of homes when sales prices have increased over time and the discount would not exceed the original sale price of the home. Our policy is not to grant discounts when the discounted sales price would result in a value lower than the carrying value of the inventory. Our management determines discounts on a home-by-home basis. Cost estimates are based on our cost budgeting system as discussed above. Impairment is recognized when the fair value less costs to sell is less than the carrying amount of the inventory. As in the low-income sector, we generally earn a gross margin of approximately 30% to 35% in this sector. Accordingly, we are only recognize impairment on inventories in the moderate-income sector if we offer discounts greater than our operating margin or otherwise significantly reduce our prices below our operating margin because of, for example, market forces or deteriorating economic factors.

In both the low-and moderate-income sectors, we have seen an increase of 22% in the last quarter of 2014 compared to the last quarter of 2013 and a decrease of 53% in the first quarter of 2015 in home sales, when compared to the same period in the prior year.

Other Critical Accounting Judgments and Estimates

See Note 5 to our consolidated financial statements for further information regarding additional critical accounting policies.

Recently Issued Accounting Standards Application of new and revised IFRS

 

  i) Effective January 1, 2015, we adopted the following International Financial Reporting Standards and interpretations in our consolidated financial statements:

 

   

Amendments to IAS 19, Defined Benefit Plans: Employee Contributions

 

   

Annual Improvements to IFRSs, 2010-2012 Cycle

 

   

Annual Improvements to IFRSs, 2011-2013 Cycle

We do not manage contributions of the employees or third parties to the defined benefit plans, therefore, the application of Amendments to IAS 19 has had no impact on the disclosures or the amounts recognized in our consolidated financial statements. The application of IFRS Annual Improvements, 2010-2012 and 2011-2013 cycle had no significant impact on our consolidated financial statements.

 

84


Table of Contents
  ii) We have not applied the following new and revised IFRSs that have been issued but are not yet effective:

 

   

IFRS 9, Financial Instruments ( “IFRS 9”) (3)

 

   

IFRS 15, Revenue from Contracts with Customers (3)

 

   

IFRS 16, Leases (4)

 

   

Amendments to IFRS 11, Accounting for Acquisitions of Interests in Joint Operations (1)

 

   

Amendments to IAS 1, Disclosure Initiative (1)

 

   

Amendments to IAS 16 and IAS 38 , Clarification of Acceptable Methods of Depreciation and Amortization (1)

 

   

Amendments to IFRS 10, IFRS 12, and IAS 28 Investment Entities: Applying the Consolidation Exception (1)

 

   

Annual Improvements to IFRSs 2012-2014 Cycle (1)

 

   

Amendments to IAS 12 Income Taxes (2)

 

   

Amendments to IAS 7 (Cash Flow Statement) Disclosure Initiative (2)

1 Effective for annual periods beginning on or after July 1, 2016, with earlier application permitted.

2 Effective for annual periods beginning on or after January 1, 2017, with earlier application permitted.

3 Effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.

4 Effective for annual periods beginning on or after January 1, 2019, with earlier application permitted.

IFRS 9 Financial Instruments

IFRS 9 was issued in November 2009 and introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013, to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include (a) impairment requirements for financial assets and (b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.

Key requirements of IFRS 9:

 

   

All recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss.

 

85


Table of Contents
   

With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss.

 

   

In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognized.

 

   

The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced.

We are in the process of determining the potential impacts on our consolidated financial statements resulting from the adoption of this standard.

IFRS 15, Revenue from Contracts with Customers

In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective.

The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

 

   

Step 1: Identify the contract(s) with a customer.

 

   

Step 2: Identify the performance obligations in the contract.

 

   

Step 3: Determine