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AURORA RESEARCH

“The desert grows; woe to him in whom deserts hide.” F. Nietzsche

FIRST REPORT ON OHLMEX’S BIGGEST

SUBSIDIARY, CONCESIONARIA MEXIQUENSE,

S.A. DE C.V. (“OHL”)

November 12, 2015

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Disclaimer

By reading the contents of this report, you agree that use of research produced by Aurora Research is at

your own risk. The research published in this website includes forward-looking statements, estimates,

projections, and opinions prepared with respect to, among other things, certain accounting, legal, and

regulatory issues that Obrascón Huarte Laín, S.A. (“OHL Group”), OHL México, S.A.B de C.V. (“OHLMEX”) and

some of its subsidiaries, particularly Concesionaria Mexiquense, S.A. de C.V. (“OHL”), face and the potential

impact of those issues. Such statements, estimates, projections and opinions may prove to be inaccurate

and are inherently subject to significant risks and uncertainties beyond our control. Research published in

this website expresses our opinions, which are based upon generally available information. Aurora Research

has made every reasonable effort for all information contained herein to be accurate and reliable. It has

been obtained from public sources we believe to be accurate and reliable. However, such information is

presented without warranty of any kind, whether express or implied. Aurora Research makes no

representation, express or implied, as to the accuracy, timeliness, or completeness of any such information

or with regard to the results to be obtained from its use. All expressions of opinion are subject to change

without notice.

In no event will you hold Aurora Research or any related party liable for any direct or indirect trading losses

caused by any information in this website. The research published herein is not investment advice or a

recommendation or solicitation to buy or sell any securities. You agree to do your own research and due

diligence before making any investment decision with respect to securities covered herein. Aurora Research

does not hold any position, whether directly or indirectly, in OHL Group’s, OHLMEX’s or OHL’s securities; and

does not stand to profit in the event the issuer’s securities depreciate in value. Aurora Research does not

assume any obligation related to the content of this website, so no third party can claim damages or losses

caused by decisions based on the information published herein.

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1. OHL’s rights under the Concession Agreement.

In 2003, the State of Mexico awarded OHL a concession to design, build, exploit, operate, preserve

and maintain the Circuito Exterior Mexiquense. One of OHL’s rights under the Concession

Agreement is a right to request for the term of the concession to be increased if it hadn’t

recovered its venture capital (OHL’s own resources or equity) plus a 10% real annual rate of

return, given certain conditions. This right is not an unconditional right to receive cash from the

State of Mexico. It is merely a right to request something. If such a request were to be accepted by

the State of Mexico, OHL would have a right to charge users of the public service. The amount of

OHL’s revenues, however, would still be ultimately determined by actual demand for the service,

and would not be guaranteed in any way.

OHL and its external auditor, Deloitte, claim that the State of Mexico must increase the term of

the Concession if OHL were not able to recover its venture capital plus the established return

during the original term of the concession, due to causes not attributable to OHL.

Even if we were to assume OHL and Deloitte’s interpretation (which we do not share), OHL’s

alleged right would be limited to obtain an increase in the term of the Concession. Such a right

cannot be considered an unconditional contractual right to obtain cash from the State of Mexico.

The Concession Agreement enables the State of Mexico not to increase the term of the concession

if it were to consider such an increase to be inconvenient. In order for the State of Mexico to

discharge its obligation to increase the term, it may pay OHL whatever amount it hasn’t recovered

from its venture capital and its established return. However, this possibility only exists when it is

legally possible for the State of Mexico to increase the term but unilaterally CHOOSES not to. And

it is just a possibility, not an obligation. It does not exist when it is not legally possible to increase

the term of the concession. According to applicable law, there is a limit to the possible extensions

to the term of a concession. In the State of Mexico, the original term of a concession shall not

exceed 30 years, and any extension or sum of extensions shall not (collectively) exceed another 30

years. When this limit arrives, i.e. when the term of the concession can no longer be legally

extended, the concession will be automatically terminated, whether OHL was able to recover its

investment or not. In OHL’s case, the concession cannot be extended beyond 2063. If it hadn’t

recovered its venture capital plus the established return by that year, the concession would be

terminated and OHL would not have a right to receive cash whatsoever.

2. How OHL measured its concession-related asset from 2004 to 2009.

OHL claims to account for its revenues and its concession-related assets according to IFRIC 12. One

of the most important regulations contained in IFRIC 12 is the distinction between a financial asset

and an intangible asset.

According to IFRIC 12, OHL should recognize an intangible asset to the extent that it receives a

right to charge users. “A right to charge users of the public service is not an unconditional right to

receive cash because the amounts are contingent on the extent that the public uses the service”.

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Given that OHL’s only right is to charge the users of the public service, its asset is an intangible

asset. From 2004 to 2009, OHL measured its concession-related asset in the following way:

(in millions of pesos)

2004 2005 2006 2007 2008 2009

Net investment in Concession

$2,265 $5,187 $5,432 $6,336 $10,360 $15,687

This asset was also described by OHL as “total investment in infrastructure”.

Given that OHL recognized this asset as an intangible asset, and therefore, admitted to not having

any unconditional right to obtain cash from the State of Mexico, the only substantial revenue

considered to obtain each year’s net income was the revenue from toll collection.

OHL’s net income in 2009 was of only $331 million pesos. However, things started to change as of

2010, when OHLMEX (of which OHL is a subsidiary) first went public, and wanted to show a

brighter picture to investors than the one that was actually going on.

3. What OHL started doing from 2010.

OHL’s accounting irregularities can be traced back to at least 2010, when OHLMEX was about to be

listed in the Mexican Stock Exchange. The figures that OHL reported for 2009 in its “Financial

Statements as of December 31, 2010 and 2009” substantially differed from the figures reported

for 2009 (the same year) in its “Financial Statements as of December 31, 2009 and 2008”.

The following table illustrates the divergence.

(in millions of pesos) 2009, as reported on “Financial Statements as of December 31, 2009 and 2008”

2009, as reported on “Financial Statements as of December 31, 2010 and 2009”

“Other Operating Revenue” $3 $1,220

Net Income $331 $1,210

Retained Earnings $740 $3,860

Net Investment in Concession $15,687 $20,020

Neither OHL nor OHLMEX offered any disclosure whatsoever as to why the figures diverge so

greatly, which is, by itself, a violation of accounting regulation. However, the problem is much

bigger than a simple disclosure issue. Which of the two figures are investors to believe? Because,

of course, even OHL would agree that there is a huge difference between the pictures that each of

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these columns present, even though they refer to the same company, in the same year. Actually, it

would seem as if they were results from two different companies.

The following images show the divergence in the “intangible asset”. In fact, even though in the

second balance sheet the asset is still called “intangible asset”, it is actually a non-existent

“financial asset” illegally created by OHL, disguised as an “intangible asset”.

Now, let’s see the divergence in both “Other Operating Revenue”, and “Net Income”.

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Neither OHL nor OHLMEX provided the market with any information as to why these figures had

so drastically changed. However, this report’s main purpose is both to: 1) attempt to

demonstrate how OHL manipulated its accounting in order to reach its new figures, so as to i)

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look more attractive to the public; and ii) be able to monetize an asset that does not actually

exist, and has not been acknowledged nor approved by the State of Mexico; and 2) demonstrate

that the proper method for OHL to record its concession-related asset is the one it used before

2009, i.e. solely as an intangible asset.

4. “Other Operating Revenues”.

In 2010, OHL started to include a new paragraph in the notes to its financial statements. This

paragraph tries to explain how OHL obtains the figure it reports as “other operating revenue”. The

explanation is basically that the “other operating revenues” are a non-cash item which

“represents the difference between (i) the annual net income that results from applying the real

annual rate of return (…) on the cumulative capital invested and (ii) the actual net income

generated from operating the Concession”.

In other words, the “other operating revenues” represent whatever amount is missing in OHL’s

actual net income (or loss) to achieve a 10% annual return on venture capital1. So, if the actual net

income on a given year is $ X, but the net income necessary to obtain a 10% real rate of return is $

Y, then the “other operating revenues” would be equal to Y-X. In even simpler terms: OHL expects

to make an annual 10% real rate of return on its venture capital. Such an expectation (as will be

analyzed later in this report) is not supported on any right to obtain cash from the State of Mexico.

However, OHL has actually lost money in every year, at least between 2011 and 2014. OHL’s

response has been to report the amount that it expected to obtain (as opposed to the one it

actually made) as “net income”. Thus, there is a shortfall (or hole, as Enron used to call it)

between the actual net income and the expected net income, which needs to be filled with some

sort of revenue. OHL fills this hole with “other operating revenues”. These will be equal to any

amount needed to fill the gap between real net income (or loss) and expected net income.

In 2014 OHL reported an EBITDA of $7.698 billion pesos. If we were to subtract the “other

operating revenues” from that figure, EBITDA would be of only $1.639 billion pesos. We believe

this last figure presents a more accurate picture of the company.

The first question that comes to mind is: why does OHL report a net income that it didn’t obtain

but one that it claims to be expecting (without any contractual support)?

In fact, if we do not take OHL’s “other operating revenues” into account, OHL has lost money

every year, at least since 2011.

1 We have serious doubts as to whether OHL actually calculates its annual return based on its venture

capital. However, that will be the topic of a future report.

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Year Loss (not considering “other operating revenues)

2011 ($1,790)

2012 ($2,274)

2013 ($4,859)

2014 ($1,838)

By now, some analysts have understood that one part of OHL’s problem is that the figure that it

reports as “net income” is not OHL’s actual net income. This is why, on a conference call with

analysts that took place on October 16, 2015, Sergio Hidalgo, OHLMEX’s CEO was asked: “Could

you provide us with a <<cash net income>> of the highways?” Mr. Hidalgo’s answer is surprising,

but also revealing about how important it is for OHLMEX (and, obviously, for OHL) to hide its

actual “net income” or profits from investors:

“NO. WE WON’T GIVE A <<CASH NET INCOME>>. WE WON’T DO THAT. I’M SORRY.”

It seems that Mr. Hidalgo is not aware of the fact that OHLMEX is a listed company, and that its

administration must answer to shareholders and to creditors. It’s hard to understand why a

listed company’s CEO would be unable to provide investors, shareholders and creditors with a

number that transmits exactly how much money the company made (or, in OHL’s case, lost). The

problem for Mr. Hidalgo is that, if OHL’s “other operating revenue” (which is not actual revenue,

and is not even acknowledged or approved by the State of Mexico) is not considered, which is

what the CNBV is asking, OHL would have to report “net losses” for every year, at least since

2011. This would have dire consequences for OHLMEX, which would also have to report “net

losses” every year, at least since 2011.

5. How OHL made up a “financial asset” called “guaranteed profitability” (which is by now

OHL’s most “valuable” asset), even though it DOES NOT have any unconditional right to

obtain cash from the State of Mexico.

OHL had to figure out a way to look more attractive to investors when OHLMEX went public. To

them, whether they had to artificially boost the value of its earnings and assets was irrelevant as

long as they could show a brighter picture of the company. Just look, for instance, at the

divergence between: i) accumulated earnings for 2009 in OHL’s “Financial Statements as of

December 31, 2009 and 2008” (before OHLMEX went public): $740.5 million pesos, and ii)

accumulated earnings for 2009 in OHL’s “Financial Statements as of December 31, 2010 and 2009”

(in which the numbers were taken from the financial statements OHLMEX prepared to include in

its IPO): $3.86 billion pesos. This account was artificially boosted without any explanation by $3.12

billion pesos.

Basically, what OHL tried to do was to find a way to record a financial asset related to the

Concession of Circuito Exterior Mexiquense, in accordance with IFRIC 12. As we analyzed in the

first section of this report, the right that OHL has to charge users of the toll road, falls under the

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description of an intangible asset according to IFRIC 12. The other type of assets that IFRIC 12

regulates, are financial assets. The difference between intangible and financial assets is that a

financial asset can be recognized when the concessionaire has an unconditional contractual right

to obtain cash from the grantor of the concession. What constitutes an “unconditional right to

obtain cash” according to IFRIC 12 shall be explained later in this report. A financial asset, in cases

where it actually exists, allows the concessionaire to recognize revenues before it actually gets the

cash, because it has an unconditional right to obtain it later. This is the practical difference

between an intangible and a financial asset, that OHL started illegally exploiting as of 2010. As we

explained and supported with documental evidence in Section 1, OHL has no such right. This view

has been supported even further by the CNBV’s recent findings.

OHL’s non-existent “guaranteed profitability” asset’s value is calculated by adding up all the “other

operating revenues”. The value of these “other operating revenues” has never been

acknowledged or recognized by the State of Mexico.

Further proof that OHL does not have an unconditional right to obtain cash from the State of

Mexico can be found in a document that OHL Group submitted to the CNMV (the Spanish financial

regulator) dated October 28, 2011, in response to an inquiry. In this document, OHL says that it

cannot recognize the concession of Circuito Exterior Mexiquense as a financial asset because it

does not have an unconditional right to receive cash.

Translated to English, OHL Group’s response says, among other things, that OHL’s concession of

Circuito Exterior Mexiquense must be recognized as an intangible asset, because it does not meet

the conditions set forth in paragraph 16 of IFRIC 12, which provides that a financial asset shall be

recognized when the entity has an unconditional contractual right to receive cash. “For none of

these concessions does the respective Concession Agreement grant the right to receive cash or

an equivalent financial asset”, in reference to Circuito Exterior Mexiquense, and Viaducto

Bicentenario.

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Which is why it strikes us as deeply worrying, that in an Offering Circular for OHL’s Senior Secured

Notes dated January 16, 2014, OHL claims to have a “financial asset” relative to a supposed

“guaranteed return”, and which is also considered part of OHL’s investment in the concession.

So, when questioned by the Spanish authorities, OHL Group confirms that it does not have a

financial asset related to Circuito Exterior Mexiquense, because it has no unconditional right to

receive cash. However, in an offering circular for the issuance of certain promissory notes listed in

Luxembourg, in which OHL tries to please investors, OHL claims to have a financial asset related to

a non-existent “guaranteed return”. Apart from the possible illegality in which OHL incurs by doing

this, it raises serious questions that analysts, investors and authorities have to demand answers to.

The difference is not circumstantial. In fact, it is of utter importance. By making this alleged

financial asset up, OHL not only artificially inflates the value of its assets, but also significantly

increases its revenues, and net income. Keep in mind that the “benefit” from recognizing a

financial asset is that it allows to recognize revenue before the cash actually comes in.

6. How OHL manages to turn actual “loser years” into “accounting winner years”, while

breaking several regulations, and misrepresenting investors (or “OHL’s Cashless

Prosperity).

Much as Enron, OHL does not seem to care about real, dollars-and-cents income, as long as it can

find a way to book an accounting income. A former Enron executive described this situation as

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“cashless prosperity”. Well, OHL takes the “cashless prosperity” philosophy to its highest known

level: one in which the worst years in real economic terms show up in the financial statements as

the best of years. OHL’s adds the most value to its concession-related asset in the years where it

actually has the biggest losses. It is also precisely in such years that OHL needs a larger amount of

“other operating revenues” to fill the hole between its actual loss, and a real 10% rate of return on

its venture capital, which is the net income OHL would hope to achieve, but isn’t actually

achieving.

There is something that we had not yet mentioned, but which is important for the following

analysis. Whatever amount OHL reports as “other operating revenues” is automatically added to

the alleged value of the non-existent “financial” asset called “guaranteed profitability”. So, in 2012

OHL claimed that the value of this asset was of $15.462 billion pesos. Then, in 2013, it had “other

operating revenues” for $8.086 billion pesos (which only means that such an amount was needed

to fill the shortfall in income). So, to determine the value of its artificial “guaranteed profitability

asset” for 2013, OHL added those $8.086 billion pesos to the $15.462 billion pesos the asset was

supposedly worth on the previous year. The result is an artificial asset worth $23.548 billion pesos.

This can be seen in the following images.

The difference between the values of this artificial asset in 2013 and 2012 (i.e. 23.548 billion-

15.462 billion) is 8.086 billion. WHICH IS EXACTLY THE AMOUNT OF “OTHER OPERATING

REVENUE” OHL REPORTED FOR THE YEAR 2013.

The consequence of applying this “method” is that, the higher the “other operating revenues”,

the bigger the artificial boost to the asset. And what is the only way to record a high amount of

“other operating revenues”? Well, by losing money (which, in OHL’s case can be done either by

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reporting as little demand for the service as possible, or by reporting as much costs as possible). In

other words, the way in which OHL can inflate the value of its artificial asset called “guaranteed

profitability” is by actually losing money, so the difference between real net income (or loss) and

the “expected” (without any contractual right to support such an expectation) 10% rate of return

turns out to be bigger. The bigger the shortfall, the bigger the “other operating revenues” need to

be to cover the loss, and, in consequence, the bigger the boost to the non-existent financial asset.

This non-existent asset has been securitized by OHL a number of times. In other words, OHL is

borrowing from the future, but the future that awaits OHL does not come with any right to obtain

cash. So we have yet another question for OHL. How does it expect to pay off its debt if a

substantial part of the asset that has been securitized is actually non-existent? This is closely

related to the question which we will be addressing to OHL in a future report: how much of the

total investment in Circuito Exterior Mexiquense has been financed by debt, and how much has

been venture capital? As the aforementioned report shall cover, we have serious doubts that

OHL has been honest in this respect.

Let us not forget that OHL DOES NOT have any right to obtain cash from the State of Mexico; so it

is not even allowed to recognize a financial asset, or to recognize “other operating revenues” the

way it does. The only possible way for a concessionaire to report revenue from its concession

before it actually receives the cash, is if it has an unconditional contractual right to receive cash

from the grantor in precisely that amount. This certainly is not the case of OHL. Just like Mr.

Hidalgo confirmed in an interview he gave on November 3, 2015, “the State of Mexico does not

owe OHL even one cent”.

However, there is yet another irregularity in OHL’s accounting. Even if OHL were to have such a

contractual unconditional right (which it does not), the way it recognizes revenue is a violation of

how a financial asset may be booked according to IFRIC 12. So not only does OHL recognize an

asset that it does not have, but it also recognizes it in a way that is not allowed by accounting

regulation even if it were to have such an asset. The next section of this report will explain this in

detail.

7. How OHL’s ad hoc “interpretation” of IFRIC 12, allows it to book a potentially unlimited

value to a financial asset (which, by the way, is non-existent), whereas IFRIC 12 only

recognizes the existence of financial assets which are limited in value.

IFRIC 12, which is the interpretation that OHL claims to use in order to recognize its concession-

related assets, describes the situations when an entity can recognize a financial asset. As we have

seen, the first condition that has to be met is to have an unconditional contractual right to receive

cash from the grantor. IFRIC 12 adds that “the grantor has little, if any, discretion to avoid

payment”. We have already discussed why OHL does not have such a contractual right. However,

for the sake of argument, let us dive deeper down into the essence of a financial asset.

IFRIC 12 sets forth two possibilities (and only two) which can give rise to the recognition of a

financial asset: a) a specified or determinable amount; or b) the shortfall, if any, between amounts

received from users of the public service and specified or determinable amounts.

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The worrying fact is that, not only does OHL not have an actual financial asset, but that the way it

books its artificial “financial asset” (i.e. “guaranteed profitability”) does not even comply with

IFRIC 12’s regulation. What OHL reports as a financial asset, and as “other operating revenue” is,

as OHL said in its annual report, “the difference between (i) the annual net income that results

from applying the real annual rate of return (…) on the cumulative capital invested and (ii) the

actual net income generated from operating the Concession”. However, the “net income

generated from the concession” can be either positive or negative, depending on how much

money OHL spends. This way OHL “created” an asset that can be given a potentially unlimited

value, as long as it spends an unlimited amount of money. And IFRIC 12 DOES NOT allow for such

an “asset” to be recognized. The asset that IFRIC 12 recognizes is, necessarily, of a limited value,

because the “amounts received from users” (which is how IFRIC 12 describes it) can only be a

positive number, which will be then subtracted from an amount determined by the authority.

Thus, IFRIC 12 allows entities to recognize a financial asset with a value that cannot be higher

than the amount recognized by the authority2. On the other hand, OHL “found” a way to

recognize a value that is potentially unlimited: by using its “net income” in its calculation (which

can be negative), instead of its revenue from users of the public service (as IFRIC 12 provides). In

the first place, the amount recognized by the State of Mexico IS NOT a right of any kind, which

means that OHL cannot rightfully use it to report a financial asset. But, even if it were, no financial

asset which considered that the amount of “unrecovered profitability” recognized by the State of

Mexico is a right, would be allowed to have a value higher than such an amount.

The key here is in the importance of wording: IFRIC 12 allows for the difference between the

revenue collected form users (which can only be a positive number), and a fixed amount that the

grantor contractually guarantees to pay, to be recognized as a financial asset. What OHL

recognizes as a financial asset is the difference between its actual net income (which can be, and

has been in the past, a negative number), and an amount that OHL is not even unconditionally

entitled to receive from the State of Mexico.

We now have a question for both OHL and its auditor, Deloitte: why does OHL calculate the value

of its non-existent financial asset using a method that is not allowed by IFRIC 12?

In 2013, OHL recognized $8.086 billion pesos as “other operating revenue”, which it added to the

value of its non-existent financial asset called “guaranteed profitability”. This amount (which was

not acknowledged nor approved by the State of Mexico) was the result of subtracting OHL’s actual

net income from OHL’s expected (and reported) net income. Even if we were to assume (which we

do not) that OHL had an unconditional right to obtain cash from the State of Mexico (which it does

not), OHL would have to obtain the value of such an asset by subtracting the amount it collected

from users, from the amount it claims it has an unconditional right to receive (expected “net

income”). The result, for 2013, would have been of $1.121 billion pesos, which result from

2 The State of Mexico has neither acknowledged nor approved the “other operating revenues” and the

“guaranteed profitability asset”. It simply acknowledges on a semi-annual basis, an amount of profitability which is substantially lower than the “guaranteed profitability” registered by OHL.

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subtracting $2.105 billion pesos (i.e. revenue collected from users) from $3.226 billion pesos (i.e.

OHL’s reported “net income”, which is nothing else than its allegedly expected “net income”). The

difference is of $6.965 billion pesos. Do either OHL or Deloitte care to explain this to the markets

and to the financial regulators?

In fact, the next important topic covered in this report, is one of the roles that Deloitte, as OHL’s

external auditor, has played in OHL’s irregular accounting. As shall be detailed in the following

section, the role is bigger than what might have been expected.

8. How Deloitte is fully aware of the game that OHL has been playing, and hoped not to be

discovered.

Deloitte has been OHL’s external auditor ever since OHL was incorporated (i.e. 2003). Deloitte is

also OHLMEX’s auditor. Every year, Deloitte has expressed that in their opinion, OHL’s financial

statements present fairly, in all material respects, OHL’s financial position.

However, this does not seem to be true. In fact, a Deloitte partner has signed some of the

Investment Acknowledgments prepared by OHL and SAASCAEM (a governmental entity of the

State of Mexico). So Deloitte is at least fully aware that the amounts recorded by OHL in its

balance sheet and in the notes to its financial statements are not consistent with the amounts

recognized by SAASCAEM. We have reason to believe that Deloitte is also fully aware that OHL

does not have any unconditional right to obtain cash from the State of Mexico, in which case it

should not allow for OHL to record its non-existent “financial asset” (i.e. guaranteed profitability)

nor its “other operating revenues”. Deloitte is also fully aware that the net income reported both

by OHL and OHLMEX is not a real net income, but a fabricated number which is only obtained by

the fabrication of a non-existent “financial asset”.

But one of Deloitte’s most obvious violations can be seen in the opinion prepared by Deloitte on

August 6th 2010, which is included in OHLMEX’s Consolidated Financial Statements for the years

that ended on December 31st 2009, 2008 and 2007 (which were included in OHLMEX’s IPO). In this

opinion, C.P.C. Sergio Vargas, a Deloitte audit partner, said that he had examined OHLMEX’s

subsidiaries’ (including OHL) financial statements for 2009, 2008 and 2007, and that they were

consistent with the information presented by OHLMEX in its financial statements. By the end of

2009, OHLMEX’s only concession in which it claimed (falsely) to have a right to obtain cash from

the grantor in the form of a “guaranteed profitability” was the Circuito Exterior Mexiquense. This

was the only concession in which OHLMEX’s claimed to have “other operating revenues” and a

“guaranteed profitability” asset, and it is precisely the concession awarded to OHL.

This is why it is deeply worrying that, while OHLMEX’s Financial Statements (audited by Deloitte’s

Sergio Vargas) reported “other operating revenues” of $1.16 billion pesos in 2008 (supposedly

attributable to OHL’s Circuito Exterior Mexiquense), OHL’s Financial Statements for 2008 (also

audited by Deloitte’s Sergio Vargas) show “other operating revenues” (which still did not have

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anything to do with a fabricated “financial asset”) of only $3.5 million pesos. Even more worrying

is the fact that, in the notes to OHL’s Financial Statements for 2008, the “Investment in

Concession” asset does not include any sub-account relating to an alleged “guaranteed

profitability”; however in the notes to OHLMEX’s Financial Statements for 2008, the “Investment

in Concession” asset includes such a sub-account, with a value of $3.1 billion pesos, which,

according to OHLMEX, was solely attributable to OHL’s Circuito Exterior Mexiquense.

The question here is: if Deloitte examined OHLMEX’s subsidiaries’ financial statements for 2009,

2008, and 2007, as it claims to have done, why did it allow OHLMEX to report an asset supposedly

attributable to OHL’s Circuito Exterior Mexiquense that was not reported by OHL in its own

financial statements? We believe that, at the time, Deloitte was not worried about this because

OHL’s financial statements were not public, so they weren’t subject to public scrutiny. In other

words, both Deloitte and OHLMEX expected not to be discovered.

9. How OHL’s and OHLMEX’s operating cash flows are permanently lower than their illegally

reported “net income”; and how this does not happen for OHL’s competitors in the market.

One of the obvious consequences of OHL’s scheme, through which it inflates its revenues, its net

income, and the value of its concession-related asset, is a substantial divergence between its

reported net income and its operating cash flow. In other words, OHL has not been able to convert

its alleged accumulated earnings into cash. And, in the end, what matters to investors, lenders, and

regulators, is the cash that a business actually produces.

For every year between 2010 and 2014, OHL’s operating cash flow has been substantially lower

than its reported net income, whereas OHL’s major competitors in the concessions sector have

reported operating cash flows which are substantially higher than their reported net income. When

a company’s operating cash flow is permanently lower than its profits, it usually means that

something irregular is going on.

The following graphs illustrate how OHL’s accounting scheme allows it to report net incomes that

are consistently higher than its operating cash flow, and how this IS NOT a common practice within

the concession sector in Mexico.

16

As we can see from the previous graphs, OHL is the only one of these 3 companies which

consistently reports a net income that is substantially higher than its operating cash flow. OHL’s

problem is then transferred to OHLMEX, its listed parent company. Due to the fact that OHL is

OHLMEX’s most important subsidiary, the difference between operating cash flow and reported net

income that we saw in OHL can also be seen in OHLMEX:

-1,000

0

1,000

2,000

3,000

4,000

5,000

2009 2010 2011 2012 2013 2014

Mill

ion

s o

f P

eso

s

Year

OHL

Net Income

Operating CashFlow

0

1000

2000

3000

4000

5000

6000

2010 2011 2012 2013 2014

Mill

ion

s o

f P

eso

s

Year

Pinfra

Net Income

Operating CashFlow

-2000

0

2000

4000

6000

8000

2010 2011 2012 2013 2014

Mill

ion

s o

f P

eso

s

Year

IDEAL

Net Income

Operating CashFlow

17

The only two graphs in which the reported net income (blue line) is permanently higher than the

operating cash flow (red line) are the ones that illustrate OHL and OHLMEX’s respective situations.

This has one simple explanation: OHL’s “other operating revenues” are not supported by cash, and

OHL has not been able to convert such alleged but non-existent revenues to dollars and cents. This

is not in itself a worrying issue. The problem arises when the difference becomes permanent, i.e.

when, year after year, both OHL and OHLMEX report a net income that is substantially higher than

the cash flow it obtains from operating activities.

How can OHL and OHLMEX explain such a permanent and substantial divergence?

Will cash flow ever be enough to support OHL’s alleged (but non-existent) accumulated earnings?

Will it be enough to service its outstanding debt?

Additionally, OHLMEX’s CEO, Mr. Sergio Hidalgo, has claimed on various occasions that other

important listed concessionaires also have “guaranteed returns” clauses in their concessions. How

can Mr. Hidalgo explain the fact that: i) PINFRA clearly states in the notes to its financial statements

that it “has not recognized any financial assets for its investments in concessions”; ii) ICA clearly

states in the notes to its financial statements that all of its concessions are registered as intangible

assets (while the only project in which it reports a financial asset is not a concession but a Service

Contract, or PPS, as it has been defined by ICA, in which it is payed directly by the government) ;

and iii) IDEAL considers all of its toll road concessions intangible assets (while the only projects

considered as financial assets by IDEAL are water treatment plants and prisons, in both of which

IDEAL is payed directly by the government entity that hires it)?

10. How would OHL’s financial statements look like if it classified its concession solely as an

intangible asset (as the CNBV is requiring it to)? How would this affect and OHL Group’s

situation?

-2,000

0

2,000

4,000

6,000

8,000

2010 2011 2012 2013 2014

Mill

ion

s o

f P

eso

s

Year

OHLMEX

Net Income

Operating Cash Flowng

18

We think that it will be useful to show how exactly OHL would be affected by having to classify its

concession solely as an intangible asset. Contrary to what OHL, OHLMEX and OHL Group would like

us to believe, the impact of considering the Circuito Exterior Mexiquense’s concession solely as an

intangible asset would be catastrophic. The real problem is that the amount that OHL illegally

records today as a financial asset for “guaranteed profitability” represents a “right” that does not

actually exist. If the concession were to end, and if its term couldn’t legally be extended anymore,

OHL would not be entitled to charge anyone for its unrecovered investment. There is no

unconditional obligation to pay OHL for its unrecovered investment, which is supported by the

CNBV’s requirement. Not only would OHL not be able to report an asset from its non-existent

“guaranteed profitability”; OHL would have to report substantial net losses for most years from

2003 to 2014. In fact, OHL must report substantial “accumulated losses”, instead of “accumulated

earnings”. OHL’s assets would not be sufficient to cover its liabilities.

Considering that the Circuito Exterior Mexiquense’s concession asset represents 55.67% of

OHLMEX’s total assets, and 40.72% of OHL Group’s total concession assets (as of December 31st

2014), a write off of this size would be catastrophic both for OHLMEX and for OHL Group.

Additionally, OHL’s EBITDA (illegally reached by OHL by including “other operating revenues”) is

39.89% of OHL Group’s total consolidated EBITDA (as of December 31st 2014). If OHL were to start

reporting its asset solely as an intangible asset, and thus, if it were not able to report “other

operating revenues”, both OHLMEX and OHL Group’s EBITDAs would be substantially reduced. They

would also have to absorb substantial accumulated net losses from OHL, which has lost real money

in an attempt to fool the market and artificially fabricate a non-existent “financial asset”. What this

non-existent “financial asset” actually represents, is the money that OHL has lost, but wishes to

recover.

In the final section of this report, we will show some very important consequences of accepting

that OHL has no unconditional right to obtain cash from the State of Mexico. Let us not forget that

in the last week, the CNBV has stated, precisely, that OHL has no such right. We will do this by

comparing OHL’s net income (or loss), accumulated earnings (or losses) and investment in

concession the way OHL reports them as of today, and how they will look once OHL starts

recognizing its asset solely as an intangible asset, the way every other competitor does it.

a) Net income (or loss). Millions of pesos.

Year How OHL reports as of today Once OHL reports its concession solely as an intangible asset

2010 $1,650 ($520)

2011 $2,331 ($1,790)

2012 $2,561 ($2,275)

2013 $3,226 ($4,860)

2014 $4,218 ($1,838)

19

As you can see, when considered solely an intangible asset, OHL’s Circuito Exterior Mexiquense has

actually lost money (and a lot of it, by the way), in every year between 2010 and 2014. This is what

is actually happening. OHL really loses a lot of money. The way OHL reports as of today, is only

financial makeup, which, as you know, is illegal. Much like Enron, OHL’s may be better understood

with the following example. OHL has a dog (i.e. losses), but, for financial purposes, they need it to

be a duck (i.e. profits or net income). So OHL just pastes an orange beak on the dog’s nose, puts

feathers on it, and tries to convince the public that they have a duck, by merely calling it “duck”.

The lesson here is that, no matter how much OHL tries to disguise its losses by calling them “other

operating revenues”, or “guaranteed profitability”, they are still losses. There is not much more to

the story.

b) Accumulated earnings (or losses).

OHL shamelessly claims to have accumulated earnings of $17,115 million pesos as of December 31st

2014. However, when considering that OHL’s asset is solely an intangible asset with no right to

report “other operating revenues”, OHL has accumulated losses of $9,374 million pesos as of

December 31st 2014.

c) Investment in Concession. Millions of pesos.

As you can see in this table, OHL has been reporting an asset related to its investment in

concession, which, allegedly, grows every year. The problem is that the asset isn’t growing. The only

thing that is growing is OHL’s losses (or, in OHL’s financial makeup language, “other operating

revenues”). And these losses are automatically carried every year to OHL’s non-existent financial

asset. That is why this asset keeps “growing” yearly. But, when considered solely an intangible

asset, as the CNBV has requested from OHL, there is no more “guaranteed profitability” account in

which to hide losses. It is merely an intangible asset, measured at its cost.

3 We have serious doubts as to whether these amounts correctly represent the value of the investment.

However, that will be the topic of a future report.

Year How OHL reports as of today Once OHL reports its concession solely as an

intangible asset3

2010 $28,643 $22,140

2011 $33,317 $22,692

2012 $38,471 $23,009

2013 $46,564 $23,015

2014 $52,218 $22,747

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CLOSING REMARKS

We would very much appreciate that OHL’s administration, its external auditor (Deloitte) and the

State of Mexico address the issues that have been highlighted in this report. A COMPANY WHICH

DOES NOT HAVE ANYTHING TO HIDE, ANSWERS QUESTIONS. We believe OHL does have things to

hide, and it has been hiding them for many years. As we remarked in this report, OHL has

substantial accumulated losses, and its assets are worth substantially less than what OHL claims.

We believe both OHL and Deloitte are fully aware of this situation, as is Mexico’s financial

regulator, the CNBV: OHL does not have a guaranteed profitability. It has a right to ask for

extensions in the term of its concession. However, after the term has been extended for 30 years, it

cannot legally be extended anymore. At this point, whether OHL has obtained the return

established in the concession, or not, is irrelevant, because the concession will be automatically

terminated, and the State of Mexico will not pay OHL any amount whatsoever. The only way in

which OHL would be allowed to keep reporting its assets the way it does as of today, is if it provides

the public with a valid document signed by the Governor of the State of Mexico, in which he

recognizes a financial obligation (i.e. public debt) to pay OHL the amount it reports as “guaranteed

profitability”. Any other outcome will be catastrophic for OHL, OHLMEX and OHL Group.

In the near future we will be issuing additional reports regarding more of OHL’s financial and legal

irregularities.