NON-IFRS FINANCIAL INFORMATION
In this annual report, we disclose non-IFRS financial measures, namely EBITDA and net debt, each as defined under “Item 3.A Selected Financial Data–Selected Reportable Segment Data” and “Item 3.A Selected Financial Data–Selected Reportable Segment Data–OPC” and “Item 4.B Business Overview—Our Businesses—OPC—OPC’s Description of Operations.” Each of these measures are important measures used by us, and our businesses, to assess financial performance. We believe that the disclosure of EBITDA and net debt provides transparent and useful information to investors and financial analysts in their review of our, or our subsidiaries’ and associated companies’, operating performance and in the comparison of such operating performance to the operating performance of other companies in the same industry or in other industries that have different capital structures, debt levels and/or income tax rates.
| RMB/U.S. Dollar | ||||||||||||||||
| Year | Period end1 | Average rate2 | High | Low | ||||||||||||
| 2013 | 6.0537 | 6.1412 | 6.2438 | 6.0537 | ||||||||||||
| 2014 | 6.2046 | 6.1701 | 6.2591 | 6.0402 | ||||||||||||
| 2015 | 6.4778 | 6.2869 | 6.4896 | 6.1870 | ||||||||||||
| 2016 | 6.9430 | 6.6549 | 6.9580 | 6.4480 | ||||||||||||
| 2017 | 6.5063 | 6.7350 | 6.9575 | 6.4773 | ||||||||||||
| RMB/U.S. Dollar | ||||||||
| Month | High | Low | ||||||
| October 2017 | 6.6533 | 6.5712 | ||||||
| November 2017 | 6.6385 | 6.5967 | ||||||
| December 2017 | 6.6210 | 6.5063 | ||||||
| January 2018 | 6.5263 | 6.2841 | ||||||
| February 2018 | 6.3471 | 6.2649 | ||||||
| March 2018 | 6.3565 | 6.2685 | ||||||
MARKET AND INDUSTRY DATA
Certain information relating to the industries in which each of our subsidiaries and associated companies operate and their position in such industries used or referenced in this annual report were obtained from internal analysis, surveys, market research, publicly available information and industry publications. Unless otherwise indicated, all sources for industry data and statistics are estimates or forecasts contained in or derived from internal or industry sources we believe to be reliable. Market data used throughout this annual report was obtained from independent industry publications and other publicly available information. Such data, as well as internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified. In addition, in certain cases we have made statements in this annual report regarding the industries in which each of our subsidiaries and associated companies operate and their position in such industries based upon the experience of our businesses and their individual investigations of the market conditions affecting their respective operations. We cannot assure you that any of these statements are accurate or correctly reflect the position of subsidiaries and associated companies in such industries, and none of our internal surveys or information has been verified by independent sources.
Market data and statistics are inherently predictive and speculative and are not necessarily reflective of actual market conditions. Such statistics are based upon market research, which itself is based upon sampling and subjective judgments by both the researchers and the respondents. In addition, the value of comparisons of statistics for different markets is limited by many factors, including that (i) the markets are defined differently, (ii) the underlying information was gathered by different methods and (iii) different assumptions were applied in compiling the data. Accordingly, although we believe and operate as though all market and industry information presented in this annual report is accurate, the market statistics included in this annual report should be viewed with caution.
Unless otherwise indicated, statistics provided throughout this annual report with respect to power generation units are expressed in MW, in the case of the capacity of such power generation units, and in GWh, in the case of the electricity production of such power generation units. One GWh is equal to 1,000 megawatt hours, or MWh, and one MWh is equal to 1,000 kilowatt hours, or kWh. Statistics relating to aggregate annual electricity production are expressed in GWh and are based on a year of 8,760 hours. Unless otherwise indicated, OPC’s capacity figures provided in this annual report reflect 100% of the capacity of all of OPC’s assets, regardless of OPC’s ownership interest in the entity that owns each such asset. For information on OPC’s ownership interest in each of its operating companies, and associated companies, see “Item 4.B Business Overview—Our Businesses—OPC.”
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, and reflects our current expectations and views of the quality of our assets, our anticipated financial performance, our future growth prospects, the future growth prospects of our businesses, the liquidity of our ordinary shares, and other future events. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, and are principally contained in the sections entitled “Item 3. Key Information,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Some of these forward-looking statements can be identified by terms and phrases such as “anticipate,” “should,” “likely,” “foresee,” “believe,” “estimate,” “expect,” “intend,” “continue,” “could,” “may,” “plan,” “project,” “predict,” “will,” and similar expressions.
These forward-looking statements relate to:
| · | our goals and strategies; |
| · | our capital commitments and/or intentions with respect to each of our businesses; |
| · | our capital allocation principles, as set forth in “Item 4.B Business Overview”; |
6
| · | the funding requirements, strategies, and business plans of our businesses; |
| · | the potential listing, offering, distribution or monetization of our businesses; |
| · | expected trends in the industries and markets in which each of our businesses operate; |
| · | our expected tax status and treatment; |
| · | statements relating to litigation and/or regulatory |
| · | statements relating to the sale of the Inkia Business including |
| · | the expected effect of new accounting standards on Kenon; |
| · | with respect to OPC: |
| · | the expected cost and timing of commencement and completion of development and |
| · | the Tzomet project, including the license and approvals for the development of the project, financing and the expected payment of the remaining consideration, and |
| · | the OPC-Hadera project, including the expected financing, total cost of construction, expected capacity, |
| · | the OPC restructuring, including statements with respect to Kenon’s expectation in relation to future tax liability; |
| · | expected macroeconomic trends in Israel, including the expected growth in energy demand; |
| · | potential |
| · | its gas supply agreements; |
| · | its strategy; |
| · | expected trends in energy consumption; |
| · | regulatory trends; |
| · | its anticipated capital expenditures, |
| · | projections and expected trends in the electricity market in Israel; and |
| · | the price and volume of gas available to |
| · | with respect to Qoros: |
| · | Qoros’ expectation to renew or refinance its working capital facilities to support its continued operations and development; |
| · | statements with respect to |
| · | Qoros’ expectation of pricing trends in the Chinese passenger vehicle market; |
| · | Qoros’ liquidity position; |
| · | Qoros’ |
| · |
7
| · | Qoros’ ability to increase its production capacity; |
| · | the investment by the |
| · | the agreement to sell half of Kenon's remaining interest in Qoros; and |
| · | Qoros’ expectation of the development of the NEV market in China, including expected trends regarding government subsidies for the purchase of NEVs and the growth of NEV |
| · | with respect to ZIM: |
| · | the assumptions used in Kenon’s and ZIM’s impairment analysis with respect to Kenon’s investment in ZIM, and ZIM’s assets, respectively, including with respect to expected fuel price, freight rates, demand trends; |
| · | ZIM’s strategy with respect to its debt obligations; |
| · | ZIM’s expectation of modifications with respect to its and other shipping companies’ operating fleet and lines, including the utilization of larger vessels within certain trade zones and modifications made in light of environmental regulations; |
| · | ZIM’s compliance with International Maritime Organization, or IMO, regulations expected to come into effect in 2020 and other regulations, including the expected effects of such regulations; |
| · | statements regarding the 2M alliance and expected benefits of the alliance; and |
| · | trends related to the global container shipping industry, including with respect to fluctuations in container supply, industry consolidation, demand, bunker prices and charter/freights rates; and |
| · | with respect to Primus, its: |
| · | strategy; |
| · | plans to |
| · | potential customers; |
| · | potential project |
| · | potential sources of revenue. |
The preceding list is not intended to be an exhaustive list of each of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us and are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by these forward-looking statements which are set forth in “Item 3.D Risk Factors.” Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results.
Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement included in this annual report should not be construed as exhaustive. You should read this annual report, and each of the documents filed as exhibits to the annual report, completely, with this cautionary note in mind, and with the understanding that our actual future results may be materially different from what we expect.
8
A. Directors and Senior Management
Not applicable.
B. Advisers
Not applicable.
C. Auditors
Not applicable.
Not applicable.
A. Selected Financial Data
The following tables set forth our selected combined carve-out financial and other data as of and for the yearsyear ended December 31, 2014 and 2013 and selected consolidated financial and other data as of and for the years ended December 31, 2018, 2017, 2016 and 2015. This selected financial data should be read in conjunction with our audited consolidated financial statements, and the related notes thereto, as of December 31, 20172018 and 20162017 and for the years ended December 31, 2018, 2017 2016 and 2015,2016, included elsewhere in this annual report, and the information contained in “Item 5. Operating and Financial Review and Prospects” and “Item 3.D Risk Factors.” The historical financial and other data included here and elsewhere in this annual report should not be assumed to be indicative of our future financial condition or results of operations.
Our consolidated financial statements as of and for the year ended December 31, 2017 reflect the Inkia Business as discontinued operations and our consolidated financial statements as of and for the years ended 2016 and our selected consolidated financials as of and for the year ended December 31, 2015 and our selected combined carve-out financials as of and for the year ended December 31, 2014 set forth below have been reclassified for comparative purposes to account for the Inkia Business as discontinued operations. ZIM’s results of operations for 2013 and the six months ended June 30, 2014 are also presented as discontinued operations for the relevant periods.period.
Our financial statements presented in this annual report have been prepared in accordance with IFRS.
The selected financial data below also includes certain non-IFRS measures used by us to evaluate our economic and financial performance. These measures are not identified as accounting measures under IFRS and therefore should not be considered as an alternative measure to evaluate our performance.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
| 2017 | 20161 | 20151 | 20141 | 20131,2 | 2018 | 2017 | 20161 | 20151 | 20141 | |||||||||||||||||||||||||||||||
| (in millions of USD, except share data) | (in millions of USD, except share data) | |||||||||||||||||||||||||||||||||||||||
Statements of Profit and Loss Data3 | ||||||||||||||||||||||||||||||||||||||||
Statements of Profit and Loss Data2 | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 366 | $ | 324 | $ | 326 | $ | 413 | $ | 187 | $ | 364 | $ | 366 | $ | 324 | $ | 326 | $ | 413 | ||||||||||||||||||||
| Cost of sales and services (excluding depreciation) | (267 | ) | (251 | ) | (245 | ) | (297 | ) | (139 | ) | (259 | ) | (267 | ) | (251 | ) | (245 | ) | (297 | ) | ||||||||||||||||||||
| Depreciation | (31 | ) | (27 | ) | (25 | ) | (24 | ) | (11 | ) | (30 | ) | (31 | ) | (27 | ) | (25 | ) | (24 | ) | ||||||||||||||||||||
| Gross profit | $ | 68 | $ | 46 | $ | 56 | $ | 92 | $ | 37 | $ | 75 | $ | 68 | $ | 46 | $ | 56 | $ | 92 | ||||||||||||||||||||
| Selling, general and administrative expenses | (56 | ) | (47 | ) | (50 | ) | (86 | ) | (40 | ) | (34 | ) | (56 | ) | (47 | ) | (50 | ) | (86 | ) | ||||||||||||||||||||
| Gain from distribution of dividend in kind | - | - | 210 | - | - | — | — | — | 210 | — | ||||||||||||||||||||||||||||||
| Gain from disposal of investees | - | - | - | 157 | - | — | — | — | — | 157 | ||||||||||||||||||||||||||||||
| Gain on bargain purchase | - | - | - | - | 1 | |||||||||||||||||||||||||||||||||||
| Impairment of assets and investments | 29 | (72 | ) | (7 | ) | (48 | ) | - | — | 29 | (72 | ) | (7 | ) | (48 | ) | ||||||||||||||||||||||||
| Dilution gains from reduction in equity interest held in associates | - | - | 33 | - | - | — | — | — | 33 | — | ||||||||||||||||||||||||||||||
| Other expenses | - | - | (1 | ) | (6 | ) | (5 | ) | (1 | ) | — | — | (1 | ) | (6 | ) | ||||||||||||||||||||||||
| Other income | 1 | 1 | 4 | (55 | ) | 1 | 2 | 1 | 1 | 4 | (55 | ) | ||||||||||||||||||||||||||||
| Operating profit / (loss) from continuing operations | $ | 42 | $ | (72 | ) | $ | 245 | $ | 54 | $ | (6 | ) | ||||||||||||||||||||||||||||
| Financing expenses | (70 | ) | (47 | ) | (36 | ) | (49 | ) | (25 | ) | (30 | ) | (70 | ) | (47 | ) | (36 | ) | (49 | ) | ||||||||||||||||||||
| Financing income | 3 | 7 | 11 | 14 | - | 28 | 3 | 7 | 11 | 14 | ||||||||||||||||||||||||||||||
| Financing expenses, net | $ | (67 | ) | $ | (40 | ) | $ | (25 | ) | $ | (35 | ) | $ | (25 | ) | $ | (2 | ) | $ | (67 | ) | $ | (40 | ) | $ | (25 | ) | $ | (35 | ) | ||||||||||
| Provision of financial guarantee | - | (130 | ) | - | - | - | ||||||||||||||||||||||||||||||||||
Share in losses of associated companies, net of tax4 | (111 | ) | (186 | ) | (187 | ) | (185 | ) | (160 | ) | ||||||||||||||||||||||||||||||
| (Loss) / profit from continuing operations before income taxes | $ | (136 | ) | $ | (428 | ) | $ | 33 | $ | (166 | ) | $ | (191 | ) | ||||||||||||||||||||||||||
| Gain on third party investment in Qoros | 504 | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Fair value loss on option | (40 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Write back / (provision) of financial guarantee | 63 | — | (130 | ) | — | — | ||||||||||||||||||||||||||||||||||
| Share in losses of associated companies, net of tax3 | (105 | ) | (111 | ) | (186 | ) | (187 | ) | (185 | ) | ||||||||||||||||||||||||||||||
| Profit / (loss) from continuing operations before income taxes | $ | 462 | $ | (136 | ) | $ | (428 | ) | $ | 33 | $ | (166 | ) | |||||||||||||||||||||||||||
| Income taxes | (73 | ) | (2 | ) | (9 | ) | (68 | ) | (2 | ) | (11 | ) | (73 | ) | (2 | ) | (9 | ) | (68 | ) | ||||||||||||||||||||
| (Loss) / profit for the year from continuing operations | $ | (209 | ) | $ | (430 | ) | $ | 24 | $ | (234 | ) | $ | (193 | ) | ||||||||||||||||||||||||||
Profit and gain from sale of discontinued operations (after taxes)5 | 478 | 36 | 72 | 711 | (423 | ) | ||||||||||||||||||||||||||||||||||
| Profit / (loss) for the year from continuing operations | $ | 451 | $ | (209 | ) | $ | (430 | ) | $ | 24 | $ | (234 | ) | |||||||||||||||||||||||||||
| (Loss) / profit and gain from sale of discontinued operations (after taxes)4 | (6 | ) | 478 | 36 | 72 | 711 | ||||||||||||||||||||||||||||||||||
| Profit / (loss) for the year | $ | 269 | $ | (394 | ) | $ | 96 | $ | 477 | $ | (616 | ) | $ | 445 | $ | 269 | $ | (394 | ) | $ | 96 | $ | 477 | |||||||||||||||||
| Attributable to: | ||||||||||||||||||||||||||||||||||||||||
| Kenon’s shareholders | $ | 237 | $ | (412 | ) | $ | 73 | $ | 459 | $ | (631 | ) | 434 | 237 | (412 | ) | 73 | 459 | ||||||||||||||||||||||
| Non-controlling interests | 32 | 18 | 23 | 18 | 15 | 11 | 32 | 18 | 23 | 18 | ||||||||||||||||||||||||||||||
| Basic/diluted (loss)/profit per share attributable to Kenon’s shareholders (in Dollars): | ||||||||||||||||||||||||||||||||||||||||
| Basic/diluted profit/(loss) per share attributable to Kenon’s shareholders (in Dollars): | ||||||||||||||||||||||||||||||||||||||||
| Basic/diluted profit/(loss) per share | 4.40 | (7.67 | ) | 1.36 | 8.58 | (11.82 | ) | 8.07 | 4.40 | (7.67 | ) | 1.36 | 8.58 | |||||||||||||||||||||||||||
| Basic/diluted profit/(loss) per share from continuing operations | (4.00 | ) | (8.08 | ) | 0.24 | (4.44 | ) | (3.67 | ) | 8.17 | (4.00 | ) | (8.08 | ) | 0.24 | (4.44 | ) | |||||||||||||||||||||||
| Basic/diluted profit/(loss) per share from discontinued operations | 8.40 | 0.41 | 1.12 | 13.02 | (8.15 | ) | ||||||||||||||||||||||||||||||||||
| Basic/diluted (loss)/profit per share from discontinued operations | (0.10 | ) | 8.40 | 0.41 | 1.12 | 13.02 | ||||||||||||||||||||||||||||||||||
| Statements of Financial Position Data | ||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,417 | $ | 327 | $ | 384 | $ | 610 | $ | 671 | $ | 131 | $ | 1,417 | $ | 327 | $ | 384 | $ | 610 | ||||||||||||||||||||
| Short-term investments and deposits | 7 | 90 | 309 | 227 | 30 | 50 | 7 | 90 | 309 | 227 | ||||||||||||||||||||||||||||||
| Trade receivables, net | 44 | 284 | 123 | 181 | 358 | |||||||||||||||||||||||||||||||||||
| Trade receivables | 36 | 44 | 284 | 123 | 181 | |||||||||||||||||||||||||||||||||||
| Other current assets, including derivatives | 36 | 50 | 45 | 59 | 98 | 41 | 36 | 50 | 45 | 59 | ||||||||||||||||||||||||||||||
| Income tax receivable | - | 11 | 4 | 3 | 7 | — | — | 11 | 4 | 3 | ||||||||||||||||||||||||||||||
| Inventories | - | 92 | 51 | 56 | 150 | — | — | 92 | 51 | 56 | ||||||||||||||||||||||||||||||
| Assets held for sale | 70 | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Total current assets | 1,504 | 854 | 916 | 1,136 | 1,314 | 328 | 1,504 | 854 | 916 | 1,136 | ||||||||||||||||||||||||||||||
Total non-current assets6 | 1,022 | 4,284 | 3,567 | 3,184 | 4,671 | |||||||||||||||||||||||||||||||||||
| Total non-current assets5 | 1,127 | 1,022 | 4,284 | 3,567 | 3,184 | |||||||||||||||||||||||||||||||||||
| Total assets | $ | 2,526 | $ | 5,138 | $ | 4,483 | $ | 4,320 | $ | 5,985 | $ | 1,455 | $ | 2,526 | $ | 5,138 | $ | 4,483 | $ | 4,320 | ||||||||||||||||||||
| Total current liabilities | 806 | 1,045 | 653 | 497 | 2,925 | 90 | 806 | 1,045 | 653 | 497 | ||||||||||||||||||||||||||||||
| Total non-current liabilities�� | $ | 669 | $ | 3,199 | $ | 2,566 | $ | 2,385 | $ | 2,113 | ||||||||||||||||||||||||||||||
| Total non-current liabilities | $ | 649 | $ | 669 | $ | 3,199 | $ | 2,566 | $ | 2,385 | ||||||||||||||||||||||||||||||
| Equity attributable to the owners of the Company | 983 | 681 | 1,061 | 1,230 | 710 | 649 | 983 | 681 | 1,061 | 1,230 | ||||||||||||||||||||||||||||||
| Share capital | $ | 1,267 | $ | 1,267 | $ | 1,267 | $ | - | $ | - | $ | 602 | $ | 1,267 | $ | 1,267 | $ | 1,267 | $ | — | ||||||||||||||||||||
| Total equity | $ | 1,051 | $ | 894 | $ | 1,264 | $ | 1,438 | $ | 947 | $ | 716 | $ | 1,051 | $ | 894 | $ | 1,264 | $ | 1,438 | ||||||||||||||||||||
| Total liabilities and equity | $ | 2,526 | $ | 5,138 | $ | 4,483 | $ | 4,320 | $ | 5,985 | $ | 1,455 | $ | 2,526 | $ | 5,138 | $ | 4,483 | $ | 4,320 | ||||||||||||||||||||
| Basic/Diluted weighted average common shares outstanding used in calculating profit/(loss) per share (thousands) | 53,761 | 53,720 | 53,649 | 53,383 | 7 | 53,383 | 7 | 53,826 | 53,761 | 53,720 | 53,649 | 53,383 | 6 | |||||||||||||||||||||||||||
| Statements of Cash Flow Data | ||||||||||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 392 | $ | 162 | $ | 290 | $ | 410 | $ | 257 | $ | 52 | $ | 392 | $ | 162 | $ | 290 | $ | 410 | ||||||||||||||||||||
| Net cash used in investing activities | 585 | (400 | ) | (737 | ) | (883 | ) | (278 | ) | |||||||||||||||||||||||||||||||
| Net cash provided by financing activities | 97 | 175 | 233 | 430 | 281 | |||||||||||||||||||||||||||||||||||
| Net cash (used in) / provided by investing activities | (113 | ) | 585 | (400 | ) | (737 | ) | (883 | ) | |||||||||||||||||||||||||||||||
| Net cash (used in) / provided by financing activities | (1,218 | ) | 97 | 175 | 233 | 430 | ||||||||||||||||||||||||||||||||||
| (Decrease) / increase in cash and cash equivalents | 1,074 | (63 | ) | (214 | ) | (43 | ) | 260 | (1,279 | ) | 1,074 | (63 | ) | (214 | ) | (43 | ) | |||||||||||||||||||||||
| (1) | Results during these periods have been reclassified to reflect the Inkia Business as discontinued operations. For further information, see Note |
| (2) |
| Consists of the consolidated results of OPC and Primus and, from June 30, 2014 until its liquidation in July 2016, the consolidated results of |
| Includes Kenon’s share in ZIM’s loss for the six months ended December 31, 2014 and the years ended December 31, 2015, 2016, 2017 and |
| Consists of (i) ZIM’s results of operations for |
| Includes Kenon’s associated companies: (i) Qoros, (ii) Tower (until June 30, 2015), (iii) ZIM (from |
| Based on 53,383,015 shares which were issued as of January 7, 2015, the date of our spin-off from IC. |
10
Selected Reportable Segment Data
Kenon is a holding company of (i) a 76% interest in OPC, (ii) a 100% interest in Quantum (Kenon owns a 24% interest in Qoros through Quantum and Kenon has agreed to sell half of its interest to the Majority Shareholder in Qoros, subject to closing conditions; upon completion of this sale, Kenon will hold a 12% interest in Qoros), (iii) a 32% interest in ZIM, and (iv) a 91% interest in Primus. Kenon used to also hold interests in (i) the Inkia Business, which was sold effective December 31, 2017, (ii) a 22.5% interest in Tower, which was distributed to Kenon shareholders on July 23, 2015 and (iii) HelioFocus, which was liquidated in July 2017.
The results of the following companies are included in Kenon’s statements of profit and loss as share in losses of associated companies, net of tax, for the years set forth below, except as otherwise indicated: (i) Qoros, (ii) ZIM from June 30,July 1, 2014 and (iii) Tower until June 30, 2015.
Kenon’s segments are OPC, QorosQuantum and Other. Kenon’s Other segment includes the results of ZIM, Primus, and from June 30, 2014, the results of HelioFocus and Kenon (Company level).
The following table sets forth selected financial data for Kenon’s reportable segments for the periods presented:
Year Ended December 31, 20171 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 365 | $ | - | $ | 1 | $ | - | $ | 366 | ||||||||||
| Depreciation and amortization | (30 | ) | - | (1 | ) | - | (31 | ) | ||||||||||||
| Impairment of assets and investments | - | - | 29 | - | 29 | |||||||||||||||
| Financing income | 1 | - | 13 | (11 | ) | 3 | ||||||||||||||
| Financing expenses | (34 | ) | - | (47 | ) | 11 | (70 | ) | ||||||||||||
| Share in (losses) income of associated companies | - | (121 | ) | 10 | - | (111 | ) | |||||||||||||
| Profit / (Loss) before taxes | $ | 23 | $ | (121 | ) | $ | (38 | ) | $ | - | $ | (136 | ) | |||||||
| Income taxes | (9 | ) | - | (64 | ) | - | (73 | ) | ||||||||||||
| Profit / (Loss) from continuing operations | $ | 14 | $ | (121 | ) | $ | (102 | ) | $ | - | $ | (209 | ) | |||||||
Segment assets5 | $ | 936 | $ | - | $ | 1,468 | 6 | $ | - | $ | 2,404 | |||||||||
| Investments in associated companies | - | 2 | 120 | - | 122 | |||||||||||||||
| Segment liabilities | 743 | - | 732 | 7 | - | 1,475 | ||||||||||||||
Capital expenditure8 | 109 | - | 121 | - | 230 | |||||||||||||||
| Year Ended December 31, 2018 | ||||||||||||||||||||
| OPC | Quantum1 | Other2 | Adjustments3 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 363 | $ | — | $ | 1 | $ | — | $ | 364 | ||||||||||
| Depreciation and amortization | (30 | ) | — | — | — | (30 | ) | |||||||||||||
| Financing income | 2 | 10 | 48 | (32 | ) | 28 | ||||||||||||||
| Financing expenses | (27 | ) | (2 | ) | (33 | ) | 32 | (30 | ) | |||||||||||
| Gain on third party investment in Qoros | — | 504 | — | — | 504 | |||||||||||||||
| Fair value loss on option | — | (40 | ) | — | — | (40 | ) | |||||||||||||
| Write back of financial guarantee | — | 63 | — | — | 63 | |||||||||||||||
| Share in losses of associatedcompanies | — | (78 | ) | (27 | ) | — | (105 | ) | ||||||||||||
| Profit / (Loss) before taxes | $ | 36 | $ | 457 | $ | (31 | ) | $ | — | $ | 462 | |||||||||
| Income taxes | (10 | ) | — | (1 | ) | — | (11 | ) | ||||||||||||
| Profit / (Loss) from continuing operations | $ | 26 | $ | 457 | $ | (32 | ) | $ | — | $ | 451 | |||||||||
Segment assets4 | $ | 893 | $ | 92 | $ | 2395 | $ | — | $ | 1,224 | ||||||||||
| Investments in associated companies | — | 139 | 92 | — | 231 | |||||||||||||||
| Segment liabilities | 700 | — | 396 | — | 739 | |||||||||||||||
Capital expenditure7 | 100 | — | — | — | 100 | |||||||||||||||
| (1) | Subsidiary of Kenon that owns Kenon’s equity holding in Qoros. |
| (2) | Includes the |
| (3) | “Adjustments” includes inter segment financing income and expense. |
| (4) | Includes investments in associates. |
| (5) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (7) | Includes the additions of Property, Plant and Equipment, or PP&E, and intangibles based on an accrual basis. |
11
Year Ended December 31, 20171 | ||||||||||||||||||||
OPC | Quantum2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 365 | $ | — | $ | 1 | $ | — | $ | 366 | ||||||||||
| Depreciation and amortization | (30 | ) | — | (1 | ) | — | (31 | ) | ||||||||||||
| Impairment of assets and investments | — | — | 29 | — | 29 | |||||||||||||||
| Financing income | 1 | — | 13 | (11 | ) | 3 | ||||||||||||||
| Financing expenses | (34 | ) | (6 | ) | (41 | ) | 11 | (70 | ) | |||||||||||
| Share in (losses) income of associated companies | — | (121 | ) | 10 | — | (111 | ) | |||||||||||||
| Profit / (Loss) before taxes | $ | 23 | $ | (127 | ) | $ | (32 | ) | $ | — | $ | (136 | ) | |||||||
| Income taxes | (9 | ) | — | (64 | ) | — | (73 | ) | ||||||||||||
| Profit / (Loss) from continuing operations | $ | 14 | $ | (127 | ) | $ | (96 | ) | $ | — | $ | (209 | ) | |||||||
Segment assets5 | $ | 940 | $ | 16 | $ | 1,448 | 6 | $ | — | $ | 2,404 | |||||||||
| Investments in associated companies | — | 2 | 120 | — | 122 | |||||||||||||||
| Segment liabilities | 743 | 75 | 657 | 7 | — | 1,475 | ||||||||||||||
Capital expenditure8 | 109 | — | 121 | — | 230 | |||||||||||||||
| (1) | Results for this period reflect the results of the Inkia |
| (2) |
| (3) | Includes the results of Primus and HelioFocus (which was liquidated in July 2017); the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter-segment financing income and expenses. |
| (5) | Excludes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (7) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (8) | Includes the additions of |
12
Year Ended December 31, 20161 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 324 | $ | — | $ | — | $ | - | $ | 324 | ||||||||||
| Depreciation and amortization | (27 | ) | — | - | - | (27 | ) | |||||||||||||
| Impairment of assets and investments | - | — | (72 | ) | - | (72 | ) | |||||||||||||
| Financing income | 3 | — | 16 | (12 | ) | 7 | ||||||||||||||
| Financing expenses | (23 | ) | — | (36 | ) | 12 | (47 | ) | ||||||||||||
| Share in losses of associated companies | - | (143 | ) | (43 | ) | - | (186 | ) | ||||||||||||
| Provision of financial guarantee | - | — | (130 | ) | - | (130 | ) | |||||||||||||
| Profit/(Loss) before taxes | $ | 20 | $ | (143 | ) | $ | (305 | ) | $ | - | $ | (428 | ) | |||||||
| Income taxes | — | — | (2 | ) | - | (2 | ) | |||||||||||||
| Profit/(Loss) from continuing operations | $ | 20 | $ | (143 | ) | $ | (307 | ) | $ | - | $ | (430 | ) | |||||||
Segment assets5 | $ | 668 | $ | — | $ | 4,262 | $ | - | $ | 4,930 | ||||||||||
| Investments in associated companies | - | 118 | 90 | - | 208 | |||||||||||||||
| Segment liabilities | 534 | — | 3,710 | - | 4,244 | |||||||||||||||
Capital expenditure8 | 73 | — | 245 | - | 318 | |||||||||||||||
Year Ended December 31, 20161 | ||||||||||||||||||||
OPC | Quantum2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 324 | $ | — | $ | — | $ | — | $ | 324 | ||||||||||
| Depreciation and amortization | (27 | ) | — | — | — | (27 | ) | |||||||||||||
| Impairment of assets and investments | — | — | (72 | ) | — | (72 | ) | |||||||||||||
| Financing income | 3 | — | 16 | (12 | ) | 7 | ||||||||||||||
| Financing expenses | (23 | ) | — | (36 | ) | 12 | (47 | ) | ||||||||||||
| Share in losses of associated companies | — | (143 | ) | (43 | ) | — | (186 | ) | ||||||||||||
| Provision of financial guarantee | — | — | (130 | ) | — | (130 | ) | |||||||||||||
| Profit/(Loss) before taxes | $ | 20 | $ | (143 | ) | $ | (305 | ) | $ | — | $ | (428 | ) | |||||||
| Income taxes | — | — | (2 | ) | — | (2 | ) | |||||||||||||
| Profit/(Loss) from continuing operations | $ | 20 | $ | (143 | ) | $ | (307 | ) | $ | — | $ | (430 | ) | |||||||
Segment assets5 | $ | 668 | $ | 2 | $ | 4,260 | $ | — | $ | 4,930 | ||||||||||
| Investments in associated companies | — | 118 | 90 | — | 208 | |||||||||||||||
| Segment liabilities | 534 | — | 3,710 | 7 | — | 4,244 | ||||||||||||||
Capital expenditure8 | 73 | — | 245 | — | 318 | |||||||||||||||
| (1) | Results |
| (2) |
| (3) | Includes the results of Primus and HelioFocus (which was liquidated in July 2017); the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter-segment financing income and expenses. |
| (5) | Excludes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (7) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (8) | Includes the additions of PP&E and intangibles based on an accrual basis. |
Year Ended December 31, 20151 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 326 | $ | — | $ | — | $ | - | $ | 326 | ||||||||||
| Depreciation and amortization | (26 | ) | — | 1 | — | (25 | ) | |||||||||||||
| Asset impairment | - | — | (7 | ) | — | (7 | ) | |||||||||||||
| Financing income | 3 | — | 8 | — | 11 | |||||||||||||||
| Financing expenses | (26 | ) | — | (10 | ) | — | (36 | ) | ||||||||||||
| Share in (losses) income of associated companies | - | (196 | ) | 9 | — | 187 | ||||||||||||||
| Gain from distribution of dividend in kind | - | — | 210 | — | 210 | |||||||||||||||
| Profit/(Loss) before taxes | $ | 30 | $ | (196 | ) | $ | 199 | $ | — | $ | 33 | |||||||||
| Income taxes | (8 | ) | — | (1 | ) | — | (9 | ) | ||||||||||||
| Profit/(Loss) from continuing operations | $ | 22 | $ | (196 | ) | $ | 198 | $ | — | $ | 24 | |||||||||
Segment assets5 | $ | 811 | $ | — | $ | 3,303 | 6 | $ | — | $ | 4,114 | |||||||||
| Investments in associated companies | - | 159 | 210 | — | 369 | |||||||||||||||
| Segment liabilities | 677 | — | 2,542 | 7 | — | 3,219 | ||||||||||||||
Capital expenditure8 | 18 | — | 556 | — | 574 | |||||||||||||||
OPC
The following tables set forth other financial and key operating data for OPC for the periods presented:
2018 | 2017 | 2016 | ||||||||||
($ millions, except as otherwise indicated) | ||||||||||||
| Net income for the period | 26 | 14 | 20 | |||||||||
EBITDA1 | 91 | 86 | 67 | |||||||||
Net Debt2 | 401 | 395 | 371 | |||||||||
| Net energy generated (GWh) | 3,383 | 3,655 | 3,510 | |||||||||
| Energy sales (GWh) | 3,965 | 3,988 | 3,996 | |||||||||
| 2017 | 2016 | 2015 | ||||||||||
| ($ millions, except as otherwise indicated) | ||||||||||||
| Net income for the period | 14 | 20 | 22 | |||||||||
EBITDA1 | 86 | 67 | 79 | |||||||||
Net Debt2 | 395 | 371 | 289 | |||||||||
| Net energy generated (GWh) | 3,655 | 3,510 | 3,736 | 3 | ||||||||
| Energy sales (GWh) | 3,988 | 3.996 | 3,953 | 4 | ||||||||
| (1) | OPC defines “EBITDA” for each period as net income EBITDA is not recognized under IFRS or any other generally accepted accounting principles as a measure of financial performance and should not be considered as a substitute for net income or loss, cash flow from operations or other measures of operating performance or liquidity determined in accordance with IFRS. EBITDA is not intended to represent funds available for dividends or other discretionary uses because those funds may be required for debt service, capital expenditures, working capital and other commitments and contingencies. EBITDA presents limitations that impair its use as a measure of OPC’s profitability since it does not take into consideration certain costs and expenses that result from its business that could have a significant effect on OPC’s net income, such as finance expenses, taxes and depreciation. |
The following table sets forth a reconciliation of OPC’s net income to its EBITDA for the periods presented. Other companies may calculate EBITDA differently, and therefore this presentation of EBITDA may not be comparable to other similarly titled measures used by other companies:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in millions of USD) | ||||||||||||
| Net income for the period | $ | 14 | $ | 20 | $ | 22 | ||||||
| Depreciation and amortization | 30 | 27 | 26 | |||||||||
| Finance expenses, net | 33 | 20 | 23 | |||||||||
| Income tax expense | 9 | - | 8 | |||||||||
| EBITDA | $ | 86 | $ | 67 | $ | 79 | ||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
| (in millions of USD) | ||||||||||||
| Net income for the period | $ | 26 | $ | 14 | $ | 20 | ||||||
| Depreciation and amortization | 30 | 30 | 27 | |||||||||
| Finance expenses, net | 25 | 33 | 20 | |||||||||
| Income tax expense | 10 | 9 | — | |||||||||
| EBITDA | $ | 91 | $ | 86 | $ | 67 | ||||||
| (2) | Net debt is calculated as total debt, minus cash |
| Year Ended December 31, 2017 | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||
| OPC-Rotem | OPC-Hadera | Energy & Others | Total OPC | OPC-Rotem | OPC-Hadera | Energy & Others | Total OPC | |||||||||||||||||||||||||
| (in millions of USD) | (in millions of USD) | |||||||||||||||||||||||||||||||
Total debt(i) | 383 | 144 | 91 | 618 | 336 | 172 | 79 | 587 | ||||||||||||||||||||||||
Cash(ii) | 86 | 31 | 106 | 223 | 72 | 14 | 100 | 186 | ||||||||||||||||||||||||
| Net Debt | $ | 297 | $ | 113 | $ | (15 | ) | $ | 395 | $ | 264 | $ | 158 | $ | (21 | ) | $ | 401 | ||||||||||||||
| (i) | Total debt comprises loans from banks and third parties and debentures, and includes long term and short term debt. |
| (ii) | Includes short-term deposits and restricted cash of |
| Year Ended December 31, 2016 | ||||||||||||||||
| OPC-Rotem | OPC-Hadera | Energy & Others | Total OPC | |||||||||||||
| (in millions of USD) | ||||||||||||||||
Total debt(i) | 365 | — | 52 | 417 | ||||||||||||
Cash(ii) | 22 | 1 | 23 | 46 | ||||||||||||
| Net Debt | $ | 343 | $ | (1 | ) | $ | 29 | $ | 371 | |||||||
14
Year Ended December 31, 2017 | ||||||||||||||||
OPC-Rotem | OPC-Hadera | Energy & Others | Total OPC | |||||||||||||
| (in millions of USD) | ||||||||||||||||
Total debt(i) | 383 | 144 | 91 | 618 | ||||||||||||
Cash(ii) | 86 | 31 | 106 | 223 | ||||||||||||
| Net Debt | $ | 297 | $ | 113 | $ | (15 | ) | $ | 395 | |||||||
| (i) | Total debt comprises loans from banks and third parties and debentures, and includes long term and short term debt. |
| (ii) | Includes short-term deposits and restricted cash of |
Year Ended December 31, 2015 | ||||
Total OPC | ||||
| (in millions of USD) | ||||
Total debt(i) | 473 | |||
Cash(ii) | 184 | |||
| Net Debt | $ | 289 | ||
Year Ended December 31, 2016 | ||||||||||||||||
OPC-Rotem | OPC-Hadera | Energy & Others | Total OPC | |||||||||||||
| (in millions of USD) | ||||||||||||||||
Total debt(i) | 365 | — | 52 | 417 | ||||||||||||
Cash(ii) | 22 | 1 | 23 | 46 | ||||||||||||
| Net Debt | $ | 343 | $ | (1 | ) | $ | 29 | $ | 371 | |||||||
| (i) | Total debt comprises loans from banks and third parties and debentures, and includes long term and short term debt. |
| (ii) | Includes short-term deposits and restricted cash of |
Set forth below is a summary of certain OPC key historical financial and other operational information, for the periods set forth below.
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| ($ millions, except as otherwise indicated) | ||||||||||||
| Sales | 365 | 324 | 326 | |||||||||
| Cost of Sales | (266 | ) | (251 | ) | (245 | ) | ||||||
| Operating income (loss) | 69 | 46 | 57 | |||||||||
| Operating margins | 19 | % | 14 | % | 17 | % | ||||||
| Financing expenses, net | 33 | 20 | 23 | |||||||||
| Net income for the period | 14 | 20 | 22 | |||||||||
| Net Energy sales (GWh) | 3,988 | 3.996 | 3,953 | 1 | ||||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
| ($ millions, except as otherwise indicated) | ||||||||||||
| Sales | 363 | 365 | 324 | |||||||||
| Cost of Sales | (258 | ) | (266 | ) | (251 | ) | ||||||
| Operating income | 75 | 69 | 46 | |||||||||
| Operating margins | 21 | % | 19 | % | 14 | % | ||||||
| Financing expenses, net | 25 | 33 | 20 | |||||||||
| Net income for the period | 26 | 14 | 20 | |||||||||
| Net Energy sales (GWh) | 3,965 | 3,988 | 3,996 | |||||||||
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Our business, financial condition, results of operations and liquidity can suffer materially as a result of any of the risks described below. While we have described all of the risks we consider material, these risks are not the only ones we face. We are also subject to the same risks that affect many other companies, such as technological obsolescence, labor relations, geopolitical events, climate change and risks related to the conducting of international operations. Additional risks not known to us or that we currently consider immaterial may also impairadversely impact our business operations.businesses. Our businesses routinely encounter and address risks, some of which may cause our future results to be different—sometimes materially different—than we presently anticipate.
15
Risks Related to Our Strategy and Operations
Some of our businesses have significant capital requirements.
The business plans of our businesses contemplate additional debt or equity financing which is expected to be raised from third parties. However, our businesses may be unable to raise the necessary capital from third party financing sources, and in this case Kenon would be their only source of funding. For example, Qoros will require additional cash to further its development and, until it achieves significant sales levels, to meet its operating expenses, financing expenses, and capital expenditures.sources.
In the event that one or more of our businesses require capital, either in accordance with their business plans or in response to new developments or to meet operating expenses, and such businesses are unable to raise such financing, Kenon may provide such financing by (i) issueissuing equity in the form of shares or convertible instruments (through a pre-emptive offering or otherwise), (ii) provide financing to a businessfrom third parties using funds received from the operations or sales of Kenon’s other businesses, (iii) sellselling part, or all, of its interest in any of its businesses, (iv) raiseraising debt financing at the Kenon level or (v) provideproviding guarantees or collateral in support of the debt of its businesses. To the extent that Kenon is able to raise debt financing, is available to it, any debt financing that Kenon incurs may not be on favorable terms, may require Kenon to agree toimpose restrictive covenants that limit how Kenon manages its investments in its businesses, and may also limit dividends or other distributions by Kenon. In addition, any equity financing, whether in the form of a sale of shares or convertible instruments, would dilute existing holders of our ordinary shares and any such equity financing could be at prices that are lower than the current trading prices.
Disruptions in the financial markets could adversely affect Kenon or its businesses, which may not be able to obtain additional financing on acceptable terms or at all.
Kenon’s businesses may seek to access capital markets for various purposes, which may include raising funding for the repayment of indebtedness, acquisitions, capital expenditures and for general corporate purposes. The ability of Kenon’s businesses to access capital lending markets, and the cost of such capital, could be negatively impacted by disruptions in those markets. Capital markets have demonstrated significant volatility in recent years. These disruptions impacted other areas of the economy and led to a slowdown in general economic activity. Similar disruptions in the credit markets could make it more difficult or expensive for our businesses to access the capital or lending markets if the need arises and may make financing terms for borrowers less attractive or available. Furthermore, a decline in the value of any of our businesses, which are or may be used as collateral in financing agreements, could also impact their ability to access financing.
Kenon may seek to access the capital or lending markets to obtain financing in the future, including to support its businesses. The availability of such financing and the terms thereof will be impacted by many factors, including: (i) our financial performance, (ii) our credit ratings or absence of a credit rating, (iii) the liquidity of the overall capital markets, and (iv) the state of the economy. There can be no assurance that Kenon will be able to access the capital markets on acceptable terms or at all. If Kenon deems it necessary to access financing and is unable to do so on acceptable terms or at all, this could have a material adverse effect on our financial condition or liquidity.
We are dependent upon accesssubject to fluctuations in the capital markets to execute our strategy.markets.
Our strategy may include sales or distributions of our interests in our businesses. For example, in August 2017, OPC completed an initial public offering, or IPO, in Israel, and a listing on the TASE. Our ability to complete an initial public offering, distribution or listing of one or more of our businesses is heavily dependent upon the public equity markets.
To the extent that the securities of our business are publicly traded, we are exposed to risks of downward movement in market prices. In addition, large holdings of securities can often be disposed only over a substantial length of time. Accordingly, under certain conditions, we may be forced to either sell our equity interest in a particular business at lower prices than expected to realize or defer such a sale, potentially for a long period of time. In addition, following OPC's initial public offering in August 2017, our shares in OPC are subject to a lock-up period, which restricts the amount of shares sold each month until 18 months after the IPO, pursuant to TASE regulation.
We have pledged a portion of our shares in OPC to secure obligations to the buyer of the Inkia BusinessesBusiness under the indemnification obligations in the share purchase agreement for the sale. To the extent that we are required to make payments under the indemnity obligation in the share purchase agreement, we may be required to sell shares in OPC and we would be subject to market conditions at the time of such sale (and the TASE regulations in relation to such sale) which could mean that we are forced to sell our shares for a lower price than we would otherwise be able to do so, particularly if we need to sell a significant amount of shares. If we do not make required payments in the event we are required to make payments under the share purchase agreement, then, in certain circumstances, the pledge can be enforced to satisfy the indemnity obligations, which would result in a loss of some or all of the pledged OPC shares.
16
We are a holding company and are dependent upon cash flows from our businesses to meet our existing and future obligations.
We are a holding company of various operating companies, and as a result, do not conduct independent operations or possess significant assets other than investments in and advances to our businesses. As a result, we depend on funds from our businesses or external financing to meet our operating expenses and obligations, including our operating expenses, our guarantee of the indemnification obligations under the share purchase agreement for the sale of the Inkia Business and our operating expenses and our guarantee obligations in respect of Qoros debt.
Kenon may also seek to raise financing at the Kenon level to meet its obligations. In the event that funds from its businesses or external financing are not available to meet such obligations on reasonable terms or at all, Kenon may need to sell assets to meet such obligations, and its ability to sell assets may be limited, particularly in light the various pledges over the shares and assets of some of Kenon'sKenon’s businesses. Any sales of assets may not be at attractive prices, particularly if such sales must be made quickly to meet Kenon’s obligations.
Kenon has provided loans and guarantees in the past to support our businesses, such as Qoros, and may provide additional loans to or make other investments in or provide guarantees in support of its businesses. Kenon’s liquidity requirements will increase to the extent it makes further loans or other investments in or grants additional guarantees to support its businesses.
In addition, as Kenon’s businesses are legally distinct from it and will generally be required to service their debt obligations before making distributions to Kenon, Kenon’s ability to access such cash flow from its businesses may be limited in some circumstances and it may not have the ability to cause its subsidiaries and associated companies to make distributions to Kenon, even if they are able to do so. Additionally, the terms of existing and future joint venture, financing, or cooperative operational agreements and/or the laws and jurisdictions under which each of Kenon’s businesses are organized may also limit the timing and amount of any dividends, other distributions, loans or loan repayments to Kenon.
Additionally, as dividends are generally taxed and governed by the relevant authority in the jurisdiction in which the company is incorporated, there may be numerous and significant tax or other legal restrictions on the ability of Kenon’s businesses to remit funds to us, or to remit such funds without incurring significant tax liabilities or incurring a ratings downgrade.
We do not have the right to manage, and in some cases do not control, some of our businesses, and therefore we may not be able to realize some or all of the benefits that we expect to realize from our businesses.
As we own minority interests in Qoros and ZIM, we are subject to the operating and financial risks of these businesses, the risk that these businesses may make business, operational, financial, legal or regulatory decisions that we do not agree with, and the risk that we may have objectives that differ from those of the applicable business itself or its other shareholders. Our ability to control the development and operation of these investments may be limited, and we may not be able to realize some or all of the benefits that we expect to realize from these investments. For example, we may not be able to cause these businesses to make distributions to us in the amount or at the time that we may need or want such distributions.
In January 2018, Kenon announced the NewMajority Shareholder in Qoros Investor completed a transaction to purchaseacquired 51% of Qoros from Kenon and Chery for RMB3.315 billion (approximately $526 million), which is part of an investment structure to invest a total of approximately RMB6.63 billion (approximately $1,052 million) by the New Qoros Investor of which RMB6.5 billion will ultimately be invested in Qoros’ equity.Chery. As a result, Kenon and Chery now have 24% and 25% stakes in Qoros, respectively. InIn addition, Kenon can now appoint two of nine Qoros directors (as opposed to half of the Qoros directors prior to the investment). Although we still actively participate in the management of Qoros through our 24% interest and board representatives, our right to control Qoros decreased with the new investment. Furthermore, in January 2019, Kenon agreed to sell half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros. The sale is subject to obtaining relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros, the Majority Shareholder in Qoros will hold 63% and Chery will own 25%. For further information, see “Item 4.B Business Overview—Our Businesses—Qoros —Qoros’ Investment Agreement.” and “Item 4.B Business Overview—Our Businesses—Qoros —2019 Qoros Sale Agreement.”
In addition, we rely on the internal controls and financial reporting controls of our businesses and the failure of our businesses to maintain effective controls or to comply with applicable standards could make it difficult to comply with applicable reporting and audit standards. For example, the preparation of our consolidated financial statements requires the prompt receipt of financial statements from each of our subsidiaries and associated companies, some of whom rely on the prompt receipt of financial statements from each of their subsidiaries and associated companies. Additionally, in certain circumstances, we may be required to file with our annual report on Form 20-F, or a registration statement filed with the SEC, financial information of associated companies which has been audited in conformity with SEC rules and regulations and relevant audit standards. We may not, however, be able to procure such financial statements, or such audited financial statements, as applicable, from our subsidiaries and associated companies and this could render us unable to comply with applicable SEC reporting standards.
Our businesses are leveraged.
Some of our businesses are significantly leveraged and may incur additional debt financing in the future. As of December 31, 2017,2018, OPC had $618$587 million of outstanding indebtedness, Qoros had outstanding indebtedness of RMB4.8RMB5.1 billion (excluding shareholder loans)(approximately $742 million), and ZIM had outstanding indebtedness of approximately $1.5 billion.
Highly leveraged assets are inherently more sensitive to declines in earnings, increases in expenses and interest rates, and adverse market conditions. A leveraged company’s income and net assets also tend to increase or decrease at a greater rate than would otherwise be the case if money had not been borrowed. Consequently, the risk of loss associated with a leveraged company is generally greater than for companies with comparatively less debt. Additionally, some of our businesses’ assets have been pledged to secure indebtedness, and as a result, the amount of collateral that is available for future secured debt or credit support and a business’ flexibility in dealing with its secured assets may be limited. Our businesses use a substantial portion of their consolidated cash flows from operations to make debt service payments, thereby reducing its ability to use their cash flows to fund operations, capital expenditures, or future business opportunities. Additionally, notwithstanding the completion of its restructuring in July 2014, ZIM remains highly leveraged and will continuenotwithstanding its debt restructuring in 2014, continues to face risks associated with those of a highly leveraged company.
17
Our businesses will generally have to service their debt obligations before making distributions to us or to any other shareholder. In addition, many of the financing agreements relating to the debt facilities of our operating companies contain covenants and limitations, including the following:
| · | leverage ratio; |
| · | minimum equity; |
| · | debt service coverage ratio; |
| · | limits on the incurrence of liens or the pledging of certain assets; |
| · | limits on the incurrence of subsidiary debt; |
| · | limits on the ability to enter into transactions with affiliates, including us; |
| · | minimum liquidity and fixed charge cover ratios; |
| · | limits on the ability to pay dividends to shareholders, including us; |
| · | limits on our ability to sell assets; and |
| · | other non-financial covenants and limitations and various reporting obligations. |
If any of our businesses are unable to repay or refinance their indebtedness as it becomes due, or if they are unable to comply with their covenants, we may decide to sell assets or to take other actions, including (i) reducing financing in the future for investments, acquisitions or general corporate purposes or (ii) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on their indebtedness. As a result, the ability of our businesses to withstand competitive pressures and to react to changes in the various industries in which we operate could be impaired. A breach of any of our businesses’ debt instruments and/or covenants could result in a default under the relevant debt instrument(s), which could lead to an event of default. Upon the occurrence of such an event of default, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and, in the case of credit facility lenders, terminate all commitments to extend further credit. If the lenders accelerate the repayment of the relevant borrowings, the relevant business may not have sufficient assets to repay any outstanding indebtedness, which could result in a complete loss of that business for us. Furthermore, the acceleration of any obligation under certain debt instrument may permit the holders of other material debt to accelerate their obligations pursuant to “cross default” provisions, which could have a material adverse effect on our business, financial condition and liquidity. Qoros will generally be required to seek bank approvals to make shareholder loan repayments. Furthermore, changes to the investment structure of the transaction completed by the New Qoros Investor could require Qoros to receive bank consent. Failure to obtain such consent could have an adverse impact.
As a result, our businesses’ leverage could have a material adverse effect on our business, financial condition, results of operations or liquidity.
In addition, we have back-to-back guarantee obligations to Chery of RMB320RMB288 million (approximately $44 million), with respect to debt in principal of RMB288RMB320 million (approximately $47 million), and have pledged a substantial portion of our interest in Qoros to support certain Qoros debt, as well as Chery'sChery’s guarantees of Qoros debt.
We face risks in relation to the New Qoros Investor'sMajority Shareholder in Qoros’ investment in Qoros
In January 2018, Kenon announced the NewMajority Shareholder in Qoros Investor completed a transaction to purchaseacquired 51% of Qoros from Kenon and Chery for RMB3.315 billion (approximately $526 million), which is part of an investment structure to invest a total of approximately RMB6.63 billion (approximately $1,052 million) by the New Qoros Investor of which RMB6.5 billion will ultimately be invested in Qoros’ equity.Chery. As a result, Kenon and Chery now have 24% and 25% stakes in Qoros, respectively. The investment was made pursuant to an investment agreement among the NewMajority Shareholder in Qoros, Investor, Quantum, Wuhu Chery Automobile Investment Co., Ltd., or Wuhu Chery, (a subsidiary of Chery) and Qoros. Under the investment agreement, during the three-year period beginning from the closing of the investment, Kenon has the right to cause the NewMajority Shareholder in Qoros Investor to purchase up to 50% of its remaining equity interest in Qoros following the related capital increase, for up to RMB1.56 billion (approximately $248$227 million), being the price for 50% of Kenon'sKenon’s remaining 24% interest in Qoros, subject to adjustments for inflation. From the third anniversary of the closing until April 2023, Kenon has the right to cause the NewMajority Shareholder in Qoros Investor to purchase up to all of its remaining equity interests in Qoros for up to a total of RMB3.12 billion (approximately $495$454 million) (for Kenon'sKenon’s full 24% interest in Qoros), subject to adjustment for inflation. If the NewMajority Shareholder in Qoros Investor (and the other company within the Baoeneng group has effectively guaranteed the New Qoros Investor'sMajority Shareholder in Qoros’ obligations under the put right by also serving as a grantor of the put) is unable to purchase Kenon’s equity interest in Qoros upon exercise of the put option, or if any exercise of the put option does not result in a purchase of Kenon'sKenon’s shares in accordance with the terms thereof for any other reason, this could have a material adverse effect on Kenon.The investment agreement also provides for the repayment of existing shareholder loans owing from Qoros, and as a result Kenon is subject to the risk of non-payment.
Kenon.
As part of the investment agreement,, the NewMajority Shareholder in Qoros Investor will assumeassumed its pro rata share (based on its 51% equity ownership) of the guarantees and pledges provided by Quantum and Wuhu Chery in respect of Qoros debt,, which will beis subject to further adjustment following any future changes in the equity ownership in Qoros (including as a result of the exercise of the put option or investment right by a shareholder under the investment agreement). The NewMajority Shareholder in Qoros Investor is still in the process of assuming its proportionate pledge obligations with respect to the RMB1.2 billion loan facility after which Kenon will also be proportionately released from its pledge obligations thereunder, subject to the Qoros bank lender consent. Failure to obtain bank consents could adversely impact Kenon.
In January 2019, Kenon agreed to sell half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros for a purchase price of RMB1,560 million (approximately US$227 million). The sale is subject to obtaining customary relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale Kenon will hold a 12% interest in Qoros, the Majority Shareholder in Qoros will hold 63% and Chery will own 25%. The sale was not made pursuant to the put option described above. Furthermore, following completion of the sale, the Majority Shareholder in Qoros will be required to assume its pro rata share of guarantees and equity pledges of Kenon and Chery based on the change to its equity ownership. Failure to complete the sale of the 12% interest to the Majority Shareholder in Qoros or failure by the Majority Shareholder in Qoros to assume its pro rata share of guarantees and equity pledges could adversely impact Kenon.
In connection with its January 2018 investment in Qoros, the Majority Shareholder in Qoros agreed to introduce a minimum number of vehicle purchase orders to Qoros each year between 2018 and 2020 following the entry into further agreements with respect to these purchases. This minimum number of purchases orders was not met in 2018 and there is no assurance that it will be met in the future.
Our success will be dependent upon the efforts of our directors and executive officers.
Our success will be dependent upon the decision-making of our directors and executive officers as well as the directors and executive officers of our businesses. The loss of any or all of our directors and executive officers could delay the implementation of our strategies or divert our directors and executive officers’ attention from our operations which could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Foreign exchange rate fluctuations and controls could have a material adverse effect on our earnings and the strength of our balance sheet.
Through our businesses, we have facilities and generate costs and revenues in a number of geographic regions across the globe. As a result, a significant portion of our revenue and certain of our businesses’ operating expenses, assets and liabilities, are denominated in currencies other than the U.S. Dollar. The predominance of certain currencies varies from business to business, with many of our businesses generating revenues or incurring indebtedness in more than one currency. For example, most of ZIM’s revenues and a significant portion of its expenses are denominated in the U.S. Dollar. However, a material portion of ZIM’s expenses are denominated in local currencies.
We have outstanding back-to-back guarantees to Chery of up to RMB320RMB288 million (approximately $44 million), with respect to debt in principal of RMB288RMB320 million (approximately $47 million), plus certain interest and fees, in respect of certain of Qoros’ indebtedness. In addition, from time to time, we have held, and may hold, a portion of our available cash in RMB, which may expose us to RMB exchange rate fluctuations.
Furthermore, our businesses may pay distributions or make payments to us in currencies other than the U.S. Dollar, which we must convert to U.S. Dollars prior to making dividends or other distributions to our shareholders if we decide to make any distributions in the future. Foreign exchange controls in countries in which our businesses operate may further limit our ability to repatriate funds from unconsolidated foreign affiliates or otherwise convert local currencies into U.S. Dollars.
Consequently, as with any international business, our liquidity, earnings, expenses, asset book value, and/or amount of equity may be materially affected by short-term or long-term exchange rate movements or controls. Such movements may give rise to one or more of the following risks, any of which could have a material adverse effect on our business, financial condition, results of operations or liquidity:
| · | Transaction Risk—exists where sales or purchases are denominated in overseas currencies and the exchange rate changes after our entry into a purchase or sale commitment but prior to the completion of the underlying transaction itself; |
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| · | Translation Risk—exists where the currency in which the results of a business are reported differs from the underlying currency in which the business’ operations are transacted; |
| · | Economic Risk—exists where the manufacturing cost base of a business is denominated in a currency different from the currency of the market into which the business’ products are sold; and |
| · | Reinvestment Risk—exists where our ability to reinvest earnings from operations in one country to fund the capital needs of operations in other countries becomes limited. |
| · | If our businesses are unable to manage their interest rate risks effectively, our cash flows and operating results may suffer. |
Certain of our businesses’ indebtedness bears interest at variable, floating rates. In particular, some of this indebtedness is in the form of Consumer Price Index (or CPI)-linked, NIS-denominated bonds. We, or our businesses, may incur further indebtedness in the future that also bears interest at a variable rate or at a rate that is linked to fluctuations in a currency in the form of other than the U.S. Dollar. Although our businesses attempt to manage their interest rate risk, there can be no assurance that they will hedge such exposure effectively or at all in the future. Accordingly, increases in interest rates or changes in the CPI that are greater than changes anticipated based upon historical trends could have a material adverse effect on our or any of our businesses’ business, financial condition, results of operations or liquidity.
Risks Related to the Industries in Which Our Businesses Operate
Conditions in the global economy, and in the industries in which our businesses operate in particular, could have a material adverse effect on us.
The business and operating results of each of our businesses are affected by worldwide economic conditions, particularly conditions in the energy generation, passenger vehicle, and shipping industries our businesses operate in. The operating results and profitability of our businesses may be adversely affected by slower global economic growth, credit market crises, lower levels of consumer and business confidence, downward pressure on prices, high unemployment levels, reduced levels of capital expenditures, fluctuating commodity prices (particularly prices for electricity, natural gas, bunker, gasoline, and crude oil), bankruptcies, government deficit reduction and austerity measures, heightened volatility, uncertainties with respect to the stability of the emerging markets, increased tariffs and other forms of trade protectionism and other challenges affecting the global economy. Volatility in global financial markets and in prices for oil and other commodities could result in a worsening of global economic conditions. As a result of global economic conditions, some of the customers of our businesses have experienced, and may experience, deterioration of their businesses, cash flow shortages, and/or difficulty in obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase the products and/or services of our businesses, or may not be able to fulfill their obligations to us in a timely fashion. Furthermore, the vendors, suppliers and/or partners of each of our businesses may experience similar conditions, which may impact their ability to fulfill their obligations.
Additionally, economic downturns may alter the priorities of governments to subsidize and/or incentivize participation in any of the markets in which our businesses operate. For example, economic downturns or political dynamics may impact the availability of financial incentives provided by the Chinese government for Chinese automobile purchases. Slower growth or deterioration in the global economy (as a result of recent volatility in global markets, trade protectionism and commodity prices, or otherwise) could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Our businesses’ operations expose us to risks associated with conditions in those markets.
Through our businesses, we operate and service customers in geographic regions around the world which exposes us to risks, including:
| · | heightened economic volatility; |
| · | difficulty in enforcing agreements, collecting receivables and protecting assets; |
| · | the possibility of encountering unfavorable circumstances from host country laws or regulations; |
| · | fluctuations in revenues, operating margins and/or other financial measures due to currency exchange rate fluctuations and restrictions on currency and earnings repatriation; |
| · | unfavorable changes in regulated electricity tariffs; |
| · | trade protection measures, import or export restrictions, licensing requirements and local fire and security codes and standards; |
| · | increased costs and risks of developing, staffing and simultaneously managing a number of |
| · | issues related to occupational safety, work hazard, and adherence to local labor laws and regulations; |
| · | adverse tax developments; |
| · | changes in the general political, social and/or economic conditions in the countries where we operate; and |
| · | the presence of corruption in certain countries. |
If any of our businesses are impacted by any of the aforementioned factors, such an impact could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We require qualified personnel to manage and operate our various businesses.
As a result of our decentralized structure, we require qualified and competent management to independently direct the day-to-day business activities of each of our businesses, execute their respective business plans, and service their respective customers, suppliers and other stakeholders, in each case across numerous geographic locations. Many of the products and services offered by our businesses are highly technical in nature and may require specialized training or physically demanding work. Therefore, weWe must be able to retain employees and professionals with the skills necessary to understand the continuously developing needs of our customers and to maximize the value of each of our businesses. This includes developing talent and leadership capabilities in the emerging markets in which certain of our businesses operate, where the depth of skilled employees may be limited. Changes in demographics, training requirements and/or the unavailability of qualified personnel could negatively impact the ability of each of our businesses to meet these demands. Unpredictable increases in the demand for our goods and/or services, or the geographical diversity of our businesses, may exacerbate the risk of not having a sufficient number of trained personnel. If any of our businesses fail to train and retain qualified personnel, or if they experience excessive turnover, we may experience declining sales, production/manufacturing delays or other inefficiencies, increased recruiting, training or relocation costs and other difficulties, any of which could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Significant raw material shortages, supplier capacity constraints, production disruptions, supplier quality and sourcing issues or price increases could increase our operating costs and adversely impact the competitive positions of the products and/or services of our businesses.
The reliance of certain of our businesses on certain third-party suppliers, contract manufacturers and service providers, or commodity markets to secure raw materials (e.g., natural gas for OPC and bunker and containers for ZIM), parts, components and sub-systems used in their products or services exposes us to volatility in the prices and availability of these materials, parts, components, systems and services. Some of these suppliers or their sub-suppliers are limited- or sole-source suppliers. For more information on the risks relating to supplier concentration in relation to OPC, see “—Risks Related to OPC— Supplier concentration may expose OPC to significant financial credit or performance risk, particularly with respect to those agreements which may expire during the life of its power plants.”
A disruption in deliveries from these and other third-party suppliers, contract manufacturers or service providers, capacity constraints, production disruptions, price increases, or decreased availability of raw materials or commodities, including as a result of catastrophic events, could have an adverse effect on the ability of our businesses to meet their commitments to customers or could increase their operating costs. Our businesses could encounter supply problems and may be unable to replace a supplier that is not able to meet their demand in either the short- or the long-term; these risks are exacerbated in the case of raw materials or component parts that are sourced from a single-source supplier. Furthermore, quality and sourcing issues experienced by third-party providers can also adversely affect the quality and effectiveness of our businesses’ products and/or services and result in liability and reputational harm that could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Some of our businesses must keep pace with technological changes and develop new products and services to remain competitive.
The markets in which some of our businesses operate experience rapid and significant changes as a result of the introduction of both innovative technologies and services. To meet customer needs in these areas, these businesses must continuously design new, and update existing, products and services, as well as invest in, and develop new technologies. Introducing new products and technologies requires a significant commitment to research and development that, in return, requires the expenditure of considerable financial resources that may not always result in success.
Our sales and profitability may suffer if our businesses invest in technologies that do not operate, or may not be integrated, as expected or that are not accepted into the marketplace as anticipated, or if their services, products or systems are not introduced to the market in a timely manner, in particular, compared to its competitors, or become obsolete. Furthermore, in some of these markets, the need to develop and introduce new products rapidly in order to capture available opportunities may lead to quality problems. Our operating results depend on our ability, and the ability of these businesses, to anticipate and adapt to changes in markets and to reduce the costs of producing high-quality, new and existing products and services. If we, or any of these businesses, are unsuccessful in our efforts, such a failure could have a material adverse effect on our business, financial condition, results of operations or liquidity.
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Our businesses may be adversely affected by work stoppages, union negotiations, labor disputes and other matters associated with our labor force.
As of December 31, 2017,2018, OPC employed 8592 employees, Qoros employed approximately 1,6403,400 employees and ZIM employed approximately 3,6003,700 employees. Our businesses could experience strikes, industrial unrest, or work stoppages. Any disruptions in the operations of any of our businesses as a result of labor stoppages or strikes could materially and adversely affect our or the relevant businesses’ reputation and could adversely affect operations. Additionally, a work stoppage at any one of the suppliers of any of our businesses could materially and adversely affect our operations if an alternative source of supply were not readily available.
Our business operations, and the operations of our various operating companies,businesses, rely upon securethe accuracy, availability and security of information technology systems for data processing, storage and reporting. As a result, we, and our businesses, maintain information security policies and procedures for managing such information technology systems. However, such security measures may be ineffective and our information technology systems, or those of our businesses, may be subject to cyber-attacks, including malicious software, network, system, application and data breaches and such cyber-security breaches may result in operational disruptions or information misappropriation.
cyber-attacks. A number of companies around the world have been the subject of cybersecurity attacks in recent years, including in Israel where we have a large part of our businesses. For example, a large shipping company experienced a major cyberattack on its IT systems in 2017, which impacted that company’s operations in transport and logistics businesses and resulted in financial loss. These attacks are increasing and becoming more sophisticated, and may be perpetrated by computer hackers, cyber terrorists or other corporate espionage.
Cyber security attacks could include malicious software (malware), attempts to gain unauthorized access to data, and other electronic security breaches of our and our business’ information technology systems as well as the information technology systems of our customers and other service providers that could lead to disruptions in critical systems, unauthorized release, misappropriation, corruption or loss of data or confidential information. In addition, any system failure, accident or security breach could result in business disruption, unauthorized access to, or disclosure of, customer or personnel information, corruption of our data or of our systems, reputational damage or litigation. We or our operating companies may also be required to incur significant costs to protect against or repair the damage caused by these disruptions or security breaches in the future, including, for example, rebuilding internal systems, implementing additional threat protection measures, providing modifications to our services, defending against litigation, responding to regulatory inquiries or actions, paying damages, providing customers with incentives to maintain the business relationship, or taking other remedial steps with respect to third parties. These cyber security threats are constantly evolving. We, therefore, remain potentially vulnerable to additional known or yet unknown threats, as in some instances, we, our businesses and our customers may be unaware of an incident or its magnitude and effects Should Kenonwe or any of itsour operating businesses experience a cyber-attack, this could have a material adverse effect on our, or any of our operating companies’, business, financial condition or results of operation.operations.
Risks Related to Legal, Regulatory and Compliance Matters
We, and each of our businesses, are subject to legal proceedings and legal compliance risks.
We are subject to a variety of legal proceedings and legal compliance risks in every part of the world in which our businesses operate. We, our businesses, and the industries in which we operate, are periodically reviewed or investigated by regulators and other governmental authorities, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages. Changes in laws or regulations could require us, or any of our businesses, to change manners of operation or to utilize resources to maintain compliance with such regulations, which could increase costs or otherwise disrupt operations. Protectionist trade policies and changes in the political and regulatory environment in the markets in which we operate, such as foreign exchange import and export controls, tariffs and other trade barriers and price or exchange controls, could affect our businesses in several national markets, impact our profitability and make the repatriation of profits difficult, and may expose us or any of our businesses to penalties, sanctions and reputational damage. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights.
The global and diverse nature of our operations means that legal and compliance risks will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time. No assurances can be made that we will be found to be operating in compliance with, or be able to detect violations of, any existing or future laws or regulations. In addition, as we hold minority interests in ZIM and Qoros, we do not control them and therefore cannot ensure that they will comply with all applicable laws and regulations. A failure to comply with or properly anticipate applicable laws or regulations could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We may be subject to further government regulation, which may adversely affect our strategy.
The U.S. Investment Company Act of 1940 regulates "investment companies",“investment companies,” which includes entities that are, or that hold themselves out as being, primarily engaged in the business of investing, reinvesting and trading in securities or that are engaged, or propose to engage, in the business of investing, reinvesting, owning, holding or trading in securities and own, or propose to acquire, investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.basis (or 45% of the issuer’s net income or assets, excluding interest in primarily controlled companies). Accordingly, we do not believe that we are subject to regulation under the U.S. Investment Company Act of 1940. We are organized as a holding company that conducts its businesses primarily through majority owned and primarily controlled subsidiaries. Maintaining such status may impose limits on our operations and on the assets that we and our subsidiaries may acquire or dispose of. If, at any time, we meet the definition of investment company, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company under the U.S. Investment Company Act of 1940, either of which could have an adverse effect on us and the market price of our securities. The U.S. Investment Company Act of 1940 generally only allows U.S. entities to register. If we were required to register as an investment company but failed to do so, we could be prohibited from engaging in our business in the United States or offering and selling securities in the United States or to U.S. persons, unable to comply with our reporting obligations in the United States as a foreign private issuer, subject to the delisting of the Kenon shares from the New York Stock Exchange, or the NYSE, and subject to criminal and civil actions that could be brought against us, any of which would have a material adverse effect on the liquidity and value of the Kenon shares and on our business, financial condition, results of operations or liquidity.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws outside of the United States.States
The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with the FCPA and other applicable anti-bribery laws. We operate, through our businesses, in some parts of the world that are recognized as having governmental and commercial corruption. Additionally, because many of our customers and end users are involved in infrastructure construction and energy production, they are often subject to increased scrutiny by regulators. Our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees, the employees of any of our businesses, or third party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we would investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, inability to do business with existing or future business partners (either as a result of express prohibitions or to avoid the appearance of impropriety), injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits, reputational harm or other restrictions which could disrupt our business and have a material adverse effect on our business, financial condition, results of operations or liquidity. We face risks with respect to compliance with the FCPA and similar anti-bribery laws through our acquisition of new companies and the due diligence we perform in connection with an acquisition may not be sufficient to enable us fully to assess an acquired company’s historic compliance with applicable regulations. Furthermore, our post-acquisition integration efforts may not be adequate to ensure our system of internal controls and procedures are fully adopted and adhered to by acquired entities, resulting in increased risks of non-compliance with applicable anti-bribery laws.
We could be adversely affected by international sanctions and trade restrictionsrestrictions.
We have geographically diverse businesses, which may expose our business and financial affairs to political and economic risks, including operations in areas subject to international restrictions and sanctions. Legislation and rules governing sanctions and trade restrictions are complex and constantly evolving. Moreover, changes in these laws and regulations can be unpredictable and happen swiftly. Part of our global operations necessitate the importation and exportation of goods and technology across international borders on a regular basis. From time to time, we, or our businesses, obtain or receive information alleging improper activity in connection with such imports or exports. Our policies mandate strict compliance with applicable sanctions laws and trade restrictions. Nonetheless, our policies and procedures may not always protect us from actions that would violate U.S. and/or foreign laws. Such improper actions could subject us to civil or criminal penalties, including material monetary fines, denial of import or export privileges, or other adverse actions. The occurrence of any of the aforementioned factors could have a material adverse effect on our business, financial condition, results of operations or liquidity.
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Risks Related to OPC
OPC faces risks in connection with the expansion of its business.
OPC is contemplatingin the process of the construction and development of power generation facilities.facilities and is contemplating further such development. Existing regulation, such as antitrust laws, regulation by virtue of the Israeli Concentration Law, or the EA rules with respect to holdings of control in generation licenses, may restrict the expansion of OPC’s activity in Israel.
For example, in April 2017, OPC entered into agreements (including an option agreement) for the acquisition of 95% of the shares ofOPC's subsidiary Tzomet Energy Ltd., which is developing a natural gas-fired open-cycle power station in Israel with capacity of approximately 396 MW,MW. In April 2019, the EA published its decision to grant Tzomet a conditional license for total consideration of $23 million,a 66-month term (which can be extended, subject to adjustments. In August 2017, the EA received a letter from the from the Israel Concentration Committee stating that it believed that, for reasons of broad economy concentration (i.e. taking into account businesses owned by related entities of Kenon's controlling shareholder), OPC should not be granted a contingent licenseconditions) for the construction of a 396MW conventional open-cycle power plant. However, such conditional license remains subject to the planned facility. In March 2018, OPC completedIsraeli Minister of Energy's approval and the acquisitionissuance of 95%a guarantee by Tzomet. The grant of a permanent generation license to Tzomet, upon expiration of the shares of Tzomet Energy, although Tzomet Energy still requires (among other requirements) aconditional license, from the EA to proceed with construction of the planned facility. The total consideration for the acquisition is estimated at approximately $23 million, subject to certain adjustments, of which $3.65 million was paid in March 2018, an additional $3.65 million is expected to be paid inTzomet's compliance with the second quarter of 2018, and the remaining consideration will be paid at financial closingconditions set by law. Development of the Tzomet plant is also subject to a positive interconnection study and to financial closing. If these conditions are not met by January 1, 2020, it could lead to cancellation of the project.
According to the Israeli Concentration Law, when allocating and determining the terms of certain rights, including a powerthe right to an electricity generation license, and when determining the terms for this right, the regulator must take into account the promotion of competition in the relevant industry and the Israeli economy generally. If the right is on the list of rights that may have a material impact on competition, the regulator must consult with the Israel Antitrust Commissioner. Kenon, OPC, OPC-Rotem and OPC-HaderaOPC’s subsidiaries are considered concentration entities under the Israel Corporation Group, which may affect OPC’s or its subsidiaries’ ability to receive a generation license if it involves the construction and operation of power plants exceeding 175 MW. The list of concentration entities also includes Mr. Idan Ofer, who is the beneficiary of entities that indirectly hold a majority of the shares in Kenon, and includes a list of other entities which may be affiliated with Mr. Idan Ofer, including ZIM, in which Kenon holds a 32% interest. OPC's expansion activities and future projects could, therefore, be limited by the Israeli Concentration Law.
Pursuant to the Israeli Government’s electricity sector reform, as part of the required IEC tender process of five of its sites, entities will not be permitted to hold more than 20% of the total planned installed capacity on the date of sale of all the sites being sold. This reform is, therefore expected to increase competition and would impose limitations on OPC’s ability to expand its business.
As of December 31, 2018, OPC had $587 million of outstanding indebtedness. The debt instruments to which OPC and its operating companies are party to require compliance with certain covenants and limitations, including
| · | Minimum liquidity, loan life coverage ratios and debt service coverage ratios covenants; and |
| · | Other non-financial covenants and limitations such as restrictions on dividend distributions, repayments of shareholder loans, asset sales, pledges investments and incurrence of debt, as well as reporting obligations. |
Breach of the Hadera Power station. In the casevarious covenants could result, among other things, in acceleration of the Hadera project, OPC's financing fordebt, restrictions in the project is subject to various conditions and restrictions, including OPC-Hadera's maintenancedeclaration or payment of Hadera Paper asdividends or cross-defaults across the debt instruments.
Furthermore, OPC may have a customer. If OPC is unable to obtain or utilize financing for the Hadera project, this may hinder OPC'slimited ability to completereceive financing from Israeli banks due to Israeli regulatory restrictions on the Hadera Power station.amount of loans that Israeli banks are permitted to grant to single borrowers or groups of borrowers, which may result in limitations to the amount of loans that they are permitted to grant to OPC.
OPC’s facilities may be affected by disruptions, including planned maintenance, technical failures and natural disasters.
In addition, OPC’s long-term service agreement for the maintenance of OPC-Rotem includes timetables for performance of the maintenance work, and in particular the first “major overhaul” maintenance, which is to be performed every six years. Regular maintenance work is completed approximately every 18 months, with the next regular maintenance work scheduled to occur prior to the summer of 2020. Maintenance work may result in operational shutdowns and impact results. As planned, major overhaul maintenance work was completed between September and November 2018, which halted the OPC-Rotem plant’s operations along with the related energy generation activities, which impacted results for this period.
The political and security situation in Israel may affect OPC.
A deterioration of the political and security situation in Israel may adversely affect OPC’ sOPC’s activities and harm its assets. Security and political events such as a war or acts of terrorism may harm the facilities serving OPC (including the power station facilities owned by the Company), the construction of the Hadera Power stationOPC’s current construction projects and other future projects, computer systems, facilities for transmission of natural gas to the power stations and the electricity transmission grid. In addition, such acts may have an adverse effect on OPC'sOPC’s material suppliers, thereby limiting OPC'sOPC’s ability to supply electricity to its customers reliably. Likewise, a deterioration in the political and security situation in Israel may have a negative effect on OPC'sOPC’s ability to construct new projects, to raise capital for new projects and to initiate new projects in areas exposed to a security risk. Negative developments in the political and security situation in Israel and various security events may cause additional restrictions on OPC, including boycotts by various parties. In addition, in such cases, parties with whom OPC has contracted may claim to terminate their obligations pursuant to the agreements with the OPC due to the occurrence of force majeure events. In addition, some of OPC'sOPC’s employees may be called for reserve military duty and their absence may have an adverse effect on OPC'sOPC’s operations. Although the OPC-Rotem station is classified by the State of Israel as an "essential enterprise" and therefore its key employees are exempt from reserve duty during an emergency, these workers may be called up for reserve duty if the station were to lose its status as an "essential enterprise."
Changes in the EA’s electricity rates may reduce OPC’s profitabilityprofitability.
If the productiongeneration component tariffs published by the EA change as a result of, among other things, fluctuations in currency exchange rates or IEC fuel costs, OPC’s revenues from sales to private customers and cost of sales will be affected. This isAccording to public reports of the case asTamar Group partners, in February 2019 an amendment to the priceagreement of electricity for OPC’s customers is directly affected by the electricity generation tariff, and this isTamar Group with the basis of linkingIEC was approved regarding the price of natural gas pursuantunder the agreement. If the amendment is executed, the IEC will pay lower prices for the natural gas supplied under the agreement, commencing from January 2019 up to gas purchase agreements. the first price adjustment date (currently set for July 1, 2021). This could impact the tariffs under PPAs and could potentially affect the price that OPC pays for gas. For further information on the effect of EA tariffs on OPC’s revenues and margins, see “Item 5. Operating and Financial Review and Prospects—Material Factors Affecting Results of Operations—OPC— Sales—EA Tariffs.”
Furthermore, the gas price formula determined in the agreement with the Tamar Group (which includes Noble Energy Mediterranean Ltd., Isramco Negev 2 Limited Partnership, Delek Drilling Limited Partnership, Dor Gas Exploration Limited Partnership, Everest Infrastructure Limited Partnership and Tamar Petroleum Ltd.) is subject to a minimum price. Therefore, when the price of gas is equal to or lower than the minimum price,, reductions in the generation tariff will not lead to a reduction in the cost of natural gas consumed by OPC-Rotem, but rather to a reduction in profit margins. For example, in connection with reductions in the EA generation component tariff in 2015, OPC-Rotem and OPC-Hadera began to paypaid the ultimate floorminimum price starting in November 2015 and Aprilas well as during 2016 respectively. to 2018 (excluding one month in 2018).
Therefore, declines in the EA generation component tariff may not have a corresponding decline in OPC-Rotem’s natural gas expenses, due to the floor price mechanism. and may lead to a decline in OPC-Rotem’s margins, which may have a material adverse effect on OPC’s business, results of operations and financial condition.
Changes in the Consumer Price Index in Israel or the U.S. Dollar to NIS exchange rate could adversely affect OPC.
If Israel experiences inflation it may affect OPC. For instance, aA significant portion of the liabilities of OPC and its subsidiaries is linked to the Consumer Price Index, or CPI, including a substantial part of the OPC-Rotem and OPC-Hadera loans. Therefore, adverse changes to the CPI could impact OPC’s financing expenses and results of operations. In addition, to the extent that OPC is above the floor price in its gas supply agreement, the price it pays for gas is linked in part to the U.S. Dollar to NIS exchange rate, and accordingly variations in such rate can impact OPC'sOPC’s results. The IEC’s electricity tariff is also set, in part, in accordance with the IEC’s fuel costs that are denominated in U.S. Dollars and is therefore also affected by variations in the U.S. Dollar to NIS exchange rate.
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OPC could face barriers to exit in connection with the disposals or transfers of its businesses, development project or other assets.
OPC may face exit barriers, including high exit costs or objections from various parties (whose approval OPC requires), in connection with dispositions of its operating companies, development projects or their assets. For example, pursuant to Israel’s Electricity Sector Law 5756-1996, or Electricity Sector Law, the transfer of control over an entity that holds a generation license in Israel must be approved by the Electricity Authority, or the EA. Additionally, there are restrictions on a transfer of control of OPC, OPC-Rotem and OPC-Hadera, pursuant to, among others, OPC-Rotem’s PPA with the Israel Electric Corporation, or IEC, the trust deed relating to OPC’s bonds, and OPC-Rotem’s and OPC-Hadera’s credit agreements. Such restrictions may prohibit or make it difficult for OPC to dispose of its interests in its businesses.
OPC OPC-Rotem and OPC-Hadera areis also defined as a “significant real corporations.corporation.” As a result, OPC OPC-Rotem and OPC-Hadera areis subject to various restrictions, which mainly include restrictions inon significant financial entities holding an interest (above a certain percentage) in such companies and restrictions on OPC, OPC-Rotem and OPC-Hadera’sOPC’s holdings (above a certain percentage) of financial entities. Such restrictions may also limit Kenon'sKenon’s ability to transfer its interests in OPC.
OPC requires qualified personnel to manage and operate its various businesses and projects.
OPC requires professional and skilled personnel in order to manage its current activities and the performance of its projects, to service and respond to customers and suppliers. Therefore, OPC must be able to retain employees and professionals with the necessary skills. Furthermore, OPC employs foreign employees. Any unavailability of qualified personnel could negatively impact OPC’s activity and results of operations.
In addition, most of OPC-Rotem’s and Hadera Energy Center’s operations employees are employed through a collective agreement. In March 2018, aThe OPC-Rotem collective employment agreement was signed withexpires on April 1, 2019, and upon such expiration OPC is expected to commence negotiations to renew this collective employment agreement on terms to be agreed among the Energy Center, similar to the agreement that is currently in place at the OPC-Rotem plant. The agreement will apply to the Energy Center employees and to the employees that will be hired at the Hadera Power station. The implementation of the collective agreementnegotiating parties. Collective agreements may reduce managerial flexibility and impose additional costs on OPC. For further information on OPC-Rotem’sthese collective agreement,agreements, see “Item 4.B Business Overview—Our Businesses—OPC—Employees.”
The interruption or failure of OPC’s information technology, communication and processing systems or external attacks and invasions of these systems could have an adverse effect on OPC.
OPC uses information technology systems, telecommunications and data processing systems to operate its businesses. Damage to such systems may result in service delays or interruptions to OPC’s ability to provide electricity to its customers. It may also result in damage to or theft of OPC’s or its customer’s information.
In recent years, cybersecurity attacks of security systems have increased globally and OPC could be exposed to such attacks, which may harm its business and operations or result in reputational damage. There is no certainty that OPC will be able to prevent a cyber-attack. Furthermore, OPC, as an Israeli company, is at risk of cyber-attacks, as a number of Israeli corporations have been the subject of recent cybersecurity attacks. Ifif a cyber-attack occurs, there is no certainty that OPC will be able to prevent the harm on its information systems and it could have a significant effect on OPC’s operations. OPC may be subject to significant costs in order to protect itself against harm caused to its information systems and to repair any damages caused. It may also face litigation, compensation and remediation costs relating to cybersecurity incident, which could have an adverse effect on its reputation, business, financial condition and results of operations.
OPC is exposed to litigation and/or administrative proceedings.
OPC is involved in various litigation proceedings, and may be subject to future litigation proceedings, which could have adverse consequences on its business.
For example, in connection with the indexation of their natural gas price formula for OPC-Rotem’s gas supply agreement with the Tamar Group, OPC-Rotem and the Tamar Group disagreed as to which of Israel’s Public Utilities Authority (Electricity) July 2013 tariffs applied to OPC-Rotem’s supply agreement and have a similar disagreement with respect to the tariffs published in January 2015. In February 2017, OPC-Rotem received a letter from the Tamar Group with respect to the dispute. The Tamar Group requested payment by OPC-Rotem of approximately $25 million (including accrued interest) in connection with the dispute, or the deposit of such amount in escrow pursuant to the gas supply agreement. In May 2017, OPC-Rotem deposited $21.75approximately $22 million in a trust account in respect of the dispute. In June 2017, the Tamar Group submitted a motion to initiate arbitration proceedings at the London Court of International Arbitration, demanding arequesting payment of approximately $33 million, plus accrued interest.along with alternative requests based on lower tariffs should its primary request fail. In its response in July 2017, OPC-Rotem disputed the Tamar Group’s claims. However, thereclaims, requesting release of the amount deposited in the trust account. In February 2018, the Tamar Group filed a statement of claim, repeating its initial claims and requesting a different tariff determination. OPC-Rotem filed its defense in June 2018, disputing all of the Tamar Group’s claims, and the Tamar Group responded in October 2018. A hearing was held in February 2019 and the arbitrator has yet to issue its ruling, which is expected to be issued during 2019. There is no certainty that OPC-Rotem’s claims will be accepted in whole or in part.
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Litigation and/or regulatory proceedings are inherently unpredictable, and excessive verdicts may occur. Adverse outcomes in lawsuits and investigations could result in significant monetary damages, including indemnification payments, or injunctive relief that could adversely affect OPC’s ability to conduct its business and may have a material adverse effect on OPC’s financial condition and results of operations. In addition, such investigations, claims and lawsuits could involve significant expense and diversion of OPC’s management’s attention and resources from other matters, each of which could also have a material adverse effect on its business, financial condition, results of operations or liquidity.
OPC’s insurance policies may not fully cover damage, and OPC may not be able to obtain insurance against certain risks.
OPC and its subsidiaries maintain insurance policies intended to reduce various risks, as is customary in the industry. However, the existing insurance policies maintained by OPC and its subsidiaries may not cover certain types of damages or may not cover the entire scope of damage caused. In addition, OPC may not be able to obtain insurance on comparable terms in the future. OPC and its subsidiaries may be adversely affected if they incur losses that are not fully covered by their insurance policies. For further information on OPC’s insurance policies, see “Item 4.B Business Overview—Our Businesses—OPC—Insurance.”
OPC’s operations are significantly influenced by regulationsregulations.
OPC is subject to significant government regulation. It is therefore exposed to changes in these regulations as well as changes to regulations applicable to sectors that are associated with the company’s activities. Regulatory changes may have an adverse effect on OPC’s activity and results or on its terms of engagement with third parties, such as its customers and suppliers, such as the Tamar Group. In the coming years, OPC expects frequent regulatory changes in the industry, including in relation to the private electricity market in Israel, which is a new and developing market. Regulatory changes may impact the power stations owned by OPC or the power stations that it intends to develop, including the economic feasibility of establishing new power stations.
Furthermore, OPC is subject to environmental laws and regulations, including those that seek to regulate noise pollution and emission of contaminants to treat hazardous materials. If stricter regulatory requirements are imposed on private electricity producers or if OPC does not comply with such requirements, laws and regulations, this could have an adverse effect on OPC’s results and activity. Furthermore, stricter regulatory requirements could require material expenditures or investments by OPC.
Additionally, OPC requires certain licenses to produce and sell electricity in Israel, and may need further licenses in the future. For example, in November 2017, for propriety purposes, OPC-Rotem submitted an application to the EA to obtain a supply license which would permit OPC-Rotem to trade electricity with other electricity suppliers in Israel. In February 2018, the EA responded that OPC-Rotem is required to receive a supply license to continue its sale of electricity to consumers, that the license will not change the terms of the agreement between OPC-Rotem and the IECEA and will not derogatedetract from OPC-Rotem’s rights according to it. The EA also stated that it will consider OPC-Rotem’s supply license once the issue of electricity trade in the Israeli economy has been comprehensively dealt with, but there is no assurance regarding the receipt of the license or the terms of the license should it be issued. If the EA refuses to grant OPC-Rotem a supply license as requested, this may harm OPC-Rotem'sOPC-Rotem’s ability to trade surplus electricity with other power stations, including related companies.
Furthermore, as discussed under “—OPC faces risks in connection with the expansion of its business,” OPC’s conditional license for the construction of the Tzomet plant remains subject to the Israeli Minister of Energy's approval and the issuance of a guarantee by Tzomet. The grant of a permanent generation license to Tzomet, upon expiration of the conditional license, is subject to Tzomet's compliance with the conditions set by law. An inability to obtain approval for the conditional license or the permanent generation license in time or at all may result in the project not being completed in time or at all and, therefore, have a material adverse effect on OPC's business, financial condition and results of operations.
Construction or development projects may not be completed or, if completed, may not be completed on time or perform as expected.
OPC faces risks in connection with its development projects, including future projects and the development of the Hadera Power station, in particular because it owns this project at a development stage. Developing a power station project entails certain risks, such as:
| · | risks associated with the construction contractor, |
| · | supply of key equipment, |
| · | performance of works at the required specifications and within the required time, |
| · | receipt of services required from the IEC to establish the station and connect it to the grid (which may be affected by sanctions and IEC strikes), |
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| · | impact on PPAs of any delays in completing new projects; |
| · | applicable regulation, and |
| · | obtaining the required approvals and permits for the development and operation of the station, including obtaining permits required in connection with the environment, including emission permits, and compliance with their terms. |
OPC-Hadera
OPC-Hadera is party to on the Hadera Power station maintenanceEPC agreement with SerIDOM Servicios Integrados IDOM S.A.U., or IDOM.IDOM and a maintenance agreement with General Electric International, Inc. and its affiliates, or GE. Breaches by IDOM or General Electric International, Inc. and its affiliates, or GE, including failure to meet certain fixed schedules and supply the primary equipment on time, or in the required quality, are likely to delay or hinder the establishment of the Hadera Power station, and may also hamper the performance of the Hadera Power station once it is built, and as a result cause material harm to OPC. IDOM has agreed to compensate OPC-Hadera in case of a delay or non-compliance with the terms determined in the agreement in connection with the operation of the station. However, the agreed compensation for the underperformance of the Hadera Power station is limited.
Additionally, the establishment of part of the infrastructure to connect the Hadera Power station and the Hadera Paper mill is under Hadera Paper’s responsibility. If Hadera Paper, which we do not control, does not meet its obligations to establish the infrastructure by the agreed date, this may lead to delays and obstructions in the development and operation of the Hadera Power station, thus adversely affecting OPC’s business and results of operation.operations.
Pursuant to OPC-Hadera's contingent license, the license is valid until September 2019. Expiration of the conditional license prior to the COD date and the receipt of a permanent license would constitute grounds for an event of default under OPC-Hadera's financing agreement.
Furthermore, in the event of significant delays past the agreed COD date, the majority of customers have the right to cancel PPAs, subject to certain conditions.
Tzomet
As discussed under “—OPC may not be able to enter into, or renew existing, long-term contractsfaces risks in connection with the expansion of its business,” the conditional license for the saleconstruction of energythe Tzomet plant remains subject to the Israeli Minister of Energy's approval and capacity, contractsthe issuance of a guarantee by Tzomet. The grant of a permanent generation license to Tzomet, upon expiration of the conditional license, is subject to Tzomet's compliance with the conditions set by law. Development of the Tzomet plant is also subject to a positive interconnection survey and to financial closing.
In September 2018, Tzomet entered into an EPC agreement with PW Power Systems LLC, or PW, for construction of the Tzomet project. For more information on this agreement, see “Item 4.B Business Overview—OPC—OPC’s Description of Operations—Tzomet.” If OPC is unable to meet its commitments or achieve the milestones under the agreement, including in the case that OPC is unable to obtain relevant approvals, this could result in increased costs for or delays in the project, which reduce volatility in itscould have a material adverse effect on our business, financial condition and results of operations.
In addition, OPC requires financing in connection with the development of the Tzomet project. If OPC is unable to obtain or utilize financing for the Tzomet project, this may hinder OPC’s ability to complete the Tzomet project.
If these conditions described above for the Tzomet project are not met by January 1, 2020, Tzomet could lose relevant permits to develop the project.
OPC faces competition from other IPPs.
In recent years, the Israeli government’s policy has been to open the electricity market to competition and to encourage the entry of private electricity producers. This policy has increased the number of private electricity producers, increasing the level of competition in the private generation market, which may have an adverse effect on OPC’s business. In 2018, 32% of the total electricity generation in Israel was generated by private producers.
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Pursuant to the Electricity Sector Law (Amendment No. 16 and Temporary Order) (2018) that was published in July 2018, the IEC will be required to sell five of its power stations through a tender process over the next 8 years, which is expected to reduce the IEC’s market share to below 40%. Furthermore, the IEC will be required to build and operate two new gas-powered stations, but will not be authorized to construct any new stations or recombine existing stations. This new law is expected to further increase competition from private producers, which may have an adverse effect on OPC’s business. For more information regarding this law, see “—OPC’s Description of Operations—Regulatory, Environmental and Compliance Matters.”
Increased competition could make it more difficult for OPC to enter into new long-term PPAs, renew the existing PPAs at the time they expire. OPC-Rotem has a PPA with the IEC, the government-owned electricity generation, transmission and distribution company in Israel, or the IEC PPA. The term of the IEC PPA lasts until 20 years after the power station’s COD. According to the agreement, OPC-Rotem is entitled to operate in one of the following two ways (or a combination of both with certain restrictions set in the agreement): (1) provide the entire net available capacity of its power station to IEC or (2) carve out energy and capacity for direct sales to private consumers, and OPC-Rotem has accordingly allocated the entire capacity of the plant to private consumers since COD. Under the IEC PPA, OPC-Rotem can also elect to revert back to supplying to IEC instead of private customers, subject to twelve months’ advance notice. If OPC may beis required to rely on the IEC PPA because it is unable to enter into new long-termsufficient PPAs renew the existing PPAs at the time they expire, or enter into PPA agreementsas a result of increased competition, it will be faced with terms other than those thatlower margins, which may have ended due to various reasons, such as market conditions.an adverse effect on its business, financial condition and results of operations.
OPC is dependent on certain significant customers.
OPC has a small number of customers that purchase a significant portion of OPC’s output under PPAs that account for a substantial percentage of the anticipated revenue of its generation companies. OPC's top five customers represented approximately 75% of its revenues in 2018; therefore, OPC’s revenues from the generation of electricity are highly sensitive to the consumption by significant customers. Therefore, should there be no demand for electricity from OPC’s significant customers or should such customers not fulfill their obligations, including by failing to make payments to OPC, OPC’s revenues could be significantly affected.
The ORL Group, which is a major OPC customer and is considered a related party, represented approximately 20% of OPC's revenues in 2018. Loss of the ORL Group as a customer could have a material adverse effect on OPC's business and results of operations. In January 2018, a shareholder of the ORL Group filed a claim against, among others, OPC, regarding certain gas purchase transactions. If this suit or related considerations impacts OPC's ability to do business with the ORL Group or other related parties, or if OPC were to otherwise lose this significant customer, this could impact OPC's business and results of operations.
Furthermore, OPC-Hadera is dependent on Hadera Paper’s consumption of steam. If such consumption ceases, it could have a material effect on OPC’s operations and OPC-Hadera'sOPC-Hadera’s classification as a cogeneration electricity producer (which entails certain benefits). For further information on the regulations relating to cogeneration electricity producers, see "“Item 4.B Business Overview—OPC—Regulatory, Environmental and Compliance Matters—Regulatory Framework for Cogeneration IPPs."
Supplier concentration may expose OPC to significant financial credit or performance risk, particularly with respect to those agreements which may expire during the life of its power plants.risk.
OPC relies on transmission facilities for the transmission of power and gas.
OPC’s businesses depend upon transmission facilities owned and operated by the IEC to deliver the wholesale power it sells from its power generation plants. If transmission is disrupted, or if the transmission capacity infrastructure is inadequate, OPC’s ability to sell and deliver wholesale power may be adversely impacted. OPC’s businesses may also be affected by IEC strikes and sanctions.
Furthermore, there is currently a single company supplying natural gas to OPC and one company providing it with gas transmission services. Failure to comply with the requirements of these companies or limitations in the supply or transmission of gas by such companies could affect OPC’s ability to generate electricity using natural gas, which could have a material adverse effect on OPC’s business and results of operations. Finally, OPC’s plants require water for their operation. A continued disruption in the water supply could disrupt the operation of such plants.
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Risks Related to the Sale of the Inkia Business
We have indemnification obligations under the share purchase agreement for the sale of the Inkia Business
In December 2017, our wholly-owned subsidiary Inkia sold its Latin America and Caribbean businesses, or the Inkia Business, to an entity controlled by I Squared Capital, an infrastructure private equity firm. For further information on the sale and share purchase agreement see “Item 4.B Business Overview—Discontinued Operations—Inkia Business — Sale of the Inkia Business— Share Purchase Agreement.”
Under the share purchase agreement, our subsidiary Inkia has agreed to indemnify the buyer and its successors, permitted assigns, and affiliates against certain losses arising from a breach of Inkia’s representations and warranties and certain tax matters, subject to certain time and monetary limits depending on the particular indemnity obligation. These indemnification obligations are supported by (a) a three-year pledge of shares of OPC which represent 25% of OPC’s outstanding shares, (b) a deferral of $175 million of the purchase price in the form of a four-year $175 million deferred payment agreement, or the Deferred Payment Agreement, accruing interest at 8% per year and payable in-kind, and (c) a three-year corporate guarantee from Kenon for all of the Inkia’s indemnification obligations. All of the foregoing time periods run from December 31, 2017. To the extent that Inkia is required to make indemnification payments under the share purchase agreement (and such payment obligations are agreed between buyer and seller or determined by a court in a non-appealable judgment), the buyer is entitled to seek recourse to the foregoing support arrangements in the following order: first, by exhausting rights under the OPC share pledge, second, by set off against amounts owing by the buyer under the Deferred Payment Agreement and third against the Kenon guarantee.
If Inkia is required to make indemnification payments under the share purchase agreement this could require us to sell OPC shares or result in enforcement of the OPC share pledge, set off against amounts owing to us under the Deferred Payment Agreement and enforcement of the Kenon guarantee, which could impact our liquidity and financial position. Furthermore, any enforcement of the OPC share pledge could result in the buyer acquiring a significant interest in OPC or could result in a sale of a significant amount of OPC shares which could adversely affect the market price of OPC’s shares.
If Kenon is required to make payments under the guarantee it may need to use funds from its businesses, or sell assets, including OPC shares. Furthermore, any sales of assets may not be at attractive prices, particularly if such sales must be made quickly to meet the sellers'sellers’ obligations.
We are subject to risk in relations to the $175 million Deferred Payment Agreement
As part of the consideration for the sale of the Inkia Business, $175 million of the purchase price payable to us was deferred in the form of a four-year $175 million Deferred Payment Agreement, accruing interest at 8% per year and payable in-kind. The obligor under the Deferred Payment Agreement is Nautilus Energy TopCo LLC, or Nautilus Energy, which is the parent company of the buyer of the Inkia Business. The obligations of Nautilus Energy under this agreement are secured by a pledge over its shares by its direct parent company and a pledge over the shares of the direct subsidiary of Nautilus Energy. The obligations of Nautilus Energy are structurally subordinated to all of the debt and other obligations of the buyer of the Inkia Business and the Inkia Business itself. Accordingly, to the extent that the buyer of the Inkia Business or the Inkia Business itself are required to make payments to their creditors, there could be insufficient funds remaining for Nautilus Energy to meet its obligations under the Deferred Payment Agreement. In addition, debt or other agreements may limit amounts which can be distributed or otherwise transferred to Nautilus Energy to make payments on the Deferred Payment Agreement. Finally, Nautilus Energy will depend on cash held or generated by the Inkia Business to be made available to it to meet its obligations under this agreement. ISQ Global Infrastructure Fund II, L.P., an indirect parent of Nautilus Energy, has provided a guarantee of Nautilus Energy'sEnergy’s obligations under the deferred payment agreement. However, this guarantee falls away upon a cross-acceleration of Nautilus Energy'sEnergy’s obligations under the deferred payment agreement. For further information see “Item 4.B Business Overview—Discontinued Operations— Inkia Business—Nautilus Energy TopCo LLC Deferred Payment Agreement.”
We are subject to credit risk relating to this loan, as Nautilus Energy may be unable to make principal and interest payments as they become due and there is no guarantee that any collateral securing such loan will be sufficient to protect us in the event of non-payment by Nautilus Energy.
In addition, we face risks under this loan relating to our indemnification obligations under the share purchase agreement for the sale of the Inkia Business, as to the extent that there are indemnification obligations owing to the buyer (and such payment obligations are agreed between buyer and seller or determined by a court in a non-appealable judgment) which are unpaid and after the buyer has exhausted its rights under the OPC share pledge, the buyer can offset amounts owing under this loan against unpaid indemnification obligations.
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The transition services to be provided by the buyer may not be sufficient and be difficult for us to replace upon expiration of the agreement
In connection with the sale of the Inkia Business, we entered into a transition services agreement with the buyer. This agreement outlines the provision of transition services by the Inkia Business throughout a transition period. The transition services covered by this agreement include the preparation of financial statements, assistance with reporting requirements and consulting services with respect to the construction of OPC-Rotem. Any failure by the Inkia Business to perform such services during the transition period, or any failure by us to successfully transition such services away from the Inkia Business upon expiration of the transition services agreement and integrate the new services into our business, could have an adverse effect on our business.
Risks Related to Our Interest in Qoros
Qoros depends on funding to further its development and, until it achieves significant sales levels, to meet its operating expenses, financing expenses, and capital expenditures.
Qoros commenced commercial operations at the end of 2013. Qoros has incurred losses since its inception and is continuing to experience losses and negative operating cash flow and expects that this will continue until it achieves significantly higher levels of sales. Qoros’ operating expenses, debt service requirements, capital expenditures and other liquidity requirements are significant. Until Qoros experiences a significant increase in sales, it will continue to require additional financing, including the renewal or refinancing of its working capital facilities, to meet these expenses and requirements, and there is no assurance that Qoros will experience an increase in sales in the near-term, if at all, or obtain additional financing.
Qoros has significant obligations. Qoros has historically relied upon capital contributions, loans, guarantees and pledges from its shareholders, and third partythird-party loans supported by its shareholders, to fund its development and operations. Qoros has long-term, short-term and working capital credit facilities, but amounts available under such facilities are limited. Qoros actively manages its trade payables, accrued expenses and other operating expenses in connection with the management of its liquidity requirements and resources.
Qoros’ success is dependent upon an increase in sales volumes.
Qoros commenced commercial sales increased in 2013 and has not yet achieved significant2018 compared to prior years, but it still needs to increase sales levels. Qoros's sales decreased to 15,000 cars in 2017 from 24,000 cars in 2016. Qoros sold approximately 11,400 cars in the first quarterreach breakeven. In addition, a substantial portion of 2018 a more than 200% increase as comparedsales were made to approximately 3,700 cars sold in the first quarter of 2017, with a substantial number of such sales in Q1 2018 reflecting purchase ordersan entity introduced by the New Qoros Investor. Majority Shareholder in Qoros. Qoros’ success will depend upon Qoros increasing its sales volumes, which will depend on, among others:other things:
| · | the continued development of the Qoros brand; |
| · | successful development and launch of new vehicle models; |
| · | expansion and enhanced sales |
| · | build-up of its aftersales and services infrastructure; |
| · | managing its procurement, manufacturing and supply processes; |
| · | the volume of vehicles acquired by a new customer introduced by the |
| · | establishing effective, and continuing to improve, customer service processes; and |
| · | securing additional financing to support its operating and capital expenses and further its growth and development. |
Qoros will need to significantly increase sales to a broad base of customers to establish its brand and create a sustainable customer base.
Qoros sells a majority of its vehicles to a single purchaser
A significant portion of car sales in 2018 were made to a leasing company, which was introduced by the Majority Shareholder in Qoros. If this entity reduces or ceases its purchases from Qoros, it could have a material impact on sales which could have a material adverse effect on Qoros’ business, financial condition and results of operations. Additionally, Qoros faces credit risk with respect to its sales to meet its operating expenses and principal payments under its debt facilities. If Qoros is not able to increase its sales, this could have a significant impact on Qoros’ liquidity and future success, as well as on the value of Kenon’s investment in Qoros, which may result in Kenon being required to make payments under its guarantees of Qoros’ debt if Qoros is unable to meet its debt obligations.customer.
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Qoros is significantly leveraged.
As of December 31, 2017,2018, Qoros had total loans and borrowings (excluding shareholder loans) of RMB4.8 billion.RMB5.1 billion (approximately $742 million). Qoros maywill require additional financing for its continued development.
Highly leveraged businesses are inherently more sensitive to declines in revenues, increases in expenses and interest rates, and adverse market conditions. This is particularly true for Qoros, as Qoros has yet to generate positive cash flows from its operations. Qoros uses a portion of its liquidity to make debt service payments, thereby reducing its ability to use its cash flows to fund its operations, capital expenditures, or future business opportunities. Qoros ishas been required to make amortizing principal payments on its RMB3 billion, RMB1.2 billion and RMB700 million facilities since 2018 and the repayment requirements will increase significantly in 2018.2019 and in future years.
Currently, Qoros’ debt-to-asset ratio is higher, and its current ratio is lower, than the allowable ratios set forth in the terms of Qoros’ RMB3 billion syndicated credit facility. In 2016, the lenders under Qoros’ syndicated credit facility waived Qoros’ compliance with the financial covenants under this facility through the first half of 2020. Should Qoros’ debt-to-asset ratio continue to exceed, or its current ratio continue to be less than, the permitted ratios in any period after the waiver period, and Qoros’ syndicated lenders do not waive such non-compliance or revise such covenants, Qoros’ lenders could accelerate the repayment of borrowings due under Qoros’ RMB3 billion syndicated credit facility. If Qoros does not maintain a good relationship with its lenders this could impact requests for lender consents, including the consents being sought by NewMajority Shareholder in Qoros, Investor, Chery and Kenon as pledgorspledgors of Qoros shares under the RMB1.2 billion facility in connection with the investment by the New Qoros Investor.Majority Shareholder in Qoros.
If Qoros is unable meet its debt service obligations or otherwise comply with other covenants in its credit facilities, this would lead to an event of default. Each of Qoros’ significant debt facilities above contains a “cross-default” provision which provides for an event of default if any other debt of Qoros in excess of RMB50 million becomes payable prior to maturity, so a default under such other debt facilities would result in a default under the facilities referenced above and a default that leads to acceleration under either facility above will result in an event of default under the other facility.
In the event that any of Qoros’ lenders accelerate the payment of Qoros’ borrowings, Qoros would not have sufficient liquidity to repay its debt under the syndicated credit facility, or to maintain payments on its remaining credit facilities.such debt. Additionally, as Qoros is significantly leveraged and certaina substantial portion of itsQoros' assets, including its manufacturing facility and significant portion of its intellectual property, securessecure its syndicated credit facility and other indebtedness, if Qoros were unable to comply with the terms of its debt agreements, this could result in the foreclosure upon and loss of certain of Qoros’ assets.
Kenon has outstanding “back-to-back” guarantee obligations to Chery in respect of guarantees that Chery has given in respect of Qoros’ bank debt and has pledged a substantial portion of its interests in Qoros to secure Qoros’ bank debt, as well as Chery’s guarantees of Qoros’ debt. Accordingly, if Qoros’ debt facilities become payable due to a default under these facilities or otherwise, Kenon may be required to make payments under its guarantees and could lose the shares in Qoros it has pledged. In addition, Kenon may be required to increase the amount of Qoros shares pledged (or Kenon may provide other credit support).
We have a minority interest in Qoros.
Under the investment agreement, the NewMajority Shareholder in Qoros Investor also has the right to increase its stake in Qoros to up to 67%, subject to conditions. For further information on this option, see “Item 4.B Business Overview—Our Businesses—Qoros —Qoros’ Investment Agreement—Kenon’s Put Option; the New Qoros Investor'sMajority Shareholder in Qoros’ Right to make Further Investments in Qoros.” If this right is exercised, Kenon’s indirect interest in Qoros will be further diluted, resulting in less control over the Qoros business.
Prior to the New Qoros Investor’s investment,Majority Shareholder in Qoros’ investments, Kenon had a 50% interest in Qoros, and the right to appoint three of the six directors on the Qoros board, among various other management rights. As a result of this investment, Kenon'sKenon’s interest in Qoros has been diluted, and it is now entitled to only appoint two of the nine Qoros directors. Qoros'
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Accordingly, while Kenon maintains an active role as one of the three joint venture partners in Qoros, it holds a minority interest in Qoros. Qoros’ other joint venture partners may have goals, strategies, priorities, or resources that conflict with our goals, strategies, priorities or resources, which may adversely impact our ability to effectively own Qoros, undermine the commitment to Qoros’ long-term growth, or adversely impact Qoros’ business.
Qoros has entered into certain arrangements and agreements with its shareholders.
Qoros sources its engines and certain spare parts from Chery, in the ordinary course of Qoros’ business, and has entered into various commercial agreements with respect to the provision of such supplies from Chery. Qoros has amounts payable to Chery in the amount of RMB555 million as of December 31, 2017.
Qoros has also entered into a platform sharing agreement with Chery, pursuant to which Qoros provided Chery with the right to use Qoros’ platform in exchange for a fee. In 2018, Qoros entered into a new platform sharing agreement with Chery, pursuant to which Chery provides Qoros with a modified version of the Qoros platform which was been further developed by Chery in exchange for a fee.
Qoros has total amounts payable to Chery in the amount of RMB652 million (approximately $95 million) as of December 31, 2018.
Qoros may enter into additional commercial arrangements and agreements with Chery,shareholders or parties related to it,their affiliates in the future.
Qoros actively managesfaces certain risks relating to its trade payables, accrued expenses and other operating expenses in connection with the management of its liquidity requirements and resources, and Qoros has accounts payable to Chery. Should Qoros be unable to make payments to Chery for its supply of engines, spare parts and other supplies from Chery, this may have a material adverse effect on Qoros’ relationship with Chery.
Qoros depends upon a network of independent dealers to sell its automobiles.
| · | Risks relating to the evolution of its vehicle models and brand and the achievement of broad customer acceptance – as Qoros’ brand and business are relatively new Qoros has not achieved significant sales levels and its future business and profitability depend, in large part, on Qoros’ ability to sell vehicle models to its targeted customers in its targeted price range; |
| · | Risks relating to Qoros’ dependence upon a network of independent dealers to sell its automobiles – Qoros’ success is dependent, in large part, upon a network of dealers, whose salespersons Qoros does not directly employ and therefore cannot control, and as a result Qoros’ dealer network may not achieve the required standards of quality of service producers within Qoros’ expected timeframe, if at all. Qoros’ development of its dealer network will likely be affected by conditions in the Chinese passenger vehicle market and the Chinese economy (which may impact Qoros, as a relatively new company, more than other established companies), the financial resources available to existing and potential dealers, the decisions dealers make as a result of the current and future sales prospects of Qoros’ vehicle models, and the availability and cost of the capital necessary to acquire and hold inventories of Qoros’ vehicles for resale. Qoros may have difficulty in expanding its dealer network if existing dealers are not performing well in terms of sales, and if Qoros is unable to expand its dealer network, this could make it difficult for Qoros to significantly increase sales levels; |
| · | Risks relating to the competitive industry in which Qoros operates – Qoros competes in the highly competitive Chinese passenger vehicle market with established automobile manufacturers that may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, pricing sale and support of their products, which could impair Qoros’ ability to operate within this market or adversely impact Qoros’ sales volumes or margins. Furthermore, additional competitors, both international and domestic, may seek to enter the Chinese market. Increased competition may reduce Qoros' margins and may also make it difficult for Qoros to increase sales. |
| · | Risks relating to recent trends in the Chinese market. The growth rate in the Chinese vehicle market declined in recent years and sales declined in China in 2018, after many years of growth. This trend has resulted in increased competition in China’s automotive market through price reductions, which has resulted in reduced margins. |
| · | Credit risk. Qoros has accounts receivable for sales of cars on a wholesale basis of RMB1,521 million (approximately US$221 million) as of December 31, 2018 and, accordingly, is subject to credit risk. |
If Qoros is unable to keep up with advances in the electric vehicle industry, its competitive position may be adversely affected.
Qoros has pledged,recently entered into the electric vehicle market, and in December 2018 Qoros introduced an NEV model of the future, may further pledge,Qoros Sedan, the Qoros 3 EV500. Qoros expects to experience significant competition in the NEV market, as OEMs are required to satisfy certain recently issued regulations, under which the automakers must obtain a certain NEV score by 2019, which score is related to the number of its intellectual property as collateral for its financing. A default on Qoros’ obligations secured by intellectual property underNEVs the terms of such facility could provideautomaker produces. There is also no assurance that the secured parties with the rightNEV models that Qoros plans to foreclose on, and subsequently sell and/or license, all or a portion of Qoros’ pledged patent rights, which could materially impair Qoros’ ability to conduct its business.offer will be accepted in this market.
NEVs in China. In connection with its January 2018 investment in Qoros,recent years, the New Qoros Investor agreed to introduce approximately 100,000 vehicle purchase orders to Qoros each year between 2018 and 2020 following the entry into further agreements with respect toChinese government has offered large subsidies for purchases of electric vehicles. However, these purchases. Such further agreements, which will need to set out specific details relating to modelssubsidies are expected to be purchased, purchase pricegradually phased out over the next few years, which is expected to increase the costs to consumers and other details,may affect the demand for NEVs in China. This could affect the profitability of the NEV market and have not yet been agreed in full, so there is no assurance as to the terms of such purchases.
Qoros has recently experienced significant growth in its operations, which may place significant demands on its administrative, operational and financial resources.
Qoros is subject to Chinese regulation and its business or profitability may be affected by changes in China’s regulatory environment.
Local and national Chinese authorities have exercised, and will continue to, exercise substantial control over the Chinese economy through regulation and state ownership, including rules and regulations that regulate or affect the Chinese automobile manufacturing process and concern vehicle safety and environmental matters such as emission levels, fuel economy, noise and pollution. Additionally, China has recently permitted provincial and local economic autonomy and private economic activities, and, as a result, Qoros is dependent upon its relationship with the local governments in the Jiangsu province and Shanghai provinces,city, among others. As a result, certain of Qoros’ ongoing corporate activities are subject to the approval and regulation of the relevant authorities in China including, among other things, capital increases and investments in Qoros, changes in the structure of Qoros’ ownership, increases in the production capacity, construction of Qoros’ production facilities, ownership of trademarks, the formation of subsidiaries, and the inclusion of Qoros’ products in the national catalogue for purposes of selling them throughout China. Qoros’ operations are also sensitive to changes in the Chinese government’s policies relating to all aspects of the automobile industry. In addition, Qoros’ production facility and products are required to comply with Chinese environmental regulations.
Qoros has incurred, and expects to incur in the future, significant costs in complying with these, and other applicable, regulations and believes that its operations in China are in material compliance with all applicable legal and regulatory requirements. The central or local Chinese governments may continue to impose new, conflicting or stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts by Qoros to ensure its compliance with such regulations or interpretations or maintain its competitiveness and margins. Qoros’ ability to operate profitably in China may be harmed by any such changes in the laws and regulations, including those relating to taxation, environmental regulations, land use rights, property, or the aforementioned corporate matters, of China, Jiangsu, Shanghai or any other jurisdiction in which Qoros may do business. Qoros’ failure to comply with such laws and regulations may also result in fines, penalties or lawsuits, which could have a material adverse effect on Qoros’ business, financial condition, results of operations or liquidity.
Qoros requires qualified personnel to manage its operations.
Qoros’ senior executives and personnel are important to Qoros’ success, the establishment of Qoros’ strategic direction, and the design and implementation of Qoros’ business plan. Qoros also requires qualified, competent and competentskilled employees to independently direct its day-to-day business operations, execute its business plans, and service Qoros’ customers, dealers, suppliers and other stakeholders. Qoros’ products and services are highly technical in nature. Therefore, Qoros must be able to attract, recruit, hire, train and retain skilled employees, including employees with the capacity to operate Qoros’ production line as well as employees possessing core competencies in vehicle design and engineering. In recent years, Qoros has made a number of personnel changes at the executive management level and in the senior management structure, including after the investment in Qoros in 2018. Such management changes have affected and any future changes may affect, Qoros’ ability to execute its business plan.
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Qoros is dependent upon its suppliers.
Qoros sources the component parts necessary for its vehicle models from over 100 suppliers. A number of Qoros’ component parts are currently obtained from a single source. Qoros utilizes such single-source suppliers to manage its expenses and maintain consistency in its component parts. Many of Qoros’ suppliers are European-based with manufacturing facilities in China. Additionally, Qoros sources its engines and certain spare parts from Chery.
Qoros maintains minimal inventoriesis dependent upon the continued ability of its suppliers to deliver the materials, systems, components and parts needed to conduct its manufacturing operations. Therefore, Qoros is dependent upon the continued ability of its suppliers to deliver such materials, systems, components and partsoperations in sufficient quantities and at such times that will allow Qoros to meet its production schedules. As Qoros, consistent with industry practice, outsources a significant portion of its components and parts from suppliers, it may be affected by any fluctuations in the expertise and manufacturing capabilities of its suppliers. Additionally, as Qoros’ suppliers may also supply a significant portion of the components and parts of Qoros’ competitors, such concentration may expose Qoros and its competitors to increased pricing pressure. Qoros may also be unable to procure the component partscomponents necessary for its vehicle models if the established manufacturers with which it competes have the capacity to influence Qoros’ suppliers. Although Qoros believes it may be able to establish alternate supply relationships and obtain or engineer replacement components in the event a supplier, including Chery or a single-source supplier, is unable to supply Qoros with a necessary component part at a favorable cost, Qoros may be unable to do so in the short-term, or at all, at prices or costs that it deems favorable. In addition, although Qoros believes that its component parts are available from many suppliers, qualifying alternate suppliers or developing replacements for certain highly customized components of its vehicles may be time consuming and costly or may force Qoros to make additional and unexpected modifications to its vehicle models’ designs or schedules. An unexpected shortage of materials, systems, components or parts, if even for a relatively short period of time, could prevent Qoros from manufacturing its vehicles, cause Qoros to alter its production designs, or prevent Qoros from timely supplying its dealers with the aftersales parts necessary for the servicing of Qoros’ vehicles. Such occurrences could adversely impact Qoros’ relationships with its dealers or customers and thereby affect Qoros’ business, financial condition, results of operations or liquidity.
Increases in the prices of raw materials that are included within the component parts Qoros purchases from its suppliers, may increase Qoros’ costs and could reduce Qoros’ profitability if Qoros cannot recoup the increased costs through increased vehicle prices. As Qoros continues to actively manage its trade payables, Qoros may not be able to maintain favorable arrangements and relationships with its suppliers and, in particular, may not be able to secure or maintain, as applicable, contractual conditions comparable with those of Qoros’ main competitors.
Qoros may experience delays and/or cost overruns with respect to the design, manufacture, launch and financing of new or enhanced models.
Qoros’ business plan contemplates the introduction of new vehicle models, (including anincluding NEV model),models, as well as enhanced versions of existing vehicle models, over the short- and long-term. In light of technological developments, Qoros will need to continually upgrade and adapt its vehicle models, vehicle platform and manufacturing facility in Changshu, as automobile customers generally expect new or enhanced vehicle models to be introduced frequently. Upgrading and adapting Qoros’ vehicle models and manufacturing facility and developing and launching an NEVNEVs will require significant investments, whereas in recent years, Qoros has undertaken cost-cutting measures.investments. Further, there can be no assurance that Qoros will be able to secure the necessary financing to fund the continued introduction and manufacturing of new and enhanced vehicle models, design future vehicle models that will maintain the high quality standards required for Qoros’ branding image, meet the expectations of its customers, and become commercially viable. Should Qoros be unable to invest in developing and upgrading its vehicle models and manufacturing facility, Qoros may experience difficulties in introducing and developing new vehicles, including NEVs, with the latest automobile technology which meets consumer standards. In addition, automobile manufacturers often experience delays and cost overruns in the design, manufacture and commercial release of new and enhanced vehicle modelsmodels. Qoros has experienced and any delaymay in the financing, design, manufacture or launch of Qoros’ new or enhanced models could materially damage Qoros’ brand, the development of its businessfuture experience such delays and its financial position.cost overruns.
Our independent registered public accounting firm currently relies on an independent registered public accounting firm located in the People’s Republic of China for assistance in completing the audit work associated with our investment in Qoros. Auditors of companies that are publicly traded in the United States and firms registered with the Public Company Accounting Oversight Board, or PCAOB, are required to undergo regular PCAOB inspections. However, because Qoros has substantial operations within China, a jurisdiction in which the PCAOB is currently unable to conduct inspections without the approval of the Chinese government authorities, the audit work conducted in China with respect to Qoros has not been inspected by the PCAOB.
Furthermore, in late 2012, such violation could result in the Chinese member firms of the “Big Four” accounting firms being suspended from practicing before the SEC which could, in turn, delay the timely filing of our, or Qoros’, financial statements with the SEC.
In January 2014, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the “Big Four” accounting firms, including the auditor of Qoros, from, among other things, practicing before the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of “Big Four” accounting firms agreedSEC, agreeing, among others, to settlement terms that include a censure; undertakings to make a payment to the SEC; procedures and undertakings as to future requests for documents by the SEC; and possible additional proceedings and remedies should those undertakings not be adhered to.
Any such occurrences may ultimately affect the continued listing of our ordinary shares on the New York Stock Exchange, or the NYSE, or our registration with the SEC, or both. Moreover, any further negative news about the proceedings, any violations of the settlement agreement relating to the proceedings or any future proceedings against these audit firms may adversely affect investor confidence in companies with substantial mainland China based operations listed in, or affiliated with listings in, the U.S., such as Qoros, which could have a material adverse effect on the price of our ordinary shares and substantially reduce or effectively terminate the trading of our ordinary shares in the United States.
Risks Related to Our Other Businesses
Risks Related to Our Interest in ZIM
ZIM is highly leveraged and may be unable to comply with its financial covenants or meet its debt service or other obligations.
As of December 31, 2018, ZIM had approximately $1.5 billion of outstanding debt to be repaid between 2019 through 2030, of which $292 million of principal is scheduled to be repaid during 2019. Many of the financing agreements relating to ZIM’s debt facilities contain covenants and limitations, including:
| · | Minimum liquidity, fixed charge coverage ratio and total leverage covenants; and |
| · | Other non-financial covenants and limitations such as restrictions on dividend distributions, asset sales, investments and incurrence of debt, as well as reporting obligations. |
In 2014, ZIM completed a comprehensive restructuring of its outstanding debt, which resulted in a significant reduction in debt and reduced our former parent company's interest in ZIM from approximately 99% to 32%.
In 2016, ZIM agreed with its creditors a rescheduling of principal payments of $116 million originally scheduled for payment in by September 30, 2017, as well as to waive and revise certain covenants to which ZIM was subject. The covenants which had been waived for 2017, were further waived in July 2018 until reinstated in March 2020, except for the minimum liquidity requirement, which continues to apply.
If ZIM is unable to meet its obligations or refinance its indebtedness as it becomes due given that ZIM has limited assets available for sale or refinancing, or if ZIM is unable to comply with its covenants, ZIM may have to take disadvantageous actions, such as (i) reducing financing in the future for investments, acquisitions or general corporate purposes or (ii) dedicating a high level of ZIM’s cash flow from operations to the payment of principal and interest on indebtedness. As a result, the ability of ZIM’s business to withstand competitive pressures and to react to changes in the container shipping industry could be impaired. If ZIM is unable to comply with its covenants or meet debt service obligations and is unable to obtain waivers from the relevant creditors, a breach of any of its debt instruments and/or covenants could result in a default under the relevant debt instruments. Upon the occurrence of such an event of default, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and, in the case of credit facility lenders, terminate all commitments to extend further credit. If the lenders accelerate the repayment of the relevant borrowings, ZIM may not have sufficient assets to repay any outstanding indebtedness. Furthermore, a default or the acceleration of any obligation under a particular debt instrument may cause a default under other material debt or permit the holders of such debt to accelerate repayment of their obligations pursuant to “cross default” or “cross acceleration” provisions, which could have a material adverse effect on ZIM’s business, financial condition and liquidity and the value of Kenon's interest in ZIM. For additional information, see “Item 5.B Liquidity and Capital Resources—ZIM’s Liquidity and Capital Resources.”
Furthermore, ZIM may be unable to generate sufficient cash flows to satisfy its debt service and other obligations. ZIM’s ability to generate cash flow from operations to make interest and principal payments on ZIM’s debt obligations depends on its performance, which is affected by a range of economic, competitive and business factors. ZIM cannot control many of these factors, including general economic conditions and the health of the shipping industry. If ZIM’s operations do not generate sufficient cash flow from operations to satisfy its debt service and other obligations, ZIM may need to sell assets, borrow additional funds or undertake alternative financing plans, such as refinancing or restructuring its debt, or reducing or delaying capital investments and other expenses. ZIM's debt instruments limit the incurrence of debt, so ZIM may not be permitted to incur additional debt. Even if ZIM is permitted to so incur additional debt under its debt agreements, it may be difficult for ZIM to do so on commercially reasonable terms or at all. Substantially all of ZIM's vessels are leased by ZIM and accordingly, ZIM has limited assets that it owns and is able to pledge to secure financing, which can make it difficult for ZIM to incur additional debt financing.
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The container shipping industry is dynamic and volatile.
The container shipping industry is dynamic and volatile and has been marked in recent years by instability as a result of global economic conditions and the many conditions and factors that affect supply and demand in the shipping industry, which include:
| · | global and regional economic and geopolitical trends, including armed conflicts, terrorist activities, embargoes and strikes; |
| · | the supply of and demand for commodities and industrial products globally and in certain key markets, such as China; |
| · | developments in international trade, including the imposition of tariffs, the modification of trade agreements between states and other trade |
| · | the relocation of manufacturing capabilities to importers’ nearby locations/inland locations; |
| · | currency exchange rates; |
| · | prices of energy resources; |
| · | environmental and other regulatory developments; |
| · | changes in seaborne and other transportation patterns; |
| · | changes in the shipping industry, including mergers and acquisitions, bankruptcies, restructurings and alliances; |
| · | changes in the infrastructure and capabilities of ports and terminals; |
| · | weather conditions; and |
| · | development of digital platforms to manage |
These factors also significantly affect ZIM’s freight rates. Furthermore, rates within the charter market, through which ZIM sources a substantial portion of its capacity, may also fluctuate significantly based upon changes in demand for shipping services. As global trends continue to change, it remains difficult to predict their impact on the container shipping industry and on ZIM’s business. If ZIM is unable to adequately respond to market changes, they could have a material adverse effect on its business, financial condition, results of operations and liquidity.
Excess supply of global container ship capacity may limit ZIM’s ability to operate vessels profitably, and lead to overload and/or overcapacity and congestion in certain ports.
Global container ship capacity has increased over the years and continues to exceed demand. As of December 31, 2017,2018, global container ship capacity was approximately 2122.3 million 20-foot equivalent units, or TEUs, spread across approximately 5,2005,284 vessels. According to Alphaliner, excess capacity is projected to further increase, outpacing any expected increase in worldwide demand as a result of the large global orders for new vessels. Many of these orders are for vessels with carrying capacities of 18,000 TEUs and above, which may increase capacity is projected to continue to impact the industry and the capacity growth rate in 2019 is projected to be similar to the growth rate of the demand for each shipping voyage.services. Additionally, responses to changes in market conditions may be slow as a result of the time required to build new vessels and adapt to market needs. As shipping companies purchase vessels years in advance to address expected demand, vessels may be delivered during times of decreased demand or unavailable during times of increased demand, leading to a supply/demand mismatch. The container shipping industry may continue to face oversupply in the coming years and numerous other factors beyond ZIM’s control may also contribute to an increase in capacity, including deliveries of refurbished or converted vessels, port and canal congestion, decreased scrapping of older vessels, any decline in the practice of slow steaming, a reduction in the number of void voyages and a decrease in the number of vessels that are out of service (e.g., vessels that are laid-up, dry-docked, awaiting repairs or are otherwise not available for hire). Excess capacity depresses freight rates and can lead to lower utilization rates, which may adversely affect ZIM’s revenues, profitability and asset values. Until such capacity is fully absorbed by the container shipping market and, in particular, the shipping lines on which ZIM’s operations are focused, the industry will continue to experience downward pressure on freight rates and such prolonged pressure could have a material adverse effect on ZIM’s financial condition, results of operations and liquidity.
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Furthermore, in recent years, container ship capacities have increased globally at a faster rate than the rate at which some container ports have increased their capacities, leading to considerable delays in processing container shipments in affected ports. As a result of longer load and unload times, increases in container ship capacities could increase port congestion, which could have a material adverse effect on affected shipping lines. In addition, asthe continued growth in industry capacity continues to grow, ZIM may havehas resulted in difficulty in securing sufficient terminal slots to expand its operations in accordance with its growth strategy due to the limited availability of port facilities.
The container shipping industry has experienced a reduction in the number of major carriers, as well as a continuation of the trends of strategic alliances and partnerships among container carriers, which can result in more efficient and better coverage for shipping companies participating in such arrangements. For example, in recent years, COSCO and China Shipping Container Lines merged into COSCO Shipping, Hanjin Shipping filed for bankruptcy and APL Shipping2018, OOCL was acquired by CMA CGM Shipping.COSCO and three large Japanese carriers (ONE) merged. In 2017, there were announcements of further consolidation in the shipping industry, including the merger of United Arab Shipping Company and Hapag-Lloyd, and the acquisition of Hamburg Sud by Maersk took place. In 2016, COSCO and the merger of three large Japanese carriers.China Shipping Container Lines merged (into COSCO Shipping), APL Shipping was acquired by CMA CGM Shipping and Hanjin Shipping filed for bankruptcy.
The recent consolidation in the industry has affected the existing strategic alliances between shipping companies. For example, the Ocean Three alliance, which consisted of CMA CGM Shipping, United Arab Shipping Company and China Shipping Container Lines, was terminated and replaced by the Ocean Alliance, consisting of COSCO Shipping, CMA CGM Shipping, Evergreen Marine and Orient Overseas Container Line.
ZIM is not party to any strategic alliances and therefore has not been able to achieve the benefits associated with being a member of any alliances. As a result,such an alliance. If ZIM does not benefit fromis unable to enter into strategic alliances in the economies of scale that many of its competitors are ablefuture, it may be unable to achieve through participationthe cost and other synergies that can result from such alliances which can impact ZIM's business and results of operations.
In September 2018, ZIM and the 2M Alliance entered into a strategic operational cooperation agreement in such arrangements. However,the Asia-USEC trade zone. In January 2019, ZIM entered into a second strategic cooperation agreement with the 2M Alliance to cover the (i) Asia - East Mediterranean and (ii) Asia - American Pacific Northwest trade zones. The second agreement remains subject to regulatory approvals. For additional information on the 2M Alliance, see “Item 4.B Business Overview—Our Businesses—ZIM—ZIM’s Description of Operations.” ZIM is party to operational partnerships with other carriers in some of the other trade zones in which ZIMit operates, and may seek to enter into additional operational partnerships or similar arrangements with other shipping companies or local operators, partners or agents. These strategic cooperation agreements and other arrangements reduce ZIM’s flexibility in decision making in the covered trade zones and ZIM is subject to the risk that the expected benefits of the agreements may not materialize. Furthermore, in the rest of the trade zones in which the 2M Alliance operates as well as in other trade zones in which other alliances operate, ZIM is still unable to benefit from the economies of scale that many of its competitors are able to achieve through participation in strategic arrangements. If ZIM is not successful in expanding or entering into additional operational partnerships, this could adversely affect its business. In addition, ZIM’s status as an Israeli company has limited, and may continue to limit, its ability to call on certain ports and has therefore limited, and may continue to limit, ZIM’s ability to enter into alliances or operational partnerships with certain shipping companies.
Declines in freight rates or other market conditions and other factors, could negatively affect ZIM’s business, financial condition, or results of operations and could thereby result in ZIM or Kenon incurring impairment charges.
At each of its reporting periods, ZIM examines whether there have been any events or changes in circumstances, such as a decline in freight rates or other market conditions, which would indicate an impairment. Additionally, when there are indications of an impairment, an examination is made as to whether the carrying amount of the operating assets or cash generating units, or CGUs, exceeds the recoverable amount and, if necessary, an impairment loss is recognized in its financial statements. The projection of future cash flows related to ZIM’s CGU, which is one CGU, is complex and requires ZIM to make various estimates including future freight or charter rates, bunker prices, earnings from the vessels and discount rates, all of which have been volatile historically. Should freight rates decline significantly or ZIM or the shipping industry experience adverse conditions, this may have a material adverse effect on ZIM'sZIM’s business, results of operationoperations and financial condition, which may result in ZIM or Kenon recording an impairment charge.
An increase in bunker prices may have an adverse effect on ZIM’s results of operations.
Bunker expenses represent a significant portion of ZIM’s operating expenses, accounting for 11%17% and 13% of the income from voyages and related services for the years ended December 31, 20162018 and 2017, respectively. Bunker prices move in close interdependence with crude oil prices, which have historically exhibited significant volatility. In the past year bunker prices have risen significantly, which has impacted our results of operations. Crude oil prices are influenced by a host of economic and geopolitical factors that are beyond ZIM’s control, particularly economic developments in emerging markets such as China and India, global terrorism, political instability and tensions in North Africa and the Middle East, environmental regulations, fracking, and the long-term increase in global demand for oil.
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Increases in bunker prices could have a material adverse effect on ZIM’s business, financial condition, results of operations and liquidity. Historically, and in line with industry practice, from time to time ZIM has imposed surcharges over the base freight rate ZIM charges to its customers in part to minimize its exposure to certain market-related risks, including bunker price adjustments. The new regulations introduced by the International Maritime Organization, or IMO, expected to come into effect in 2020 are expected to result in an increase in bunker costs. For more information on such regulations see “—ZIM is subject to the IMO’s environmental regulations and failure to comply with such regulations could have a material adverse effect on ZIM’s business.” However, there can be no assurance that ZIM will be successful in passing on future price increases, as a result of the 2020 regulations or otherwise, to customers in a timely manner, either for the full amount or at all.
ZIM’s bunker consumption is affected by various factors, including the number of vessels being deployed,employed, vessel size and capacity pro forma(and therefore bunker consumption increases with vessel size), speed (with consumption increasing dramatically as speed increases), vessel efficiency, the weight of the cargo being transported, port efficiency and sea conditions. ZIM has implemented various optimization strategies designed to reduce bunker consumption, including operating vessels in “super slow steaming” mode and “turbocharger cut-out” mode, trim optimization, hull and propeller polishing and sailing rout optimization. Additionally, ZIM manages part of its exposure to bunker price fluctuations by entering into hedging arrangements. ZIM’s optimization strategies and hedging program may not be successful in mitigating higher bunker costs, and any price protection provided by hedging may be limited due to market conditions, such as choice of hedging instruments, and the fact that only a portion of ZIM’s exposure is hedged. There can be no assurance that ZIM’s hedging arrangements will be cost-effective, will provide sufficient protection, if any, against rises in bunker prices or that the counterparties will be able to perform under ZIM’s hedging arrangements.
ZIM’s operations are exposed to the risk of increased trade protectionism, particularly with IMO sulfur emissions regulations expectedregards to come into effect in 2020, ZIMChina as a significant portion of ZIM’s business originates from China. China’s import and export of goods may be required to use fuel oil which is more costly than that which it currently uses to comply withaffected by trade protectionism, specifically the regulations.
The U.S. administration has advocated greater restrictions on trade generally and revisesignificant increases on tariffs on certain covenants to which ZIM was subject.goods imported into the United States, particularly from China and has taken steps toward restricting trade in certain goods. The covenants which had been waived for 2017 are applicable beginningU.S. has imposed around $500 billion worth of tariffs on Chinese imports in March 2018.
Such trade escalations have had, and may continue to comply with its covenants, ZIMhave, an adverse effect on manufacturing levels, trade levels and specifically, may have to take disadvantageous actions, such as (i) reducing financingcause an increase in the futurecost of goods exported from Asia Pacific, the length of time required to deliver goods from the region and the risks associated with exporting goods from the region. Such increases may also affect the quantity of goods to be shipped, shipping time schedules, voyage costs and other associated costs. They could also result in an increased number of vessels returning from China with less than their full capacity being met. These restrictions may encourage local production over foreign trade which may, in turn, affect the demand for investments, acquisitions or general corporate purposes or (ii) dedicating a high level of ZIM’s cash flow from operationsmaritime shipping. Such restrictions, if they continue to the payment of principal and interest on indebtedness. As a result, the ability of ZIM’s business to withstand competitive pressures and to react to changesbe implemented in the container shipping industry could be impaired. If ZIM is unable to comply with its covenants or meet debt service obligations or does not pursue any of these alternativessame manner, may affect the global demand for ZIM’s services and is unable to obtain waivers from the relevant creditors, a breach of any of its debt instruments and/or covenants could result in a default under the relevant debt instruments. Upon the occurrence of such an event of default, the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable and, in the case of credit facility lenders, terminate all commitments to extend further credit. If the lenders accelerate the repayment of the relevant borrowings, ZIM may not have sufficient assets to repay any outstanding indebtedness. Furthermore, a default or the acceleration of any obligation under a particular debt instrument may cause a default under other material debt or permit the holders of such debt to accelerate repayment of their obligations pursuant to “cross default” or “cross acceleration” provisions, which could have a material adverse effect on ZIM’s business, financial condition and liquidity. For additional information, see “Item 5.B Liquidity and Capital Resources—ZIM’s Liquidity and Capital Resources.”
A decrease in the level of China’s import or export of goods could have a material adverse effect on ZIM’s business.
A significant portion of ZIM’s business originates from China, and ZIM therefore depends on the level of imports and exports to and from China. As China exports considerably more goods than it imports, any reduction in or hindrance to China-based exports, whether due to decreased demand from the rest of the world, an economic slowdown in China, increased tariffs or other factors, could have a material adverse effect on ZIM’s business. For instance, the Chinese government has recently implemented economic policies aimed at increasing domestic consumption of Chinese-made goods. This may have the effect of reducing the supply of goods available for export and may, in turn, result in decreased demand for cargo shipping. In recent years, China has experienced an increasing level of economic autonomy and a gradual shift toward a “market economy” and enterprise reform. However, many of the reforms implemented, particularly some limited price reforms, are unprecedented or experimental and may be subject to revision, change or abolition. The level of imports to and exports from China could be adversely affected by changes to these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese or other governments. In recent years, China has experienced slower GDP growth rates than in previous years, which affected levels of imports to and exports from China. In response to the recent slowdown in China’s economic growth, China may implement additional trade barriers to protect their domestic industries against foreign imports, which may depress the global demand for shipping services.
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Furthermore, China’s import and export of goods may also be affected by trade protectionism and local production over foreign trade, which may affect the demand for maritime shipping, particularly between the United States and China. For instance, in March 2018, the U.S. President directed the U.S.See “—Greater restrictions on global trade, representative to impose tariffs of approximately $50 billion of products originating inespecially imposed on or by China, file a case against China with the World Trade Organization and also proposed to limit Chinese inbound investment into the United States. The Chinese government has announced that it intends to retaliate against the imposition of these sanctions through imposition of its own tariffs on certain imports from the United States. Such policies, if implemented, may affect the global demand for ZIM's services.
Changes in laws and regulations, including with regard to tax matters, and their implementation by local authorities could also affect ZIM’s vessels calling on Chinese ports and could have a material adverse effect on its business, financial condition and results of operations.
Israel holds a Special State Share in ZIM, which imposes certain restrictions on ZIM’s operations and our equity interest in ZIM.
The State of Israel holds a special share in ZIM, or Special State Share, which imposes certain limitations on the activities of ZIM that may negatively affect ZIM’s business and results of its operations. The Special State Share, and the permit which accompanies it, also imposes transferability restrictions on our equity interest in ZIM. Furthermore, although there are no contractual restrictions on any sales of our shares by our controlling shareholders, if Idan Ofer’s ownership interest in Kenon is less than 36%, or Idan Ofer ceases to be the controlling shareholder, or sole controlling shareholder of Kenon, then Kenon’s rights with respect to its shares in ZIM (e.g., Kenon’s right to vote and receive dividends in respect of its ZIM shares) will be limited to the rights applicable to an ownership of 24% of ZIM, until or unless the State of Israel provides its consent, or does not object to, this decrease in Idan Ofer’s ownership or “control” (as defined in the State of Israel consent received by IC in connection with the spin-off). The State of Israel may also revoke Kenon’s permit if there is a material change in the facts upon which the State of Israel’s consent was based, upon a breach of the provisions of the Special State Share by Kenon, Mr. Ofer, or ZIM, or if the cancellation of the provisions of the Special State Share with respect to a person holding shares in ZIM contrary to the Special State Share’s provisions apply (without limitation). For further information on the Special State Share, see “Item 4.B Business Overview—Our Businesses—ZIM—ZIM’s Special State Share.”
ZIM faces risks as a result of its status as an Israeli corporation.
ZIM is incorporated and its headquarters is located in Israel, and the majority of its key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect ZIM’s business and existing relationships with certain foreign corporations, as well as affect the willingness of potential partners to enter into business arrangements with ZIM. Numerous countries, corporations and organizations limit their business activities in Israel and their business ties with Israeli-based companies. ZIM’s status as an Israeli company has limited, and may continue to limit, its ability to call on certain ports and therefore has limited, and may continue to limit, its ability to enter into alliances or operational partnerships with certain shipping companies, which has historically adversely affected its operations and its ability to compete effectively within certain trades. In addition, ZIM’s status as an Israeli company has limited, and may continue to limit, its ability to enter into alliances that include certain carriers who are not willing to cooperate with Israeli companies.
Since the establishment of the State of Israel, in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. In recent years, these have included hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza Strip, both of which resulted in rockets being fired into Israel, causing casualties and disrupting economic activities. Recent political uprisings, social unrest and violence in the Middle East and North Africa, including Israel’s neighbors Egypt and Syria, are affecting the political stability of those countries. This instability has raised concerns regarding security in the region and the potential for armed conflict. Armed conflicts or hostilities in Israel or neighboring countries could cause disruptions in ZIM’s operations, including significant employee absences, failure of its information technology systems and cyber-attacks, which may lead to the shutdown of its headquarters in Israel. ZIM’s commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages caused by terrorist attacks or acts of war, ZIM cannot assure that this government coverage will be maintained, or if maintained, will be sufficient to fully compensate us for damages incurred. Any losses or damages incurred by us could have a material adverse effect on its business. Any armed conflict involving Israel could adversely affect ZIM’s business and results and operations.
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ZIM charters a substantial portionsubstantially all of its fleet and the cost associated with chartering such vessels is unpredictable.
ZIM charters a substantial portionsubstantially all of the vessels in its fleet. As of December 31, 2017,2018, of the 8173 vessels through which ZIM provides transport services globally, 7470 are chartered (including 5 vessels accounted under financial leases and 4 vessels accounted under sale and leaseback refinancing agreements), which represents a percentage of chartered vessels that is significantly higher than the industry average. A rise in charter hire rates may adversely affect ZIM’s results of operations. ZIM is party to a number of long-term charter agreements. As of December 31, 2017,2018, approximately 34%81% of ZIM’s chartered vessels (in terms of capacity) are chartered under operational leases for terms exceeding one year. As a result, ZIM may be unable to take full advantage of short-term reductions in charter hire rates. In addition, some of ZIM’s long-term charter agreements contain rate adjustment mechanisms pursuant to which charter hire rates will increase if the market rate increases, so ZIM may not benefit from such long-term charter agreements in the event of an increase in market charter hire rates. Furthermore, if ZIM is unable in the future to charter vessels of the type and size needed to serve its customers efficiently on terms that are favorable to ZIM, if at all, this may have a material adverse effect of on its business, financial condition, results of operations and liquidity.
ZIM relies mainly on the cash flow generated from its results of operation, and accordingly its financial condition, are significantly dependent on conditions in the container shipping market, which are for the most part beyond ZIM's control. For example, ZIM's results in any given period are substantially impacted by supply and demand in container shipping market, which impacts freight rates, bunker prices, and the prices it pays under the charters for its vessels. ZIM does not own any ports or similar ancillary assets.
Due to ZIM's lack of diversification, an adverse development in the container shipping industry would have a significantly greater impact on its financial condition and results of operations than if we maintained more diverse assets or lines of business. An adverse development could also impair ZIM's ability to service debt.
In addition, ZIM charters substantially all of its vessels, and a significant number of its charters will expire within the next 5 years. ZIM will be subject to market conditions for charter rates prevailing at the time new charters are entered into. If ZIM is unable to enter into new charters for vessels as existing charters expire on favorable terms this will impact its business and results of operations.
The trend towards increasing vessel sizes has and may continue to adversely affect ZIM.
Container shipping companies have been incorporating, and are expected to continue to incorporate, larger, more economical vessels into their operating fleets. The cost per TEU transported on large vessels is less than the cost per TEU for smaller vessels (assuming the vessels are operating at full capacity), as, among other reasons, larger vessels provide increased capacity and fuel efficiency. As a result, cargo shippers are encouraged to deploy large vessels, particularly within the more competitive trades. According to Alphaliner, vessels in excess of 18,000 TEUs and above represented approximately 47%36% of the current global order book based on TEU capacity as of December 2017.February 2019. Furthermore, a significant introduction of large vessels, including very large vessels in excess of 18,000 TEUs, into any trade zone will enable the transfer of existing, large vessels to other shipping lines on which smaller vessels typically operate. Such transfers, which are referred to as “fleet cascading,” may in turn generate similar effects in the other, smaller trade zones in which ZIM operates. ZIM does not currently have agreements in place to procure or charter large container vessels, and theThe continued deployment of larger vessels by ZIM’s competitors will adversely impact ZIM’s competitiveness if ZIM is not able to acquire, charter or obtain financing for suchlarge container vessels on attractive terms or at all. This risk iscan be further exacerbated due to ZIM’s inability to participate in certain alliances and thereby access lagerlarger vessels for deployment.deployment as well as the limitations on vessel size and ability to own vessels imposed on ZIM by the covenants in its debt facilities. Even if ZIM is able to acquire or charter larger vessels, ZIM may be unable to achieve utilization rates necessary to operate such vessels profitably.
In order to maintain and/or increase their competitiveness ZIM’s competitors are gradually updating their fleet to capacities of 13,000-14,000 TEUs in the trans-Pacific trade zone. The introduction of such vessels within this trade zone has required shipping liners seeking to remain competitive, including ZIM, to alter their fleet composition and incorporate larger vessels into their Panama Canal operations.
However, ZIM currently does not have any agreements in place to procure or charter-in large container vessels with capacities of 13,000-14,000 TEUs. As large container vessels continue to be delivered into the shipping industry, ZIM’s competitors are expected to further upgrade their fleet to capacities of 13,000-14,000 TEUs in the trans-Pacific trade. As a result, a significant portion of ZIM’s vessels may become increasingly less efficient to operate via the Panama Canal.
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ZIM is subject to the IMO’s “2020” environmental regulations and failure to comply with such regulations could have a material adverse effect on ZIM’s business.
In October 2016, in an attempt to reduce marine pollution and emissions, the IMO announced that it was proceeding with a requirement for 0.5% mass by mass sulfur content in marine fuel (down from current levels of 3.5%) for all marine carriers, currently expected to become effective in January 2020 (known as the “Sulphur Cap” regulation). In April 2018, the IMO’s Marine Environment Protection Committee, or MEPC, further prohibited the carriage of non-compliant fuel after 2020, unless a ship is fitted with an equivalent arrangement to reduce emissions, such as a scrubber. Therefore, it is expected that by 2020 ships will be required to remove sulfur from emissions through the use of emission control equipment, or purchase marine fuel with 0.5% sulfur content, which may see increased demand and higher prices for such bunker due to supply constraints. The regulation could also affect the supply of vessels in the market. Compliance with this regulation by installing pollution control equipment (i.e., scrubbers), using lower sulfur fuel or deploying new types of vessels using liquefied natural gas (LNG) is expected to result in significant costs for carriers and container shipping companies, including ZIM, may seek to implement a surcharge in order to compensate for this cost impact but there is no assurance that any such surcharge will mitigate these increased costs in full or at all.
ZIM is subject to environmental regulationand other regulations and failure to comply with such regulation could have a material adverse effect on ZIM’s business.
ZIM is subject to many legal provisions relating to the protection of the environment, including the emissions of hazardous substances, sulfur oxides, or SOx, and nitrogen oxides, or NOx, and the use of low-sulfur fuel or shore power voltage, all of which may be subject to ongoing developments and amendments. For example, ZIM is subject to the International Convention for the Prevention of Pollution from Ships (including designation of Emission Control Areas thereunder), the International Convention for the Control and Management of Ships Ballast Water & Sediments, the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea of 1996, the Oil Pollution Act of 1990, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Water Act, and National Invasive Species Act, among others. Compliance with such laws, regulations and standards, where applicable, may require the installation of costly equipment or operational changes. ZIM may also incur additional compliance costs, and any such costs could have a material adverse effect on its business. If ZIM fails to comply with any of the environmental regulations applicable, ZIM could be exposed to significant environmental liability damages, criminal charges, and substantial harm to its operations and reputation. Additionally, environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject ZIM to liability without regard to whether ZIM is negligent or at fault.
The IMO has imposed updated guidelines for ballast water management systems specifying the maximum amount of viable organisms allowed to be discharged from a vessel's ballast water. Depending on the date of the IOPP renewal survey, existing vessels must comply with the updated standard on or after September 8, 2019. For most vessels, compliance with the standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms. Costs of compliance may be substantial and adversely affect ZIM's profitability.
In addition, ZIM may be required to incur significant costs in connection with modifications to environmental regulations applicable to shipping companies. For example, risks associated with the IMO’s 2020 sulfur emission regulations see “—ZIM will be requiredis subject to the IMO 2020 environmental regulation and failure to comply with IMO regulations relating to sulfur emissions which are expected to come intosuch regulation could have a material adverse effect in 2020. In order to comply with these regulations, ZIM will be required to either use fuel oil which is more costly than that which it currently uses or modify its vessels by installing scrubbers, either of which may entail significant costs.on ZIM’s business.”
Environmental requirements may also require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of or more costly insurance coverage for safety and environmental matters or result in ZIM’s denial of access to certain jurisdictional waters or ports, or its detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, ZIM could incur material liabilities, including cleanup obligations, natural resource damages, personal injury and property damage claims in the event there is a release of petroleum or other hazardous materials from its vessels, or otherwise, in connection with its operations. Violations of, or liabilities under, safety and environmental requirements can result in substantial penalties, fines and other sanctions, including in certain instances, seizure or detention of its vessels and events of this nature could have a material adverse effect on ZIM’s business, reputation, financial condition and results of operations.
As a company with global operations, ZIM is also subject to anti-corruption and anti-bribery laws in Israel and other countries. The risks related to this are described in more detail under “—We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws outside of the United States.”
Finally, ZIM is subject to the EU’s General Data Protection Regulation (2016/679), or the GDPR, which relates to the collection, use, retention, security, processing and transfer of personally identifiable information about ZIM’s customers and employees in the countries where ZIM operates. The EU data protection regime expands the scope of the EU data protection law to all companies processing data of EEA individuals, imposes a more stringent data protection compliance regime, including the introduction of administrative fines of up to the greater of 4% of worldwide turnover or €20 million (as well as the right to compensation for financial or non-financial damages claimed by any individuals), and includes new data subject rights such as the “portability” of personal data. Any failure, by ZIM to comply with the GDPR where applicable could result in proceedings or actions against ZIM which could subject ZIM to significant fines, penalties, judgments and negative publicity.
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The shipping industry is subject to extensive government regulation and standards, international treaties and trade prohibitions and sanctions.
The shipping industry is subject to extensive regulation that changes from time to time and that applies in the jurisdictions in which shipping companies are incorporated, the jurisdictions in which vessels are registered (flag states), the jurisdictions governing the ports at which vessels call, as well as regulations by virtue of international treaties and membership in international associations. As a global container shipping company, ZIM is subject to a wide variety of international, national and local laws, regulations and agreements. As a result, ZIM is subject to extensive government regulation and standards, customs inspections and security checks, international treaties and trade prohibitions and sanctions, including laws and regulations in each of the jurisdictions in which we operate, including those of the State of Israel, the U.S. Federal Maritime Commission, the International Safety Management Code, or the ISM Code, and the European Union. Any violation of such laws, regulations, treaties and/or prohibitions could have a material adverse effect on ZIM’s business, financial condition, results of operations and liquidity and may also result in the revocation or non-renewal of its “time-limited” licenses.
Furthermore, the U.S. Department of the Treasury’s Office of Foreign Assets Control administers certain laws and regulations that impose restrictions upon U.S. companies and persons and, in some contexts, foreign entities and persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of such sanctions laws and regulations. Similar sanctions are imposed by the European Union and the United Nations. Under economic and trading sanction laws, governments may seek to impose modifications to business practices, and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions.
Additionally, ZIM is subject to competition and antitrust regulations in each of the countries where ZIM operates. In most of the jurisdictions in which ZIM operates, operational partnerships among shipping companies are exempted from the application of antitrust laws, subject to the fulfillment of certain exemption requirements. Recently, however, there has been a trend within the international community to limit such exemptions and it is difficult to predict whether existing exemptions or their renewal will be affected in the future. ZIM is party to numerous operational partnerships and view these agreements as competitive advantages in response to the market concentration in the industry as a result of mergers and global alliances. An amendment to or a revocation of any of the exemptions for operational partnerships that ZIM rely on could negatively affect ZIM’s business and results of operations.
Finally, Commission Regulation (EC) No 906/2009, or the Block Exemption Regulation, exempts certain cooperation agreements (such as operational cooperation agreements VSA (vessel sharing agreements), SCA (slot chartering agreements and slot swap agreements) in the liner shipping sector from the prohibition on anti-competitive agreements contained at Article 101 of the Treaty on the Functioning of the European Union, or TFEU. If the Block Exemption Regulation is not extended or its terms are amended this could have an adverse effect on the shipping industry and limit the ability of ZIM and other shipping companies to enter into cooperation arrangements, therefore adversely affecting ZIM’s business, financial condition and results of operations.
There are numerous risks related to the operation of any sailing vessel, as well as the carrying of cargo, and ZIM’s inability to successfully respond to such risks could have a material adverse effect on ZIM.
There are numerous risks related to the operation of sailing vessels, including dangers associated with potentialfailure or unauthorized access to information systems, port closures, marine disasters, fire, mechanical failures, collisions, lost or damaged cargo, contraband smugglers, poor weather conditions, the content of the load, including hazardous cargo, exceptional load, meeting deadlines, risks of documentation, maintenance and the quality of fuels, piracy, shortages of containers, shortages of qualified sea and shoreside personnel and maritime arrests arising from unsatisfied debts, claims or damages. The occurrence of any of the aforementioned risks could have a material adverse effect on ZIM’s business, financial condition, results of operations or liquidity and ZIM may not be adequately insured against any of these risks.
Risks Related to Primus
Primus requires additional financing for its operations.
The implementation of Primus’ business plan requires additional capital to enable Primus to continue to develop its commercial operations. Primus expects such funding to be provided by us either through capital contributions or shareholder loans, or to the extent Primus pursues projects, through contributions from strategic partners or debt financing. There is no certainty that additional financing will be provided to Primus. Any lack of, or delay in securing, such financing may delay, or prevent completely, Primus’ ability to continue to develop its commercial operations, which may result in Primus’ ultimate sale, liquidation or dissolution.
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Primus’ STG+ process may not become commercially viable.
Demand for and industry acceptance of Primus’ technologies is subject to a high level of uncertainty. If potential customers fail to accept Primus’ technologies, if acceptance develops slower than anticipated by Primus, or if Primus’ technologies prove uneconomical or unattractive, this could have a material adverse effect on Primus’ business, financial condition, results of operations or liquidity.
Primus is an early stage company with a limited operating history.
Primus is an early stage company. The risks and uncertainties associated with the operation of an early stage company include a potential inability to:
| · | retain and recruit key personnel; |
| · | adequately protect its intellectual property; |
| · | secure necessary capital; |
| · | successfully negotiate with government agencies, vendors, customers, feedstock suppliers or other third parties; |
| · | successfully manage its existing, or enter into new, strategic relationships and partnerships; |
| · | commence projects on the current, or any revised, schedule in compliance with the budget; |
| · | effectively manage rapid growth in personnel or operations; and |
| · | develop technology, products or processes that complement existing business strategies or address changing market conditions. |
If Primus is unable to adequately address any of these risks, this could have a material adverse effect on Primus’ business, financial condition, results of operations or liquidity.
Primus’ operations are highly dependent upon commodity prices, particularly natural gas, methanolgasoline and gasoline.methanol.
Primus’ operations depend substantially on the prices of various commodities, including natural gas, gasoline, crude oil, methanol and others.others, and in particular on the spread between natural gas and certain refined products. The prices of certain of these commodities are volatile, and this volatility may affect Primus’ ability to market its technology and processes.
The liquids that Primus produces using its STG+ process (gasoline, methanol and stream miscible with crude) will compete in markets with refined petroleum products. Because natural gas, or syngas derived from natural gas, will be primarily used as the feedstock in Primus’ STG+ process, an increase in natural gas prices relative to prices for refined petroleum products, or a decrease in prices for refined petroleum products, could adversely affect demand for Primus’ technology. The price and availability of natural gas and refined products may be affected by numerous factors, including the level of consumer product demand, weather conditions, the availability of water for fracking, domestic and foreign government regulation (including regulation of fracking), the actions of the Organization of Petroleum Exporting Countries, political conditions in oil and natural gas producing countries, the supply of domestic and foreign crude oil and natural gas, the location of any plants developed by Primus vis-á-vis natural gas reserves and pipelines, the capacities of such pipelines, fluctuations in seasonal demand, governmental regulations, the price and availability of alternative fuels and overall economic conditions. Primus cannot predict future demand and prices for natural gas or refined products, and a relative increasecollapse in the price ofspread between natural gas and certain refined products could have a material adverse effect on its business, financial condition, results of operations or liquidity.
Primus’ STG+ process may not generate fuel that satisfies required specifications.
The commercialization of Primus’ technology contemplates the production of liquids that satisfy certain specifications. If any of the liquids produced by Primus’ STG+ process do not satisfy required specifications, Primus may be unable to market and commercialize its proprietary liquids technology, the STG+ process. Any change in such specifications, could increase Primus’ expenses or delay the commercialization or viability of Primus’ gas monetization technology, which could have a material adverse effect on Primus’ business, financial condition, results of operations or liquidity.
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Primus’ success depends, in part, upon its ability to protect its intellectual property.
Primus has independently developed, patented and owns numerous processes related to liquids synthesis, gasoline composition, and incremental improvements and customizations. If Primus fails to protect its intellectual property rights adequately, its competitors might gain access to its technology, and its competitive advantage, brand or business may be adversely affected.
Primus relies on trade secret and patent laws, confidentiality procedures and contractual provisions to protect its proprietary methods and processes. Primus currently holds several patents and has pending patent applications in the U.S. Valid patents may not be issued from Primus’ pending applications, and the claims allowed on any issued patents may not be sufficiently broad to protect Primus’ STG+ process. Any patents currently held by Primus or that may be issued to Primus in the future may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide Primus with adequate defensive protection or competitive advantages. Additionally, the process of applying for patent protection is expensive and time-consuming, and Primus may not be able to complete all necessary or desirable patent applications at a reasonable cost or in a timely manner.
Policing unauthorized use of technology may prove difficult for Primus as the laws of some foreign countries may not be as protective of intellectual property rights as those of the United States, and mechanisms for the enforcement of Primus’ proprietary rights in such countries may be inadequate. From time to time, Primus may need to initiate legal action to enforce its intellectual property rights, to protect its trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend itself against claims of infringement. Such litigation could result in substantial costs and the diversion of limited resources and could negatively affect Primus’ business, reputation or brand. If Primus is unable to protect its proprietary rights, it may lose its expected competitive advantage which could have a material adverse effect on its business, financial condition, results of operations or liquidity.
Risks Related to Our Spin-Off
The potential indemnification of liabilities to IC pursuant to the Separation and Distribution Agreement may require us to divert cash to IC to satisfy our indemnification obligations.
We entered into a Sales, Separation and Distribution Agreement with IC, or the Separation and Distribution Agreement, which provides for, among other things, indemnification obligations designed to make us financially responsible for liabilities incurred in connection with our businesses, and as otherwise allocated to us in the Separation and Distribution Agreement. If we are required to indemnify IC under the circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities, which could have a material adverse effect on our business, financial condition, results of operations or liquidity.
There can be no assurance that IC’s indemnification of certain of our liabilities will be sufficient to insure us against the full amount of those liabilities, or that IC’s ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the Separation and Distribution Agreement, IC has agreed to indemnify us for certain liabilities retained by it (which includes certain specified pending legal matters). However, third parties could seek to hold us responsible for any of the liabilities that IC has agreed to retain, and there can be no assurance that the indemnity from IC will be sufficient to protect us against the full amount, or any, of such liabilities, or that IC will be able to satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from IC any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Additionally, IC’s insurers may deny coverage to us for liabilities associated with occurrences prior to the spin-off. Even if we ultimately succeed in recovering from such insurance providers, we may be required to temporarily bear such loss of coverage. If IC is unable to satisfy its indemnification obligations or if insurers deny coverage, the underlying liabilities could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Risks Related to Our Ordinary Shares
Our ordinary shares are traded on more than one stock exchange and this may result in price variations between the markets.
Our ordinary shares are listed on each of the NYSE and the TASE. Trading in our ordinary shares therefore takes place in different currencies (U.S. Dollars on the NYSE and New Israeli Shekels on the TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ as a result of these, or other, factors. Any decrease in the price of our ordinary shares on either of these markets could also cause a decrease in the trading prices of our ordinary shares on the other market.
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A significant portion of our outstanding ordinary shares may be sold into the public market, which could cause the market price of our ordinary shares to drop significantly, even if our business is doing well.
A significant portion of our shares are held by Ansonia, which holds approximately 58% of our shares. If Ansonia sells, or indicates an intention to sell, substantial amounts of our ordinary shares in the public market, the trading price of our ordinary shares could decline. The perception that any such sales may occur, including the entry of any of Ansonia into programmed selling plans, could have a material adverse effect on the trading price of our ordinary shares and/or could impair the ability of any of our businesses to raise capital.
Control by principal shareholders could adversely affect our other shareholders.
Ansonia beneficially owns approximately 58% of our outstanding ordinary shares and voting power. Ansonia therefore has a continuing ability to control, or exert a significant influence over, our board of directors, and will continue to have significant influence over our affairs for the foreseeable future, including with respect to the election of directors, the consummation of significant corporate transactions, such as an amendment of our constitution, a merger or other sale of our company or our assets, and all matters requiring shareholder approval. In certain circumstances, Ansonia’s interests as a principal shareholder may conflict with the interests of our other shareholders and Ansonia’s ability to exercise control, or exert significant influence, over us may have the effect of causing, delaying, or preventing changes or transactions that our other shareholders may or may not deem to be in their best interests.
We may not have sufficient distributable profits to pay dividends or make other distributions.
Under Singapore law and our constitution, dividends, whether in cash or in specie, must be paid out of our profits available for distribution. The availability of distributable profits is assessed on the basis of Kenon’s standalone unconsolidated accounts (which are based upon the Singapore Financial Reporting Standards, or the SFRS). There is no assurance that, on such basis, we will not incur losses, that we will become profitable, or that we will have sufficient distributable income that might be distributed to our shareholders as a dividend or other distribution in the foreseeable future. Therefore, we may be unable to pay dividends to our shareholders unless and until we have generated sufficient distributable reserves. Accordingly, it may not be legally permissible for us to pay dividends to our shareholders. As a result, if we declare dividends with respect to our ordinary shares, a holder of our ordinary shares will only realize income from an investment in our ordinary shares if there is an increase in the market price of our ordinary shares. Such potential increase is uncertain and unpredictable.
Under Singapore law, it is possible to effect either a court-free or court-approved capital reduction exercise to return cash and/or assets to our shareholders. Further, the completion of a court-free capital reduction exercise will depend on whether our directors are comfortable executing a solvency statement attesting to our solvency, as well as whether there are any other creditor objections raised (in the event that we have creditors other than IC). We have completed capital reduction exercises in connection with the distribution of our Tower shares and the cash distribution in March 2018, but there is no assurance that we will be able to complete further capital reductions in the future.
Any dividend payments on our ordinary shares would be declared in U.S. Dollars, and any shareholder whose principal currency is not the U.S. Dollar would be subject to exchange rate fluctuations.
The ordinary shares are, and any cash dividends or other distributions to be declared in respect of them, if any, will be denominated in U.S. Dollars. For example, in March 2018, we distributed a$765 million in cash dividend of $665 million, representing approximately $12.35 per share, to our shareholders. Although a significant percentage of our shareholders hold their shares through the TASE, the dividend was denominated in U.S. Dollars. Shareholders whose principal currency is not the U.S. Dollar will be exposed to foreign currency exchange rate risk. Any depreciation of the U.S. Dollar in relation to such foreign currency will reduce the value of such shareholders’ ordinary shares and any appreciation of the U.S. Dollar will increase the value in foreign currency terms. In addition, we will not offer our shareholders the option to elect to receive dividends, if any, in any other currency. Consequently, our shareholders may be required to arrange their own foreign currency exchange, either through a brokerage house or otherwise, which could incur additional commissions or expenses.
We are a “foreign private issuer” under U.S. securities laws and, as a result, are subject to disclosure obligations that are different from those applicable to U.S. domestic registrants listed on the NYSE.
We are incorporated under the laws of Singapore and, as such, will be considered a “foreign private issuer” under U.S. securities laws. Although we will be subject to the reporting requirements of the Exchange Act, the periodic and event-based disclosure required of foreign private issuers under the Exchange Act is different from the periodic disclosure required of U.S. domestic registrants. Therefore, there may be less publicly available information about us than is regularly published by or about other public companies in the United States. We are also exempt from certain other sections of the Exchange Act that U.S. domestic registrants are otherwise subject to, including the requirement to provide our shareholders with information statements or proxy statements that comply with the Exchange Act. In addition, insiders and large shareholders of ours will beare exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act and willare not be obligated to file the reports required by Section 16 of the Exchange Act.
As a foreign private issuer, we have followed certain, and may follow, home country corporate governance practices instead of otherwise applicable SEC and NYSE corporate governance requirements, and this may result in less investor protection than that accorded to investors under rules applicable to domestic U.S. issuers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the NYSE’s rules for domestic U.S. issuers, provided that we disclose which requirements we are not following and describe the equivalent home country requirement. For example, foreign private issuers are permitted to follow home country practice with regard to director nomination procedures and the approval of compensation of officers.
In addition, we are not required to maintain a board comprised of a majority of independent directors and a fully independent nominating and corporate governance committee. We generally seek to apply the corporate governance rules of the NYSE that are applicable to U.S. domestic registrants that are not “controlled” companies. However, we do not fully comply such rules; for example, we do not have a fully independent nominating and corporate governance committee. We may, in the future, decide to rely on other foreign private issuer exemptions provided by the NYSE and follow home country corporate governance practices in lieu of complying with some or all of the NYSE’s requirements.
Following our home country governance practices, as opposed to complying with the requirements that are applicable to a U.S. domestic registrant, may provide less protection to you than is accorded to investors under the NYSE’s corporate governance rules. Therefore, any foreign private exemptions we avail ourselves of in the future may reduce the scope of information and protection to which you are otherwise entitled as an investor.
It may be difficult to enforce a judgment of U.S. courts for civil liabilities under U.S. federal securities laws against us, our directors or officers in Singapore.
We are incorporated under the laws of Singapore and certain of our officers and directors are or will be residents outside of the United States. Moreover, most of our assets are located outside of the United States. Although we are incorporated outside of the U.S., we have agreed to accept service of process in the United States through our agent designated for that specific purpose. Additionally, for so long as we are listed in the U.S. or in Israel, we have undertaken not to claim that we are not subject to any derivative/class action that may be filed against us in the U.S. or Israel, as applicable, solely on the basis that we are a Singapore company. However, since most of the assets owned by us are located outside of the United States, any judgment obtained in the United States against us may not be collectible within the United States.
Furthermore, there is no treaty between the United States and Singapore providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters, such that a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws, would, therefore, not be automatically enforceable in Singapore. Additionally, there is doubt whether a Singapore court may impose civil liability on us or our directors and officers who reside in Singapore in a suit brought in the Singapore courts against us or such persons with respect to a violation solely of the federal securities laws of the United States, unless the facts surrounding such a violation would constitute or give rise to a cause of action under Singapore law. We have undertaken not to oppose the enforcement in Singapore of judgments or decisions rendered in Israel or in the United States in a class action or derivative action to which Kenon is a party. Notwithstanding such undertakings, it may be difficult for investors to enforce against us, our directors or our officers in Singapore, judgments obtained in the United States which are predicated upon the civil liability provisions of the federal securities laws of the United States.
We are incorporated in Singapore and our shareholders may have greater difficulty in protecting their interests than they would as shareholders of a corporation incorporated in the United States.
Our corporate affairs are governed by our constitution and by the laws governing corporations incorporated in Singapore. The rights of our shareholders and the responsibilities of the members of our board of directors under Singapore law are different from those applicable to a corporation incorporated in the United States. Therefore, our public shareholders may have more difficulty in protecting their interest in connection with actions taken by our management or members of our board of directors than they would as shareholders of a corporation incorporated in the United States. For information on the differences between Singapore and Delaware corporation law, see “Item 10.B Constitution.”
Singapore corporate law may delay, deter or prevent a takeover of our company by a third-party, and as a result of a waiver from application of the Code, our shareholders may not have the benefit of the application of the Singapore Code on Take-Overs and Mergers, which could adversely affect the value of our ordinary shares.
The Singapore Code on Take-overs and Mergers and Sections 138, 139 and 140 of the Securities and Futures Act, Chapter 289 of Singapore contain certain provisions that may delay, deter or prevent a future takeover or change in control of our company for so long as we remain a public company with more than 50 shareholders and net tangible assets of $5 million or more. Any person acquiring an interest, whether by a series of transactions over a period of time or not, either on his own or together with parties acting in concert with such person, in 30% or more of our voting shares, or, if such person holds, either on his own or together with parties acting in concert with such person, between 30% and 50% (both inclusive) of our voting shares, and such person (or parties acting in concert with such person) acquires additional voting shares representing more than 1% of our voting shares in any six-month period, must, except with the consent of the Securities Industry Council of Singapore, extend a mandatory takeover offer for the remaining voting shares in accordance with the provisions of the Singapore Code on Take-overs and Mergers.
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In October 2014, the Securities Industry Council of Singapore waived the application of the Singapore Code on Take-overs and Mergers to the Company, subject to certain conditions. Pursuant to the waiver, for as long as Kenon is not listed on a securities exchange in Singapore, and except in the case of a tender offer (within the meaning of U.S. securities laws) where the offeror relies on a Tier 1 exemption to avoid full compliance with U.S. tender offer regulations, the Singapore Code on Take-overs and Mergers shall not apply to Kenon.
Accordingly, Kenon’s shareholders will not have the protection or otherwise benefit from the provisions of the Singapore Code on Take-overs and Mergers and the Securities and Futures Act to the extent that this waiver is available.
Our directors have general authority to allot and issue new shares on terms and conditions and with any preferences, rights or restrictions as may be determined by our board of directors in its sole discretion, which may dilute our existing shareholders. We may also issue securities that have rights and privileges that are more favorable than the rights and privileges accorded to our existing shareholders.
Under Singapore law, we may only allot and issue new shares with the prior approval of our shareholders in a general meeting. Other than with respect to the issuance of shares pursuant to awards made under our Share Incentive Plan 2014 or Share Option Plan 2014, and subject to the general authority to allot and issue new shares provided by our shareholders annually, the provisions of the Singapore Companies Act and our constitution, our board of directors may allot and issue new shares on terms and conditions and with the rights (including preferential voting rights) and restrictions as they may think fit to impose. Any such offering may be on a pre-emptive or non-pre-emptive basis. Subject to the prior approval of our shareholders for (i) the creation of new classes of shares and the (ii) granting to our directors of the authority to issue new shares with different or similar rights, additional shares may be issued carrying such preferred rights to share in our profits, losses and dividends or other distributions, any rights to receive assets upon our dissolution or liquidation and any redemption, conversion and exchange rights. At the annual general meeting of shareholders held in 2017,2018, or the 20172018 AGM, our shareholders granted the board of directors authority (effective until the conclusion of the annual general meeting of shareholders to be held in 2018,2019, or the 20182019 AGM, or the expiration of the period by which the 20182019 AGM is required to be held) to allot and issue ordinary shares and/or instruments that might or could require ordinary shares to be allotted and issued as authorized by our shareholders at the 20172018 AGM and shareholders will be asked to renew this authority at the 20182019 AGM. Ansonia, our significant shareholder, may use its ability to control to approve a grant of such authority to our board of directors, or exert influence over, our board of directors to cause us to issue additional ordinary shares, which would dilute existing holders of our ordinary shares, or to issue securities with rights and privileges that are more favorable than those of our ordinary shareholders. There are no statutory pre-emptive rights for new share issuances conferred upon our shareholders under the Companies Act, Chapter 50 of Singapore, or the Singapore Companies Act. Furthermore, any additional issuances of new shares by our directors could adversely impact the market price of our ordinary shares.
Risks Related to Taxation
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.
Based upon, among other things, the valuation of our assets and the composition of our income and assets, we do not believe we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our previous taxable year ended December 31, 2017.2018. However, the application of the PFIC rules is subject to uncertainty in several respects and a separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we cannot assure you that we will not be a PFIC for our current, or any future, taxable year. A non-U.S. corporation will be a PFIC for any taxable year if either (i) 75% or more of its gross income for such year is passive income or (ii) 50% or more of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. For this purpose, we will be treated as owning our proportionate share of the businesses and earning our proportionate share of the income of any other business in which we own, directly or indirectly, 25% or more (by value) of the stock. Because the value of our assets for purposes of the PFIC test will generally be determined in part by reference to the market price of our ordinary shares, fluctuations in the market price of the ordinary shares may cause us to become a PFIC. In addition, changes in the composition of our income or assets may cause us to become a PFIC. As a result, dispositions of operating companies could increase the risk that we become a PFIC. For instance, the sale of the Inkia Business and the investment in Qoros by the NewMajority Shareholder in Qoros Investorin 2018 (which reduced our equity interest in Qoros to 24%) each may increase the value of our assets that produce, or are held for the production of, passive income and/or our passive income and result in us becoming a PFIC for our current, and any future, taxable year. Furthermore, if the sale of half of our remaining interest in Qoros to the Majority Shareholder in Qoros is completed (which would reduce our equity interest in Qoros to 12%), it may increase the value of our assets that produce, or are held for the production of, passive income and/or our passive income and result in us becoming a PFIC for our current, and any future, taxable year. If we are a PFIC for any taxable year during which a U.S. Holder (as defined below) holds an ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. For further information on such U.S. tax implications, see “Item 10.E Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”
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Tax regulations and examinations may have a material effect on us and we may be subject to challenges by tax authorities.
We operate in a number of countries and are therefore regularly examined by and remain subject to numerous tax regulations. Changes in our global mix of earnings could affect our effective tax rate. Furthermore, changes in tax laws could result in higher tax-related expenses and payments. Legislative changes in any of the countries in which our businesses operate could materially impact our tax receivables and liabilities as well as deferred tax assets and deferred tax liabilities. Additionally, the uncertain tax environment in some regions in which our businesses operate could limit our ability to enforce our rights. As a holding company with globally operating businesses, we have established businesses in countries subject to complex tax rules, which may be interpreted in a variety of ways and could affect our effective tax rate. Future interpretations or developments of tax regimes or a higher than anticipated effective tax rate could have a material adverse effect on our tax liability, return on investments and business operations.
In addition, we and our businesses operate in, are incorporated in and are tax residents of various jurisdictions. The tax authorities in the various jurisdictions in which we and our businesses operate, or are incorporated, may disagree with and challenge our assessments of our transactions (including any sales or distributions), tax position, deductions, exemptions, where we or our businesses are tax resident, or other matters. If we, or our businesses, are unsuccessful in responding to any such challenge from a tax authority, we, or our businesses, may be unable to proceed with certain transactions, be required to pay additional taxes, interest, fines or penalties, and we, or our businesses, may be subject to taxes for the same business in more than one jurisdiction or may also be subject to higher tax rates, withholding or other taxes. Even if we, or our businesses, are successful, responding to such challenges may be expensive, consume time and other resources, or divert management’s time and focus from our operations or businesses or from the operations of our businesses. Therefore, a challenge as to our, or our businesses’, tax position or status or transactions, even if unsuccessful, may have a material adverse effect on our business, financial condition, results of operations or liquidity or the business, financial condition, results of operations or liquidity of our businesses.
Our shareholders may be subject to non-U.S. taxes and return filing requirements as a result of owning our ordinary shares.
Based upon our expected method of operation and the ownership of our businesses following the spin-off, we do not expect any shareholder, solely as a result of owning our ordinary shares, to be subject to any additional taxes or additional tax return filing requirements in any jurisdiction in which we, or any of our businesses, conduct activities or own property. However, there can be no assurance that our shareholders, solely as a result of owning our ordinary shares, will not be subject to certain taxes, including non-U.S. taxes, imposed by the various jurisdictions in which we and our businesses do business or own property now or in the future, even if our shareholders do not reside in any of these jurisdictions. Consequently, our shareholders may also be required to file non-U.S. tax returns in some or all of these jurisdictions. Further, our shareholders may also be subject to penalties for failure to comply with these requirements. It is the responsibility of each shareholder to file each of the U.S. federal, state and local, as well as non-U.S., tax returns that may be required of such shareholder.
A. History and Development of the Company
We were formed in 2014 to be the holding company of certain companies that were owned (in whole, or in part) by IC in connection with our spin-off from IC in January 2015. We currently own the following subsidiaries and associated companies:
| · | a 76% interest in OPC,an owner, developer and operator of power generation facilities in the Israeli power market; |
| · | a 24% interest in Qoros, a China-based automotive |
| · | a 32% interest in ZIM, a large provider of global container shipping services; and |
| · | a 91% interest in Primus, an innovative developer and owner of a proprietary natural gas-to-liquids technology process. |
In connection with our spin-off from IC, we also held a 29% interest in Tower, a NASDAQ- and TASE–listed specialty foundry semiconductor manufacturer. In July 2015, we completed a pro-rata distribution in specie of substantially all of our interest in Tower. In 2016, we sold our remaining interest in Tower.
In December 2017, our wholly-owned subsidiary Inkia sold its power generation and distribution businesses in Latin America and the Caribbean, or the Inkia Business, to an entity controlled by I Squared Capital, an infrastructure private equity firm. For further information on the sale, see “Item 4.B Business Overview—Discontinued Operations—Inkia Business — Sale of the Inkia Business.” As a result of this sale, our remaining power generation business consists of its 76% interest in OPC.
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We were incorporated in March 2014 under the Singapore Companies Act. The legal and commercial name of the Company is Kenon Holdings Ltd. Our registered office and principal place of business is located at 1 Temasek Avenue #36-01, Millenia Tower, Singapore 039192. Our telephone number at our registered office and principal place of business is + 65 6351 1780. WeOur internet address is www.kenon-holdings.com.We have appointed Gornitzky & Co., Advocates and Notaries, as our agent for service of process in connection with certain claims which may be made in Israel.
Our ordinary shares are listed on each of the NYSE and the TASE under the symbol “KEN.” We plan to examine the various considerations in respect of our dual listing and, in particular, the advisability of maintaining or terminating such dual listing. We may, as a result of such examination, delist our ordinary shares from trading on the TASE pursuant to the Securities Law of Israel, 5728—1968. In the event we do decide to delist our ordinary shares from trading on the TASE, we have undertaken to publish an Immediate Report with the TASE pursuant to Israeli Securities regulations no less than 9 months prior to the delisting.
The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
B. Business Overview
We are a holding company that operates dynamic, primarily growth-oriented, businesses. The companies we own, in whole or in part, are at various stages of development, ranging from established, cash generating businesses to early stage companies.
We were established in connection with a spin-off of our businesses from IC to promote the growth and development of our primary businesses, and we are primarily engaged in the operation of the following businesses: (i) OPC an owner, developer and operator of power generation facilities in Israel, in which we have a 76% equity interest, and (ii) Qoros, a China-based automotive company in which we have a 24% equity interest following the completion of the New Qoros Investor investment.Qoros.
Our strategy is to realize the value of our businesses for our shareholders. In connection with this strategy, we will support the development of our business and we may provide our shareholders with direct access to our businesses, which may include spin-offs, listings, offerings, distributions or monetization of our businesses. To the extent we monetize our businesses (i.e., through offerings or sales), we may distribute the proceeds derived from such transactions to our shareholders. We made two cash distributions to shareholders in 2018, distributing a total of $765 million following the sale of the Inkia Business at the end of 2017 and the sale of a part of our interest in Qoros and related transactions in 2018.
We have implemented a number of steps in furtherance of our strategy in 2017, 2018 and early 20182019 for our primary businesses including:as described below:
| · |
| · | In 2017, we completed an IPO and listing of our OPC business in Israel, |
| · | In 2018 we entered into agreements to facilitate a new investment in Qoros, whereby the Majority Shareholder in Qoros acquired a 51% stake in Qoros, with Kenon and Chery retaining a 24% and 25% stake in Qoros, respectively. The agreement also provided Kenon a put option to sell some or all of its remaining interest in Qoros to the Majority Shareholder in Qoros for consideration of up to RMB3.12 billion (approximately $454 million) (subject to adjustments). The investment resulted in significant equity investment in Qoros and required the Majority Shareholder in Qoros to assume its pro rata share of guarantee and pledge obligations in respect of Qoros bank debt. This investment ultimately led to net cash proceeds to Kenon's subsidiary Quantum of RMB1.2 billion (approximately $175 million). |
| · | In January 2019, we entered into an agreement to sell half of our remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros for a purchase price of RMB1,560 million (approximately US$227 million), which is based on the same post-investment valuation as the initial investment by the Majority Shareholder in Qoros. The sale is subject to obtaining relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros, the Majority Shareholder in Qoros will hold 63% and Chery will own 25%. The Majority Shareholder in Qoros will be required to assume its pro rata share of guarantees and equity pledges of Kenon and Chery based on its equity ownership in Qoros (including this change in its ownership). |
| · | IC |
| · |
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We also hold interests in:
| · | ZIM, a large provider of global container shipping services, which, as of December 31, |
| · | Primus, an innovative developer and owner of a proprietary natural gas-to-liquid technology process, in which we have a 91% equity interest. |
We continue to assess our options with respect to ZIM and Primus. We do not intend to make further investments in ZIM. Nevertheless, if a strategic opportunity arises that would require an investment to facilitate a transaction that will benefit Kenon shareholders, we may consider such a transaction.
As we execute our strategy, we intend to operate under disciplined capital allocation principles designed to ensure the prudent use of our capital. We intend to refrain from acquiring interests in new companies outside our existing businesses. We do not intend to materially “cross-allocate” proceeds received in connection with distributions or sales of our interests in any of our businesses, among our other businesses.
Our strategy set forth above is designed to promote the growth and development of our primary businesses, maximize value for our shareholders and ensure the prudent use of our capital. However, we will be required to make determinations over time that will be based on the facts and circumstances prevailing at such time, as well as continually evolving market conditions and outlook. As a result, we will be required to exercise significant judgment while seeking to adhere to these capital allocation principles in order to maximize value for our shareholders and further the development of our businesses.
Our Businesses (Continuing Operations)
Set forth below is a description of our businesses (continuing operations).businesses.
OPC
OPC, which accounted for approximately 100% of our revenues in the year ended December 31, 2017,2018, is an owner, developer and operator of power generation facilities located in Israel. OPC’s facilities and primary development projects are set forth below.
| · | OPC-Rotem, in which OPC has an 80% equity interest, operates a conventional combined cycle power plant in Mishor Rotem, Israel, with an installed capacity of 466 MW (based on OPC-Rotem’s generation license). The power plant utilizes natural gas, with diesel oil and crude oil as backups. |
| · | OPC-Hadera |
| · | Tzomet |
For risks related to OPC'sOPC’s expansion, see "“Item 3.D Risk Factors—Risks Related to OPC—OPC faces risks in connection with the expansion of its business."”
In August 2017, OPC completed an initial public offering in Israel, and a listing on the TASE, resulting in net proceeds to OPC of approximately $100 million and Kenon retaining 76% stake. The OPC shares owned by Kenon are subject to an 18-month lock up from the IPO date in August 2017 in accordance with regulations of the Tel Aviv Stock Exchange. The lock up permits sales of up to 2.5% of the OPC shares held by Kenon for each month starting the fourth month after the IPO; starting the seventh month after the IPO, sales are permitted to a person who becomes subject to the lock-up restriction. Shares released from the lock-up restricted are deposited into the pledge account in respect of the sale of the Inkia Business until the full amount of shares is deposited into that account. For further information on Kenon's pledge of OPC shares, see “Item 3.B Business Overview—Discontinued Operations—Inkia Business—Sale of the Inkia Business—Pledge Agreement with respect to OPC Shares.”.
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The following table sets forth summary operational information regarding each of OPC’s operating companies as of December 31, 2017:2018:
| Country | Entity | Ownership Percentage (Rounded) | Fuel | Installed Capacity (MW) | Type of Asset | ||||||||
| Israel | OPC-Rotem | 80 | % | Natural Gas and Diesel | 466 | Greenfield | |||||||
| Israel | OPC-Hadera | 100 | % | Natural Gas and Diesel | 18 | Acquired | |||||||
| Total Operating Capacity | 484 | ||||||||||||
Country | Entity | Ownership Percentage (Rounded) | Fuel | Installed Capacity (MW) | Type of Asset | |||||||
| Israel | OPC-Rotem | 80 | % | Natural Gas and Diesel | 466 | Greenfield | ||||||
| Israel | OPC-Hadera | 100 | % | Natural Gas and Diesel | 18 | Acquired | ||||||
| Total Operating Capacity | 484 | |||||||||||
The weighted average remaining life of OPC’s PPAs based on firm capacity, as of December 31, 2017,2018, is approximately seven6 years. for OPC-Rotem and 14 years for OPC-Hadera. For OPC-Rotem, this reflects the weighted average remaining life of its PPAs with end users based on OPC’s firm capacity. The IEC PPA (as defined below), which extends for a 20-year term from COD, provides OPC-Rotem with the option to allocate and sell the generated electricity of the power station directly to end users. OPC-Rotem has exercised this option and sells all of its energy and capacity directly to 23 end users (i.e. customers other than the IEC), as of the date of this report. For further information on the IEC PPA, see “—Regulatory, Environmental and Compliance Matters.”
Industry Overview
Overview of Israeli Electricity Generation Industry
According to the Israel Central Bureau of Statistics, Israel had a population of approximately 8.88.9 million as of December 31, 2017. Israeli GDP grew by 3%, 4% and 2.6% in 2017, 2016 and 2015, respectively.2018.
Israel’s power generation units primarily utilize fossil fuels. Most of the activity of power generation in Israel is carried out by the state-owned IEC. However, in recent years the market share of private producers has been increasing in light of the Israeli government policy to allow competition in the electricity market.
The following tables feature data on the share of private electricity producers and the IEC in the electricity market in 20152017 and 2016, as published by the EA1:EA. To the best of OPC’s knowledge, as at the publication date of the report, data in respect of 2018 had not yet been published.
December 31, 2017 | December 31, 2016 | |||||||||||||||
Installed Capacity (MW) | % of Total Installed Capacity in the Market | Installed Capacity (MW) | % of Total Installed Capacity in the Market | |||||||||||||
| IEC | 13,355 | 76 | % | 13,617 | 77 | % | ||||||||||
| Private electricity producers (including renewable energy) | 4,254 | 24 | % | 4,012 | 23 | % | ||||||||||
| Private electricity producers (without renewable energy) | 3,217 | 18 | % | 3,077 | 17 | % | ||||||||||
| Renewable energy (private electricity producers) | 1,037 | 6 | % | 935 | 6 | % | ||||||||||
| Total in the market | 17,609 | 100 | % | 17,629 | 100 | % | ||||||||||
| December 31, 2016 | December 31, 2015 | ||||
| Installed Capacity (MW) | % of Total Installed Capacity in the Market | Installed Capacity (MW) | % of Total Installed Capacity in the Market | ||
| IEC | 13,617 | 77% | 13,617 | 78% | |
| Private electricity producers (without renewable energy) | 3,077 | 17% | 3,065 | 18% | |
| Renewable energy (private electricity producers) | 971 | 6% | 679 | 4% | |
| Private electricity producers (including renewable energy) | 4,048 | 23% | 3,743 | 22% | |
| Total in the market | 17,665 | 100% | 17,360 | 100% | |
| Energy generated (thousands of MWh) | % of total generated in the market | Energy generated (thousands of MWh) | % of total energy generated in the market | ||
| IEC | 45,544 | 68% | 50,641 | 77% | |
| Private electricity producers (without renewable energy) | 20,102 | 30% | 13,496 | 21% | |
| Renewable energy (private electricity producers) | 1,745 | 2% | 1,276 | 2% | |
| Private electricity producers (including renewable energy) | 21,847 | 32% | 14,772 | 23% | |
| Total in the market | 67,391 | 100% | 65,413 | 100% | |
Energy generated (thousands of MWh) | % of total generated in the market | Energy generated (thousands of MWh) | % of total generated in the market | |||||||||||||
| IEC | 48,833 | 72 | % | 48,722 | 72 | % | ||||||||||
| Private electricity producers (including renewable energy) | 19,338 | 28 | % | 18,554 | 28 | % | ||||||||||
| Private electricity producers (without renewable energy) | 17,748 | 26 | % | 17,015 | 26 | % | ||||||||||
| Renewable energy (private electricity producers) | 1,590 | 2 | % | 1,539 | 2 | % | ||||||||||
| Total in the market | 68,171 | 100 | % | 67,276 | 100 | % | ||||||||||
| (1) | Based on the Report on the Condition of the Electricity Market for 2017 and the database for the annual update to the electrical tariff for 2019, as published by the EA. |
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Sales of IPPs are generally made on the basis of PPAs for the sale of energy to customers, with prices predominantly linked to the tariff issued by the EA and denominated in NIS. The EA operates a “Time of Use” tariff, which provides different energy rates for different seasons (e.g., summer and winter) and different periods of time during the day. Within Israel, the price of energy varies by season and demand period, with tariffs varying based upon the season—summer (July, August), winter (January, February, December) and transition (March-June, September-November)—and demand (peak, shoulder and off-peak).
Hours per Consumption Block1 | ||||||||||||
| Winter | Transition | Summer | ||||||||||
| (Hours) | ||||||||||||
| Peak | 410 | 1,932 | 315 | |||||||||
| Shoulder | 206 | 946 | 315 | |||||||||
| Off-Peak | 1,544 | 2,234 | 858 | |||||||||
the legal proceedings to which the IEC is a party. For information on the risks associated with the indexation of OPC’s revenues and cost of sales to the EA’s generation component tariff and its potential impact on OPC’s business, financial condition and results of operations, see “Item 3.D Risk Factors—Risks Related to OPC— Changes in the EA’s electricity rates may reduce OPC’s profitability.”
As of December 31, 2016,2017, the total installed capacity of the Israeli market (IEC and IPPs,IPPs) was approximately 16,500 MW excluding renewable technologies) was 16,694 MW,energy, and 17,665approximately 17,500 MW, including renewable technologies.energy. According to Bank of Israel’s and IEC projections, the demand for electricity in Israel is expected to grow at an annual rate of 2.3%-2.8%2.7% from 2018 to 2030. These projections for the growth in coming years.the electricity market are based on the following assumptions published by the EA:
| Component | Megawatt |
| Installed capacity (without renewable energy) as at December 31, 2017 | 16,525 |
| Disposal of power plants of IEC up to 2030, whether by virtue of a Government decision or due to the age of the plants (Orot Rabin units 1–4 (1,440 MW), Reading (428 MW), Eshkol (912 MW), Ramat Hovav (335 MW) and additional units (621 MW) | 3,736 |
| Additional capacity through facilities under construction and quotas published by the EA | 2,838 |
| Expected installed capacity in 2030 without additional quotas | 15,527 |
| Forecasted peak demand in 2030 plus required reserve of 3,700 MW | 23,400 |
| Contribution of renewable energy and integration of accumulation in the renewable energy facilities for savings on the conventional capacity required | 1,200 |
| Additional installed capacity required (not including renewable energy) | 6,573 |
| Additional installed capacity required (including renewable energy) | 7,500 |
The IEC has been classified by the Electricity Sector Law as an “essential service provider” and, as such, is subject to basic obligations concerning the proper management of the Israeli power utility market. These obligations include the filing of development plans, management of Israel’s power system, management of Israel’s power transmission and distribution systems, provision of backup and infrastructure services to IPPs and consumers, and the purchase of power from IPPs. IEC also transmits all of the electricity in Israel.
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Pursuant to the Israeli Government’s electricity sector reform, among other things, (i) the IEC will be required to sell five power plants through a tender process over the next 8 years, which is expected to reduce its market share to below 40%, (ii) the IEC will cease acting as the System Administrator and (iii) certain limitations will be imposed on entities participating in the tender process as well as in overall capacity held by a single entity in the market. Furthermore, the IEC will be permitted to build and operate two new gas-powered stations (through a subsidiary), but will not be authorized to construct any new stations or recombine existing stations, see “—OPC’s Description of Operations—Regulatory, Environmental and Compliance Matters.” This reform is expected to increase IPPs’ presence in the market and lead to further industry competition.
In January 2019, in a letter to OPC, the IEC stated that from February to December 2019, OPC-Rotem and OPC-Hadera are expected to run on diesel oil operated for part of the period, and are expected to generate energy through use of diesel oil for approximately 13,000 MWh and 4,000 MWh, respectively. This is not expected to impact OPC's results as OPC is entitled to reimbursement from the IEC for incremental costs resulting from the use of diesel.
For further information on Israel’s regulatory environment, see “—OPC’s Description of Operations—Regulatory, Environmental and Compliance Matters.” For information on the risks related to changes in Israel’s regulatory environment, see “Item 3.D Risk Factors—Risks Related to OPC— Changes in the EA’s electricity rates may reduce OPC’s profitability.profitability” and "Item 3.D Risk Factors—Risks Related to OPC— OPC’s operations are significantly influenced by regulations."
The following tables set forth the consumption blocks for each of the seasons set forth below, as of January 1, 2019:
Hours per Consumption Block1 | ||||||||||||
Winter | Transition | Summer | ||||||||||
| (Hours) | ||||||||||||
| Peak | 420 | 1,932 | 308 | |||||||||
| Shoulder | 204 | 936 | 308 | |||||||||
| Off-Peak | 1,536 | 2,244 | 872 | |||||||||
| (1) | The hours per consumption block may vary due to changes in the dates of weekdays, weekends and public holidays. |
OPC’s Description of Operations
OPC’s portfolio includes power generation plants that operate on natural gas and diesel. As of December 31, 2017,2018, OPC’s installed capacity was up to 484 MW.
OPC’s first power plant, OPC-Rotem, a combined cycle power plant with an installed capacity of 466 MW (based on OPC-Rotem’s generation license), commenced commercial operations in Mishor Rotem, Israel in July 2013. The power plant utilizes natural gas, with diesel oil and crude oil as backup.backups. OPC has an 80% equity interest in OPC-Rotem.
OPC’s second power plant, OPC-Hadera a wholly-owned subsidiary of OPC, operates steam boilers and a turbine with an installed capacity of 18 MW in Hadera. In June 2016, OPC-Hadera commenced construction of a cogeneration power station in Israel, which is expected to have a capacity of up to 148 MW, and, following delays in the plant’s construction and operation, is currently expected to reach its COD in the first halfthird quarter of 2019. OPC expects that the total cost of completing the OPC-Hadera plant (including the consideration for the original acquisition of OPC-Hadera) will be approximately NIS 1 billion (approximately $288$267 million) (including the consideration for the original acquisition of OPC-Hadera). As of December 31, 2017,2018, OPC-Hadera had substantially completed approximately 83%construction of the projectpower plant’s generation units; however, construction still requires the completion of additional tests and further preliminary requirements to reach commercial operation. As of December 31, 2018, OPC-Hadera had invested approximately NIS 562822 million (approximately $162$219 million) in the project. OPC-Hadera is a wholly-owned subsidiary of OPC.
OPC is considering participating in the IEC tenders of five of its power stations, see “—Regulatory, Environmental and Compliance Matters.” OPC submitted a request for early classification in the Alon Tabor site tender process in January 2019 and was admitted to the preliminary classification stage in February 2019. Parties interested in participating in the tender are required to submit their bids by May 2019. There is no certainty that OPC will be participating in the tender sale of this site.
In 2017, OPC has recently begunbegan initiating projects in the field of power generation using photovoltaic technology, through OPC Solar, a wholly-owned subsidiary of OPC. These ventures areHowever, in March 2019, OPC Solar entered into a preliminary stage, and OPC does not currently have active projectsbinding memorandum of understanding for the sale of all of its shares in Greenday Renewable Energy Ltd., the entity that handles OPC’s power generation of electricity withinitiative activities using photovoltaic technology. Completion of the sale is subject to conditions.
The following table sets forth summary financial information for OPC for the yearyears ended December 31, 2017:2018, 2017 and 2016:
| Year Ended December 31, 2017 | ||||||||||||||||||||||
| Sales | Cost of Sales | Net Income | EBITDA1 | Outstanding Debt2 | Net Debt3 | |||||||||||||||||
| ($ millions) | ||||||||||||||||||||||
| $ | 365 | $ | 266 | $ | 14 | $ | 86 | $ | 618 | $ | 395 | |||||||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
| ($ millions) | ||||||||||||
| Sales | 363 | 365 | 324 | |||||||||
| Cost of Sales | 258 | 266 | 251 | |||||||||
| Net Income | 26 | 14 | 20 | |||||||||
EBITDA1 | 91 | 86 | �� | 67 | ||||||||
Outstanding Debt2 | 587 | 618 | 417 | |||||||||
Net Debt3 | 401 | 395 | 371 | |||||||||
| (1) | “EBITDA” is a non-IFRS measure. For a reconciliation of OPC’s net income (loss) to its EBITDA, see footnote 1 to the first table in “Item 3.A Selected Financial Data—Selected Reportable Segment Data—OPC” setting forth the selected financial data for the year ended December 31, |
| (2) | Includes short-term and long-term debt and excludes loans and notes owed to a parent company. |
| (3) | “Net debt” is |
The following table sets forth summary financialoperational information for OPCOPC’s operating plants as of and for the year ended December 31, 2016:2018:
| Year Ended December 31, 2016 | ||||||||||||||||||||||
| Sales | Cost of Sales | Net Income | EBITDA1 | Outstanding Debt2 | Net Debt3 | |||||||||||||||||
| ($ millions) | ||||||||||||||||||||||
| $ | 324 | $ | 251 | $ | 20 | $ | 67 | $ | 417 | $ | 371 | |||||||||||
Entity | Installed Capacity (MW)1 | Net energy generated (GWh) | Availability factor (%) | |||||||||
| OPC-Rotem | 466 | 3,299 | 87 | % | ||||||||
| OPC-Hadera | 18 | 84 | 94 | % | ||||||||
| OPC Total | 484 | 3,383 | ||||||||||
| Year Ended December 31, 2015 | ||||||||||||||||||||||
| Sales | Cost of Sales | Net Income | EBITDA1 | Outstanding Debt2 | Net Debt3 | |||||||||||||||||
| ($ millions) | ||||||||||||||||||||||
| $ | 326 | $ | 245 | $ | 22 | $ | 79 | $ | 473 | $ | 289 | |||||||||||
The following table sets forth summary operational information for OPC as of and for the year ended December 31, 2017:
Entity | Installed Capacity (MW)1 | Net energy generated (GWh) | Availability factor (%) | |||||||||
| OPC-Rotem | 466 | 3,576 | 94 | % | ||||||||
| OPC-Hadera | 18 | 79 | 89 | % | ||||||||
| OPC Total | 484 | 3,655 | ||||||||||
The following table sets forth summary operational information for OPC as of and for the year ended December 31, 2016:
Entity | Installed Capacity (MW)1 | Net energy generated (GWh) | Availability factor (%) | |||||||||
| OPC-Rotem | 466 | 3,422 | 91 | % | ||||||||
| OPC-Hadera | 18 | 88 | 95 | % | ||||||||
| OPC Total | 484 | 3,510 | ||||||||||
| Entity | Installed Capacity (MW) | Net energy generated (GWh) | Availability factor (%) | |||||||||
| OPC-Rotem | 466 | 3,422 | 91 | % | ||||||||
| OPC-Hadera | 18 | 88 | 95 | % | ||||||||
| OPC Total | 484 | 3,510 | ||||||||||
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The following summaries provide a description of OPC’s businesses.
OPC-Rotem
OPC has an 80% stake in OPC-Rotem. The remaining 20% is held by Veridis, which is ownedindirectly controlled by Oaktree Capital Management, an investment management firm. In March 2018, Delek Automotive Systems Ltd., or Delek Automotive, announced that it had entered into an agreement with Oaktree Capital Management and minority shareholders for the acquisition of the control of Veridis by Delek Automotive, together with several entities of the Harel Insurance Group, subject to the fulfillment of suspending conditions set out in the agreement. OPC-Rotem commenced operations in July 2013 in Mishor Rotem industrial zone in the south of Israel. The OPC-Rotem plant was constructed for an aggregate cost of approximately $508 million. OPC-Rotem’s plant has a capacity of 466 MW (based on OPC-Rotem’s generation license), representing, together with the Hadera Energy Center, approximately 2.7%2.6% of the total installed capacity and approximately 12%11% of the total installed capacity provided by IPPs in Israel as of December 31, 20162017 (including renewables). In 2018, OPC-Rotem’s plant generated approximately 4.7% of the total energy generated in Israel and approximately 14% of the energy generated by IPPs in Israel (including renewables).
OPC-Rotem purchases natural gas from the Tamar Group, pursuant to a natural gas supply agreement that expires upon the earlier of June 2029 or the date on which OPC-Rotem consumes the entire contractual capacity. The EA’s generation component tariff is the base for the natural gas price linkage formula in the agreement between OPC-Rotem and the Tamar Group. According to the agreement with the Tamar Group, OPC-Rotem has the option to decrease the daily contractual gas amount to a specific amount set forth in the agreement between 2020 and 2022, such that the minimum consumption from the Tamar Group constitutes 50% of the average gas consumption in the three years preceding the notice of the option exercise.
In December 2017, OPC-Rotem signed an agreement for the purchase of natural gas with Energean Israel Ltd., or Energean. Pursuant to this agreement, OPC-Rotem willhas agreed to purchase from Energean 5.3 billion m3 of natural gas over a period of fifteen years (subject to adjustments based on their actual consumption of natural gas) or until the date of consumption of the full contractual quantity,, commencing at the commercial operation date of the Energean natural gas reservoir. Construction of natural gas reservoirs by Energean has not yet been completed. According to disclosure made by Energean, the supply of gas is currently expected to commence in 2021, but there is no guarantee that the gas supply will be available by such date.date or at all. For further information on OPC-Rotem’s gas supply agreements, see “—OPC’s Raw Materials and Suppliers.”
OPC-Rotem has a PPA with IEC, the government-owned electricity generation, transmission and distribution company in Israel, or the IEC PPA. The term of the IEC PPA lasts until 20 years after the power station’s COD.COD (which was in 2013). According to the agreement, OPC-Rotem is entitled to operate in one of the following two ways (or a combination of both, withsubject to certain restrictions set in the agreement): (1) provide the entire net available capacity of its power station to IEC or (2) carve out energy and capacity for direct sales to private consumers, and OPC-Rotem has accordingly allocated the entire capacity of the plant to private consumers since COD, and OPC-Rotem has accordingly allocated the entire capacity of the plant to private consumers since COD. As a result, as of the date of this report, OPC-Rotem supplies energy to 23 end users according to long-term PPAs. In addition, OPC-Rotem from time to time enters short-term PPAs that give OPC flexibility in the sale of electricity to these customers (i.e. OPC may suspend from time to time the sale of electricity under these agreements). Under the IEC PPA, OPC-Rotem can also elect to revert back to supplying to IEC instead of private customers, subject to twelve months’ advance noticenotice.
Mitsubishi provides the long-term servicing of the power station, for a term of 100,000 hours of operation, or until the date on which 8 planned gas turbine treatments are completed (OPC estimates that this is a period of 12 years). OPC’s long-term service agreement with Mitsubishi includes timetables for performance of the maintenance work, including “major overhaul” maintenance, which is to be performed every six years. Regular maintenance work is scheduled to be completed approximately every 18 months, with the next regular maintenance work scheduled to occur prior to the summer of 2020. As planned, major overhaul maintenance work was completed between September and November 2018, which halted the OPC-Rotem plant’s operations along with the related energy generation activities. During the maintenance, supply of electricity to OPC-Rotem’s private customers continued as usual using energy purchased by OPC, in accordance with the standards published by the EA and OPC-Rotem’s PPA agreement with the IEC.
OPC has entered into a shareholders’ agreement which grants minority rights to OPC’s minority shareholder. For further information on OPC’s shareholders’ agreements, see “—Shareholders’ Agreements.”
OPC-Hadera
In August 2015, OPC acquired 100% of the shares of OPC-Hadera from Hadera Paper, a large paper and paper product manufacturer in Israel. The consideration for the transaction was NIS 60 million.million (approximately $16 million). OPC-Hadera, which currently operates an 18 MW plant, holds a conditional license for the construction of a cogeneration power station in Israel. OPC-Hadera commenced construction of the plant in June 2016. OPC expects that the total cost of completing the OPC-Hadera plant (including the consideration for the acquisition of OPC-Hadera) will be approximately NIS 1 billion (approximately $288$267 million), based upon a plant with up to 148 MW of capacity.
In January 2016, OPC-Hadera entered into an EPC contract in an amount equivalent to approximately $156 million with SerIDOM Servicios Integrados IDOM, S.A.U, or IDOM, for the design, engineering, procurement and construction of the cogeneration power plant (including(as well as amendments to the agreement that were subsequently signed). The total consideration, following amendment made to the agreement in 2018, is estimated at NIS636 million (approximately $177 million), payable upon achievement of certain milestones. The agreement contains a mechanism for the compensation of OPC-Hadera in the event that IDOM fails to meet its contractual obligations under the agreement. Furthermore, IDOM has provided bank guarantees and a corporate guarantee by its parent company to secure its obligations, and OPC has provided IDOM a guarantee to secure part of OPC-Hadera’s liabilities.
Pursuant to OPC-Hadera's contingent license, the license is valid until September 2019. Expiration of the conditional license prior to the COD date and the receipt of a permanent license would constitute grounds for an event of default under OPC-Hadera's financing agreement. Furthermore, in the event of 9-month delays to the agreed COD date, certain customers have the right to cancel PPAs, subject to certain conditions. OPC-Hadera is permitted to cancel PPAs, among others, in the event of a significant delay in the COD date.
Following delays in the plant’s construction and operation, the OPC-Hadera plant is currently expected to reach its COD in the first halfthird quarter of 2019. As of December 31, 2017,2018, OPC-Hadera had substantially completed approximately 83%construction of the projectpower plant’s generation units; however, construction still requires the completion of additional tests and invested approximately NIS 562 million (approximately $162 million) in the project.further preliminary requirements to reach commercial operation. In July 2016, OPC-Hadera entered into a NIS 1 billion loan agreement to finance the construction of the OPC-Hadera plant. Approximately 80% of the financing consists of long-term facility intended to cover the cost of construction and the remaining 20% consists of additional facilities. As of December 31, 2017,2018, following financial closing, OPC has made drawings under the loan agreement, in a total amount of NIS 494616 million (approximately $164 million), of which two thirds of the amount is CPI-linked and one third is not CPI-linked. For further information on the OPC-Hadera financing, see “Item 5.B Liquidity and Capital Resources—OPC’s Liquidity and Capital Resources—OPC’s Material Indebtedness—OPC-Hadera Financing.”
OPC-Hadera’s power plant is expected to supply the electricity and steam needs of Hadera Paper’s facility as well as to provide electricity to private customers in Israel. The power plant will operate using natural gas as its energy source, and diesel oil and crude oil as backup.backups. As a cogeneration plant which supplies electricity and steam in a single production process, based on the construction contractor’s estimates OPC-Hadera’s power plant is expected to have a relatively high level of energy utilization. The efficiency of the Hadera station is expected to be approximately 74.5% when steam is supplied to Hadera Paper, and 54.5% when steam is not produced.
In June 2015, OPC-Hadera entered into an agreement with Hadera Paper for OPC-Hadera’s supply of electricity and steam from the OPC-Hadera power plant under construction to Hadera Paper’s facility for a period of 18 years from the date the power plant reaches its COD. In January 2019, the agreement was amended and its term was extended to 25 years from the date of the amendment. Pursuant to this agreement, Hadera Paper willhas agreed to acquire all of its electricity and steam needs from OPC-Hadera. The agreement provides minimum quantity of steam to be purchased by Hadera Paper (ToP(“take-or-pay” level), which will be subject to adjustment. Until OPC-Hadera reaches its COD, OPC-Hadera will supply steam and electricity to Hadera Paper using the energy centerHadera Energy Center purchased from Hadera Paper and OPC-Rotem will supply the residual energy.
In 2012, Hadera Paper entered into an agreement with the Tamar Group for the supply of natural gas, which has been assigned to OPC-Hadera. The gas supply agreement expires upon the earlier of April 2028 or the date on which OPC-Hadera consumes the entire contractual capacity. Both contracting parties have the option to extend the agreement, under certain conditions. The price of gas is linked to the weighted average of the generation component tariff published by the EA, and it is also subject to a price floor. According to the agreement, the gas shall be supplied on a firm basis, and includes a “take-or-pay”take-or-pay obligation, or TOP, by OPC-Hadera, In addition, according to the agreement, OPC-Hadera has the option to effectively reduce the purchased gas quantities by approximately 50%, subject to certain conditionsconditions.
In September 2016, OPC-Hadera entered into another gas supply agreement with the Tamar Group. The gas supply agreement will expire at the earlier of fifteen years following the OPC-Hadera plant’s COD date or on the date on which OPC-Hadera consumes the entire contractual capacity. Both contracting parties have the option to extend the agreement, under certain conditions. OPC-Hadera also has the right to terminate this agreement, which it may elect to do in connection with the Energean agreement described below. The price of gas is linked to the weighted average of the generation component tariff published by the EA, and it is also subject to a price floor
floor. According to the agreement, the gas will be supplied on an interruptible basis, and the Tamar Group shall not be responsible for failures in the requested gas supply levels. At the same time, theThe Tamar Group may decide to switch the supply to a firm basis. In the event of such a decision and from the date of the change in supply mechanism, HaderaOPC-Hadera will be subject to a TOPtake-or-pay obligation. OPC-Hadera also has the option to sell gas surpluses to other customers, including related parties, subject to limitations. Furthermore, OPC-Hadera has the option to terminate the agreement at its sole discretion, within three years starting December 2016.
In December 2017, OPC-Hadera signed an agreement for the purchase of natural gas with Energean. Pursuant to this agreement, OPC-Hadera willhas agreed to purchase from Energean 3.7 billion m3 of natural gas for a period of fifteen years (subject to adjustments based on their actual consumption of natural gas) or until the date of consumption of the full contractual quantity,, commencing at the commercial operation date of the Energean natural gas reservoir. Construction of natural gas reservoirs by Energean has not yet been completed. The agreement is subject to consent of the lenders under the OPC-Hadera financing agreement. There is no guarantee that the gas supply will be available by such date or at all. For further information on OPC-Hadera'sOPC-Hadera’s gas supply agreements, see "—“—OPC'sOPC’s Raw Materials and Suppliers."”
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In connection with the acquisition of OPC-Hadera by OPC, Hadera Paper sold its energy center,Hadera Energy Center, consisting of certain equipment that it uses to produce steam, and up to 18 MW of additional capacity (and 7 MW that are not active), within its manufacturing plant to OPC-Hadera. OPC-Hadera will also lease from Hadera Paper the land on which the power generation plant is located for a period of 20 years from the OPC-Hadera plant’s COD. OPC-Hadera is also expected to sell its residual electricity to other end users.
In June 2017, OPC-Hadera entered into a long-term maintenance agreement with General Electric International Ltd., or GEI, and GE Global Parts & Products GmbH, or GEGPP for $42 million (which consideration is payable over the term of the service agreement based on the formula prescribed therein)pursuant to which these two companies will provide maintenance treatments for the two gas turbines of GEI, generators and auxiliary facilities of the OPC-Hadera plant for a period commencing on the date of commercial operation until the earlier of: (a) the date on which all of the covered units (as defined in the service agreement) have reached the end-date of their performance and (b) 25 years from the date of signing the service agreement. The service agreement contains a guarantee of reliability and other obligations concerning the performance of the OPC-Hadera plant and indemnification to OPC-Hadera in the event of failure to meet the performance obligations. OPC-Hadera has undertaken to pay bonuses in the event of improvement in the performance of the plant as a result of the maintenance work, up to a cumulative ceiling for every inspection period.
Tzomet
In March 2018, OPC acquired 95% of the shares of Tzomet, which is developing a natural gas-fired open-cycle power station in Israel with capacity of approximately 396 MW. The total consideration for the acquisition of the 95% interest in Tzomet is estimated at approximately $23 million, subject to certain adjustments, of which $7.3 million has been paid and the remaining consideration will be paid at financial closing of the Tzomet project. In January 2019 OPC entered into an agreement for the acquisition of the remaining 5% of the shares of Tzomet, for consideration of approximately NIS 27 million (approximately $7 million), which is expected to be completed in increments subject to the fulfillment of certain milestones. A conditional license for the construction of the Tzomet plant remains subject to conditions. In addition, the Tzomet project remains subject to a positive interconnection survey and to financial closing.
In August 2017, the Israeli Concentration Committee stated that it believed, for reasons of broad economic concentration, OPC should not be granted a license. In January 2019, OPC announced the establishment of a regulatory outline plan which would allow the Israeli Concentration Committee in Israel to modify its opinion regarding the Tzomet license. This outline plan included conditions, including the sale of the Idan Ofer Group’s holdings in Reshet Media Ltd which has been completed.
In April 2019, the EA published its decision to grant Tzomet a conditional license for a 66-month term for the construction of a 396MW conventional open-cycle power plant. Pursuant to this decision, the license will become valid following the Israeli Minister of Energy's approval and the issuance of a guarantee by Tzomet. The term of the conditional license can be extended by the EA, subject to the Israeli Minister of Energy’s approval, and subject to the regulation. In its decision, the EA also mentioned that the Israeli Concentration Committee did not object to the grant of the conditional license. The grant of a permanent generation license to Tzomet, upon expiration of the conditional license, is subject to Tzomet's compliance with the conditions set by law. For a discussion of risks associated with the development of the Tzomet plant, see “Item 3.D Risk Factors—Risks Related to OPC—OPC faces risks in connection with the expansion of its business.”
As opposed to generation facilities with an integrated cycle that operate during most of the hours in the year, the Tzomet plant will be an open‑cycle power plant (Peaker plant). Peaker plants are generally planned to operate for a short number of hours during the day, where there is a gap in the demand and supply of electricity, e.g., at peak demand times. They act as backup plants whose purpose is to provide availability in times of peak demand, such as when other generation facilities break down, or as supplements when solar energy is unavailable. As opposed to OPC-Rotem and OPC-Hadera, which enter into PPAs to sell power to private customers, Tzomet will sell all of its capacity to the IEC, acting as a Peaker plant.
In September 2018, Tzomet entered into an EPC agreement with PW for construction of the Tzomet project. Pursuant to this agreement, PW committed to provide certain maintenance services in connection with the power station’s main equipment for a period of 20 years commencing from the start date of the commercial operation and undertook to complete the construction work of the Tzomet project. The aggregate consideration payable over the term of the agreement is approximately $300 million, and is payable based on the achievement of milestones. The agreement contains a mechanism for the compensation of Tzomet in the event that PW fails to meet its contractual obligations under the agreement.
Potential Expansions
In March 2014, OPC, through one of its subsidiaries, was awarded a tender published by the Israel Land Authority to lease a 5.5 hectare plot of land adjacent to the OPC-Rotem site. Entry into the lease agreement is subject to receipt of the required approvals, including the approval of the Israel Land Council, which has not yet been received. In April 2017, OPC was authorized by the Israeli Government to promote seek zoning permissions for a gas fired power station with a capacity of up to 530MW located on the land adjacent to OPC-Rotem.OPC-Rotem.
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In April 2017, OPC was also authorized by the Israeli Government to promote seek authority for zoning of the land for a gas-fired power station of up to 800 MW of installed capacity on land owned by Hadera Paper near the Hadera power station. OPC-Hadera has entered into an option agreement with Hadera Paper to lease the relevant land. However, there
These plots of lands, if zoning permission is no guaranteegranted, would provide OPC with land that can be used with tenders but OPC will pursue either of these expansion projects, or be ablewould still require licenses to proceed with eitherany projects on this land. See “Item 3.D Risk Factors—Risks Related to OPC—OPC faces risks in connection with the expansion of these expansion projects.its business.”
OPC’s Raw Materials and Suppliers
OPC’s power facilities utilize natural gas as primary fuel, and diesel for backup.oil and crude oil as backups.
OPC-Rotem and OPC-Hadera have entered into gas supply agreements with thee Tamar Group, composed of Noble Energy Mediterranean Ltd., Delek Drilling Limited Partnership, Isramco Negev 2 Limited Partnership, Dor Gas Exploration Limited Partnership, Everest Infrastructures Limited Partnership and Tamar Petroleum Limited Partnership, or collectively, for the purchase of natural gas.gas. For further information on these agreements see “—OPC’s Description of Operations—OPC-Rotem” and “OPC’s Description of Operations—OPC HaderaOPC-Hadera.”
The price that OPC-Rotem pays to the Tamar Group for the natural gas supplied is based upon a base price in NIS set on the date of the agreement, indexed to changes in the EA’s generation component tariff, , and partially indexed (30%) the U.S. Dollar representative exchange rate. The price that OPC-Hadera pays to the Tamar Group is based upon a base price in US$, fully indexed to changes in the EA’s generation component tariff. As a result, increases or decreases in the EA’s generation tariff have a related effect on OPC-Rotem’s and OPC-Hadera’s cost of sales and margins. In addition, the natural gas price formulas in OPC-Rotem’s and OPC-Hadera’s supply agreements are subject to a floor price mechanism, which is denominated in US$ for both OPC-Rotem and OPC-Hadera.
As a result of previous declines in the EA’s generation component tariff, OPC-Rotem and OPC-Hadera began to paypaid the ultimate floorminimum price starting in November 2015 and Aprilas well as during 2016 respectively.to 2018 (excluding one month in 2018). Therefore, declines in the EA generation component tariff may not have a corresponding decline in OPC-Rotem’s natural gas expenses, due to the floor price mechanism. and may lead to a decline in OPC-Rotem’s margins, which may have a material adverse effect on OPC’s business, results of operations and financial condition. For information on the risks associated with the impact of the EA’s generation tariff on OPC’s supply agreements with the Tamar Group, see “Item 3.D Risk Factors—Risks Related to OPC—Changes in the EA’s electricity rates may reduce OPC’s profitability.”
In JanuaryDecember 2018, the EA published the electricity tariffs for 2018,2019, which included an increase of the EA’s generation component tariff by 6.7%approximately 3.3%. As a result, OPC-Rotem and OPC-Hadera’sOPC-Rotem's gas prices may rise above their ultimate floor prices.the minimum price. OPC-Hadera's gas prices exceeded the minimum price in 2018 and are expected to be above the minimum price in 2019.
In December 2017, OPC-Rotem and OPC-Hadera signed agreements for the purchase of natural gas with Energean. Pursuant to theseThese agreements (which contain take-or-pay commitments), OPC-Rotem and OPC-Hadera will collectively purchase from Energean 9 billion m3 of natural gas over a period of fifteen years (subject to adjustments based on their actual consumption of natural gas), or until the date of consumption of the full contractual quantity, commencing at the commercial operation date of the Energean natural gas reservoir. According to a disclosure made by Energean, the supply of gas is currently expected to commence in 2021, but there is no guarantee that the gas supply will be available by such date.
are described above.OPC’s Competition
Within Israel, OPC’s major competitors are IEC and private power generators, such as Dorad Energy Ltd. and Dalia, who, as a result of recent government initiatives encouraging investments in the Israeli power generation market, have constructed, and are constructing, power stations with significant capacity. The keymore important private producers competing with OPC are presented in the table below.
| Name | Power Station Technology | Approximate Capacity (MW) | Commercial Operating Date |
| Dorad | Conventional | 860 | May 2014 |
| Mashav | Conventional | 120 | April 2014 |
Dalia – Unit 11 | Conventional | 450 | July 2015 |
Dalia – Unit 21 | Conventional | 450 | September 2015 |
Ashdod Energy2 | Cogeneration | 60 | October 2015 |
Ramat Negev Energy2 | Cogeneration | 120 | January 2016 |
Sugat2 | Cogeneration | 70 | Under construction |
Alon Tabor2 | Cogeneration | 70 | Under construction |
Ramat Gabriel2 | Cogeneration | 70 | Under construction |
Paz Ashdod2 | Cogeneration | 100 | July 2013 |
Delek Sorek2 | Conventional | 140 | |
Dead Sea Works (DSW)2 | Cogeneration | 230 | Under construction |
IPM Beer Tuvia2 | Conventional | 450 | Under construction |
OPD Delek Ashkelon2 | Cogeneration | 87 | February 2019 |
| (1) | To OPC’s knowledge, |
| (2) | To OPC’s knowledge, part of the capacity generated by these entities is designated to a yard consumer or to independent consumption. |
OPC is seeking to extend its activities into the area of “Peaker” power stations, whose purpose is to provide availability to the IEC, in order to diversify its customer mix and decrease its dependence on private customers. OPC is also considering participating in the IEC tenders of five of its power stations, see “—Regulatory, Environmental and Compliance Matters.”
OPC’s Seasonality
Revenues from the sale of electricity are seasonal and impacted by the “Time of Use” tariffs published by the Electricity Authority.EA. The seasons are divided into three, as follows: (a) summer – July and August; (b) winter – December, January and February; (c) transitional seasons – March to June and September to November.
The following table provides a schedule of the weighted EA’s Generation Component rates for 20182019 based on seasons and demand hours, published by the Electricity Authority.EA.
Season | Demand Hours | Weighted Kwh) |
Winter | Off-peak | |
Shoulder | ||
Peak | ||
Transition | Off-peak | |
Shoulder | ||
Peak | ||
Summer | Off-peak | |
Shoulder | ||
Peak | ||
Weighted Average Rate | ||
In general, tariffs in the summer and winter are higher than during transitional seasons. The cost of acquiring gas, which is the primary cost of OPC, is not influenced by the tariff seasonality. Therefore, the profitability of power producers, including OPC-RotemOPC-Rotem and OPC-Hadera,OPC-Hadera, is generally higher in the summer and winter months compared to the remainder of the year.
For further information on the seasonality of tariffs in Israel, see “—Industry Overview— Overview of Israeli Electricity Generation Industry.”
The following table provides a summary of OPC’s revenues from the sale of electricity,, by season (these(in $ millions) for 2017 and 2018. These figures have not been audited or reviewed) (in $ millions):reviewed.
| 2017 | 2018 | |
| Summer (2 months) | 70 | 67 |
| Winter (3 months) | 99 | 98 |
| Transitional Seasons (7 months) | 181 | 182 |
| Total for the year | 350 | 347 |
2016 | 2017 | |
| Summer (2 months) | 62 | 70 |
| Winter (3 months) | 87 | 99 |
| Transitional Seasons (7 months) | 160 | 181 |
| Total for the year | 309 | 350 |
OPC’s Property, Plants and Equipment
The following table provides certain information regarding OPC’s power plants, as of December 31, 2017:2018:
Company/Plant | Location | Installed Capacity | Fuel Type | ||||
| (MW) | |||||||
Operating Companies | |||||||
| OPC-Rotem | Mishor Rotem, Israel | 466 | Natural gas and diesel (combined cycle) | ||||
OPC-Hadera1 | Hadera, Israel | 18 | 2 | Natural gas and diesel | |||
| (1) | OPC-Hadera also holds a conditional license for the construction of a cogeneration power station in Israel, based upon a plant with up to 148 MW of capacity. Construction commenced in June 2016 and, following delays in the plant’s construction and operation, COD is currently expected in the |
| (2) |
OPC leases its principal executive offices in Israel. OPC owns all of its power generation facilities. OPC has also been awarded a tender published by the Israel Land Authority to lease a 5.5 hectare plot of land adjacent to the OPC-Rotem site and OPC-Hadera has entered into an option agreement with Hadera Paper to lease land owned by Hadera Paper near the Hadera power station.
As of December 31, 2017,2018, the consolidated net book value of OPC’s property, plant and equipment was $630$635 million.
Insurance
OPC and its subsidiaries hold various insurance policies in order to reduce the damage for various risks, including “all-risks” insurance. However theThe existing insurance policies maintained by OPC and its subsidiaries may not cover certain types of damages or may not cover the entire scope of damage caused. In addition, OPC may not be able to obtain insurance on comparable terms in the future. OPC and its subsidiaries may be adversely affected if they incur losses that are not fully covered by their insurance policiespolicies.
Employees
As of December 31, 2017,2018, OPC had a total of 8892 employees, of which 5155 employees are in the operations division, and 37 are at OPC’s headquarters. Substantially all of OPC’s employees are employed on a full-time basis.
The table below sets forth breakdown of employees by main category of activity as of the dates indicated:
| As of December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Number of employees by category of activity: | ||||||||||||
| Plant operation and maintenance | 51 | 51 | 43 | |||||||||
| Corporate management, finance, commercial and other | 37 | 28 | 23 | |||||||||
| OPC Total | 88 | 79 | 66 | |||||||||
As of December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
| Number of employees by category of activity: | ||||||||||||
| Plant operation and maintenance | 55 | 51 | 51 | |||||||||
| Corporate management, finance, commercial and other | 37 | 37 | 28 | |||||||||
| OPC Total | 92 | 88 | 79 | |||||||||
Most of the OPC-Rotem power plant’s operations employees are employed under a collective employment agreement entered into in November 2015, which willis scheduled to remain in force through March 2019. Upon expiration of the agreement on April 1, 2019, OPC is expected to commence negotiations to renew this collective employment agreement on terms to be agreed among the negotiating parties. The agreement establishes and regulates which employees are subject to the agreement, as well as the career path that the employees will follow within the organization, from their initial hiring through the end of their employment. The agreement establishes the process of hiring employees, trial periods, starting compensation and salary, rates for wage increases and annual bonuses, as well as entitlement to vacation, sick days and convalescence pay, welfare benefits, disciplinary regulations, and the process for ending employment and the mechanism for resolving disputes between management and the employees’ representation. In addition, the agreement stipulates that OPC’s employees that are subject to the agreement will receive salary increase and annual bonus for each calendar year in the agreement period.
In March 2018, a collective employment agreement was signed with the Hadera power plant’s operations employees.Energy Center. This agreement was in line with the existing collective agreement of OPC-RotemOPC-Rotem power plant’s operations employees. The agreement will apply to the Hadera Energy Center employees whichand to the employees that will remain in force through March 2022.be hired at the Hadera Power station.
For further information on the risks relating to these collective employment agreements, see ““Item 3.D Risk Factors—Risks Related to OPC—OPC requires qualified personnel to manage and operate its various businesses and projects.”
Shareholders’ Agreements
OPC holds a 80% stake in OPC-Rotem. OPC has entered into a shareholders’ agreement with Veridis, the minority shareholder of OPC-Rotem. The shareholders’ agreement grants Veridis veto rights in connection with certain material decisions relating to OPC-Rotem, including: (a) a change in the incorporation documents; (b) winding up of OPC-Rotem; (c) change in rights attached to shares prejudicing a shareholder; (d) transactions with affiliated parties; (e) change in the OPC-Rotem’s activity; (f) reorganization, merger, sale of material assets and such like; (g) pursuit of new projects; (h) changes in share capital, issue of bonds or allotment of various securities, subject to the exceptions determined in the agreement; (i) change of accountants; and (j) appointment and dismissal of directors on behalf of Veridis.
The agreements grant the shareholders additional rights in the event of any of them selling OPC-Rotem shares, such as a right of first refusal and tag-along rights. The agreement also permits OPC to terminate the shareholder agreement in the event that Veridis sells its shares in OPC-Rotem.
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Legal Proceedings
For a discussion of significant legal proceedings to which OPC’s businesses are party, see Notes 21 and 33Note 19 to our financial statements included in this annual report.
Regulatory, Environmental and Compliance Matters
IEC generates and supplies most of the electricity in Israel in accordance with licenses granted it by virtue of the Israeli Electrical Market Law, and distributes and supplies all of the electricity in Israel. In addition, IEC serves as the “System Administrator” for the Israeli electricity system by virtue of the general license granted it.it (but, pursuant to the Israeli Government’s recent electricity sector reform, it is expected to cease acting as System Administrator in the upcoming years, see “—IEC Reform”). The System Administrator is intended to maintain balance in levels of supply and demand in the electricity market, manage the transmission of energy from power stations to substations at the reliability and quality required (by passing through the power grids), timing and performing maintenance works in production units and in transmission systems, managing commerce in Israel under competitive, equal and optimal terms, including performing agreements to purchase available capacity and energy from private electricity producers and for planning and developing the transmission and distribution systems. Within this framework, IEC, as System Administrator, sets the dispatch order of operation for production units, prepares connection surveys and more. IEC’s activity as the System Administrator is subject to the Standards published by the Electricity Authority.EA.
Pursuant to the Electricity Sector Law, IEC was defined as an “essential service provider” and as such is subject to the obligations pertaining to the proper management of the Israeli electrical services market. These obligations include, inter alia, submitting development plans, managing and operating the electrical system in Israel including the transmission and distribution systems, providing backup and infrastructure services to private power producers and to consumers as well as purchasing electricity from private power producers. In addition, IEC was declared a monopoly by the Israeli Antitrust Authority in the electricity sector, in the field of power supply – electricity production and sale, transmission and distribution of electricity and providing backup services to electricity consumers and producers.
Pursuant to the main legislation.Israeli Government’s electricity sector reform, the IEC will be required to sell five of its power plants through a tender process over the next 8 years, which is expected to reduce its market share to below 40%. The IEC will be permitted to build and operate two new gas-powered stations (through a subsidiary), but will not be authorized to construct any new stations or recombine existing stations. The IEC will also cease acting as the System Administrator. Furthermore, according to a paper published by the competition authority, the following limitations will be imposed:
| · | An entity may not acquire more than two of the sites sold in the tender process; |
| · | An entity that holds the right to an electricity generation plant with more than 30MW in capacity using conventional or cogeneration technology, may not acquire more than one of the sites sold in the tender process; |
| · | An entity may not hold more than 20% of the total planned installed capacity on the date of sale of all the sites being sold; and |
| · | An entity holding a right to a fuel venture may not acquire any of the sites being sold. |
Separate regulations are to be issued for the tender process for each power plant. Regulations for the tender of the Alon Tabor plant were issued in December 2018. Parties interested in participating in the tender of this site are required to submit their bids by May 2019. OPC submitted a request for early classification in the Alon Tabor site tender process in January 2019 and was admitted to the preliminary classification stage in February 2019. There is no certainty that OPC will be participating in the tender sale of this site.
Ministry of Energy
The Israeli Ministry of Energy is in charge ofregulates the energy and natural resources markets of the State of Israel: electricity, fuel, cooking gas, natural gas, energy conservation, water, sewerage, oil exploration, minerals, scientific research of the land and water, etc. The Ministry of Energy regulates public and private entities involved in these fields, and operates to ensure the markets’ adequate supply under changing energy and infrastructure needs, while regulating the markets, protecting consumers and preserving the environment.
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According to publications of the Ministry of Energy, the Ministry of Energy'sEnergy’s multi-year goals include diversified energy resources and ensuring reliability of supply during peacetime and emergency, developing effective and significant natural gas, and determining long-terms policies and appropriate regulations of the market'smarket’s electricity.
The Ministry of Energy'sEnergy’s main objectives in the electricity field are securing a reliable supply of electricity to the Israeli market, formulating development procedures to the electricity production sections, energy transmission and distribution, promoting policies to integrate renewable energies in electricity production in accordance with governmental decisions, formulating policies changing the market'smarket’s electricity structure, performing control and supervision of the implementation of the IEC'sIEC’s and private producers’ development plans, performing control, supervision and enforcement of implementing safety regulations according to the Electricity Law, 5714-1954, and handling legislature in the electricity market fields, rules of performing electricity works and security in electricity. The main objectives of the Ministry of Energy in its workplan for 2018 in the electricity area include consolidating a reform in the2019 included achieving an efficient and competitive electricity sector by focusing on the reform of the sector through the initiation of tenders for the sale of IEC power plants and promoting a national outline plan for infrastructuresthe transfer of system management activities from the IEC to the new System Administrator. In October 2018, the Ministry of Energy published (for public consultation) the 2019 objectives for the energy sector.sector, with the main two objectives being (a) the end of coal usage and the transition to natural gas and renewable energies and (b) 10% penetration of renewable energies in electrical manufacturing by 2020 and 17% by 2030.
EA
The Electricity Authority, or the EA, which is subordinated to the Ministry of Energy and operates in accordance with its policy, was established in January 2016, and replaced the Public Utility Authority, or PUAE, which operated until that time by virtue of the Electricity Sector Law. The EA has the authority to grant licenses in accordance with the Electricity Sector Law (licenses for facilities with a generation capacity higher than 100 MW also require the approval of the Minister of Energy), to supervise license holders, to set electricity tariffs and criteria for them, including the level and quality of services required from an “essential service provider” license holder, supply license holder, a transmission and distribution license holder, an electricity producer and a private electricity producer. Thus, the EA supervises both the IEC and private producers.
The Minister of Energy can dispute EA rulings and request a renewed discussion on specific rulings, except in the matter of the electricity tariffs, which the EA has full authority to set. In addition, the Minister of Energy has the authority to propose the appointment of some of the members of the EA board, as well as the authority to rule on electricity market policy on the subjects defined in the Electricity Sector Law.
According to the Electricity Authority Law, the EA may set the power rates in the market, based, among others, on IEC costs that the EA elects to recognize, and yield on capital. The EA sets different rates for different electricity sectors. According to the Electricity Sector Law, the IEC shall charge customers in accordance with rates set by the EA and shall pay another license holder or a customer in accordance with the relevant rates. In addition, the EA sets the tariffs paid by private electricity producers to the IEC for various services provided by the IEC, including measurement and meter services, system services, and infrastructure services.
The workplan of the EA for 2018 includes,included, among others,other things, the publication of a masterlong-term plan for the electricity sector, and the production segment, the promotion of renewable energies and decentralized generation, the consolidationformulation of a program for the development of a deliverytransmission and distribution system that will provide a response to the increase in demand the incorporationand utilization of different production technologies, the replacement of the IEC as System Administrator and an update to the centralization guidelines inadvancement of the electricity sector, regularizationsale of licensing guidelines.the IEC’s five sites.
For further information on related EA tariffs, see “—Industry Overview— Overview of Israeli Electricity Generation Industry.” For further information on the effect of EA tariffs on OPC’s revenues and margins, see “Item 5. Operating and Financial Review and Prospects—Material Factors Affecting Results of Operations—OPC— Sales—EA Tariffs.”
Independent Power Producers
In recent years, a substantial number of independent power producers have begun entering the Israeli electricity generation market, in view of, among others, increasing competition in the field of electricity generation and encouraging the construction and operation of private generation facilities. This entry has led to a significant decrease in the IEC’s market share in the sale of electricity to large electricity consumers (high and medium voltage consumers) such that in 2016, according to public IEC reports, its market share dropped to under 50% of electricity sales to large consumers.
Activity by independent power producers, including the construction of private power stations and the sale of electricity produced therein, is regulated by IPP Regulations and the Cogeneration Regulations, as well as the rules, decisions, and standards established by the EA. OPC-Rotem has a unique regulation by virtue of a tender, as detailed below.
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According to the Electricity Sector Law, none of the actions set in the Electricity Sector Law shall be carried out by anyone other than a license holder. The Licenses Regulations include provisions and conditions in the matter of issuing licenses, rules for operating under such licenses and the obligations borne by license holders.
In order to obtain a production license, a private electricity producer must file a request in accordance with the relevant regulations, and meet the threshold conditions. Among others, the manufacturer bears the burden to prove that the corporation requesting the license has a link to the land relevant to the facility. According to EA rulings, subject to meeting the terms (and with the approval of the Minister of Energy for licenses exceeding 100 MW), the developer is granted a conditional license. The conditional license holder must meet certain milestones for constructing its facility as detailed in the conditional license, and must also prove financial closing. Only after meeting these milestones and the commercial operation of the facility, the developer is granted a generation license (or Permanent License) determined by the EA for the period determined in such license (for licenses exceeding 100 MW, the license must be approved by the Minister of Energy).
This model, which is based on receiving a conditional license followed by a permanent license (subject to meeting the regulatory and statutory milestones), is applicable to both the production of electricity using conventional technology and cogeneration technology, with the exception of facilities with an installed capacity under 5 MW, for which no license is required for their operation, and photovoltaic facilities with an installed capacity over 5 MW, which require only a fixed license.
According to the 20162017 Electricity Market Report, as of 2016,2017, IPPs (including OPC-Rotem and including renewable energy) are active in the market with an aggregate capacity of approx. 4,048approximately 4,254 MW, constituting 23%24% of the Israeli electricity market’s total installed capacity. The Electricity AuthorityEA estimates that by the end of the decade,IEC reform period, IEC’s market share is expected to be approximately 40%45% of the installed conventional capacity in the market, approximately 33% of the installed capacity (including renewable energy) and approximately 32% of the installed capacity for gas. OPC’s market share is expected to drop below 40% of the generation in the Israeli electricity market will generated by IPPs (including renewable energy and self-generation).market.
The regulatory arrangements applicable to IPPs were determined while distinguishing between the different generation technologies they use and the various levels of voltage they will be connected to (according to installed capacity). The following are the key electricity production technologies used by private producers in Israel:
| · | Conventional technology – electricity generation using fossil fuel (natural gas or diesel oil). Exercise of the quota of IPPs using this technology amounts to |
| · | Cogeneration technology –electricity generation using facilities that simultaneously generate both electrical energy and useful thermal energy (steam) from a single source of energy. Exercise of the quota of generators using this technology amounts to |
| · | Renewable energy – generation of electric power the source of energy of which includes, inter alia, sun, wind, water or waste. The installed capacity of renewable energy generation facilities amounts to |
| · | Pumped storage energy – generation of electricity using an electrical pump connected to the power grid in order to pump water from a lower water reservoir to an upper water reservoir, while taking advantage of the height differences between them in order to power an electric turbine. The installed capacity of production facilities using this technology amounts to 644 MW out of a total quota of 800 MW assigned to |
According to the Electricity Sector Law, the IEC, as an essential service provider, is committed to purchasing electricity from IPPs at the rates and under the conditions set in the Electricity Sector Law and the regulations and standards promulgated thereunder (and, in relation to OPC-Rotem, by virtue of the tender and OPC-Rotem’s PPA with IEC). In addition, the IEC is committed to connecting the IPPs facilities to the distribution and transmission grid and providing them with infrastructure services in order to allow IPPs to provide power to private customers. The IEC is also committed to providing IPPs withcustomers and system administration services in return for a power system management services rate (the system cost rates).service.
Regulatory Framework for Conventional IPPs
The regulatory framework for current and under construction conventional IPPs was set by the PUAE in 2008. An IPP may choose to allocate its generation capacity, as “permanently available capacity,” or PAC, or as “variable available capacity,” or VAC. PAC refers to capacity that is allocated to IEC and is dispatched according to IEC’s instructions. PAC receives a capacity payment for the capacity allocated to IEC, as well as energy payment to cover the energy costs, in the event that the unit is dispatched. VAC refers to capacity that is allocated to private consumers, and sold according to an agreement between the IPP and a third party. Under VAC terms, IPP shall be entitled to receive availability payments for excess energy not sold to private customers. In addition, the IEC can purchase electricity allocated to it at variable availability, on a price quote basis. Within this regulatory framework, a private electricity producer can choose to allocate between 70% and 90% of their production capacity at high availability, and the rest at variable availability.
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Upon the development of the electricity market and the utilization of Regulation 241 quotas in December 2014, the EA published a follow-up regulationarrangement for conventional producers, and implemented dispatch of IPPs according to the economic dispatch order. According to this regulation, the production units shall be dispatched in accordance with an economic dispatch principle and independent of PPAs between producers and customers, and shall apply to producers with an installed capacity higher than 16 MW and up to a total output of 1,224 MW. This regulation is referred to as Regulation 914.
In May 2017, the EA published a decision amendingamended Regulation 914, in order to adapt it to914. Under the changing needs of the electricity sector and provide a response to the barriers that prevented electricity producers from reaching financial closure. According to the decision,amendment, a higher tariff was adopted for production facilities that comply with certain flexible requirements (in view of the high cost that characterize them), and the decisionrequirements. The amendment also determined that the facilities would receive a tariff based on normative characteristics. In addition, the decision offers open-cycle producers several alternatives, including receiving surplus gas from the gas agreements of other producers. The total quota for new facilities under this arrangement was limited to 1,100 MW distributed intoacross various stationsplants (at least 450 MW and up to 700 MW for combined cycle facilities, at least 400 MW and up to 650 MW for flexible open cycle facilities). According toFurthermore, under the decision,amendment the EA prohibits entry into bilateral transactions by open-cycle facilities and demands that combined-cycle facilities sell at least 15% of their capacity to private consumers. In addition, as part of the decision andFinally, in order to grant IPPs sufficient time to reach financial closure,closing, Regulation 914 was extended to apply to producers who will receive approvalslicenses no later than January 1, 2020.
In addition, in December 2017,March 2019, the EA published a proposed resolution was published fordecision regarding the establishment of generators connected to the high-voltage network without a hearing to regulatetender process. This decision would permit the activityestablishment of gas-fired productiongeneration facilities that are connected to the distribution network. The resolution encouragestransmission grid or integrated in the constructionconnection of production facilities near the consumption site by providing a capacity-dependent incentive tariff of NIS 140-180/kW per year. Accordingconsumer connected to the hearing,transmission grid (excluding renewable energy) for a maximum capacity of 500 MW and provided they receive tariff approval by the end of 2023. These generation facilities will only be permitted to sell electricity to customers within the facility (and not other private customers) and to provide the rest of their available capacity to the System Administrator, that will upload the capacity tariff will be paid to facilities that comply with certain conditions (mainly a load factor of no less than 35% per year) upthe grid according to a quota of 300 MW.central upload system.
OPC-Rotem’s Regulatory Framework
OPC-Rotem operates according to a tender issued by the state of Israel in 2001 and, in accordance therewith, OPC-Rotem and the IEC executed the IEC PPA in 2009, which stipulates OPC'sOPC’s regulatory framework. OPC-Rotem’s framework differs from the general regulatory framework for IPPs, as set by the PUAE and described above.
According to the IEC PPA, OPC-Rotem may sell electricity in one or more of the following ways:
| 1. | Capacity and Energy to IEC: according to the IEC PPA, OPC-Rotem is obligated to allocate its full capacity to IEC. In return, IEC shall pay OPC-Rotem a monthly payment for each available MW, net, that was available to IEC. |
In addition, when IEC requests to dispatch OPC-Rotem, the IEC shall pay a variable payment based on the cost of fuel and the efficiency of the station. This payment will cover the variable cost deriving from the operation of the OPC-Rotem Power station and the generation of electricity.
| 2. | Sale of energy to end users: OPC-Rotem is allowed to inform IEC, subject to the provision of advanced notice, that it is releasing itself in whole or in part from the allocation of capacity to IEC, and extract (in whole or in part) the capacity allocated to IEC, in order to sell electricity to private customers pursuant to the Electricity Sector Law. OPC-Rotem may, subject to 12-months’ advanced notice, re-include the excluded capacity (in whole or in part) as capacity sold to IEC. |
OPC-Rotem informed IEC, as required by the IEC PPA, of the exclusion of the entire capacity of its power plant, in order to sell such capacity to private customers. Since July 2013, the entire capacity of OPC-Rotem has been allocated to private customers.
The IEC PPA includes a transmission and backup appendix, which requires IEC to provide transmission and backup services to OPC-Rotem and its customers, for private transactions between OPC-Rotem and its customers, and the tariffs payable by OPC-Rotem to IEC for these services. Moreover, upon entering a PPA between OPC-Rotem and an individual consumer, OPC-Rotem becomes the sole electricity provider for this customer, and IEC is required to supply power to this customer when OPC-Rotem is unable to do so, in exchange for a payment by OPC-Rotem according to the tariffs set by the EA for this purpose. For further information on the risks associated with the indexation of the EA’s generation tariff and its potential impact on OPC-Rotem’s business, financial condition and results of operations, see “Item 3.D Risk Factors—Risks Related to OPC— Changes in the EA’s electricity rates may reduce OPC’s profitability.”
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Regulatory Framework for Cogeneration IPPs
The regulatory framework for current and under construction cogeneration IPPs was established by the PUAE in its 2008 and 2016 decisions. A cogeneration IPP can sell electricity in the following ways:
| 1. | At peak and shoulder times, one of the following shall apply: |
a. each year, the IPP may sell up to 70% of the total electrical energy, calculated annually, produced in its facility to IEC—for up to 12 years from the date of the grant of the license; or
b. each year, the IPP may sell up to 50% of the total electrical energy, calculated annually, produced in its facility to IEC—for up to 18 years from the date of the grant of the license.
| 2. | At low demand times, IPPs with units with an installed capacity of up to 175 MW, may sell electrical energy produced by it with a capacity of up to 35 MW, calculated annually or up to 20% of the produced power, inasmuch as the installed output of the unit is higher than 175 MW, all calculated on an annual basis. |
According to the regulations, if a cogeneration facility no longer qualifies as a “Cogeneration Production Unit,” other rate arrangements are applied to it, which are inferior to the rate arrangements applicable to cogeneration producers.
In December 2018, the EA published a proposed decision for hearing regarding arrangements for high voltage generators that are established without a tender process. This would also enable the establishment of cogeneration facilities.
OPC-Hadera’s Regulatory Framework
OPC-Hadera holds a conditional license, granted on October 19, 2012 (as amended on August 29, 2016), for the construction of a cogeneration power station in Israel. On September 18, 2016, OPC-Hadera provided the EA a notice that it had reached “financial closing” with respect to financing for the project.
Moreover, as set forth above, OPC-Hadera must meet certain conditions before it will be subject to the regulatory framework for cogeneration IPPs and be considered a “Cogeneration Production Unit.” For example, OPC-Hadera will have to obtain a certain efficiency rate which will depend, in large part, upon the steam consumption of OPC-Hadera’s consumers. In circumstances where OPC-Hadera no longer satisfies such conditions and therefore no longer qualifies as a “Cogeneration Production Unit,” other rate arrangements, are applied to it, which are inferior to the rate arrangements applicable to cogeneration producers.
Tzomet’s Regulatory Framework
The Tzomet power plant is expected to be constructed pursuant to Regulation 914 and will be subject to the conditions and limitations thereunder, see “—Regulatory Framework for Conventional IPPs.”
In August 2017, the IEC provided the results of its feasibility study regarding the connection of the Tzomet plant to the national power grid. According to the results, the IEC estimated that it would take longer for the Tzomet power plant (currently under construction) to be connected to the national power grid than estimated by Tzomet. Tzomet has appealed the results of the feasibility study, but did not receive a positive feasibility study during 2018 that would permit connection to the national power grid within the timeframe required by Regulation 914.
Qoros
Kenon holds a 24% interest in Qoros, a China-based automotive company, which began commercial operations in 2013.and has entered into an agreement to reduce its interest to 12% of Qoros. Kenon used to hold a 50% stake in Qoros prior to the New Qoros Investor’sMajority Shareholder in Qoros’ investment, and was one of the founding members of the company. Kenon continues to remain actively involved in the business with its current stake and right to appoint two of the nine directors on Qoros’ board.
In 2018, the Majority Shareholder in Qoros acquired 51% of Qoros from Kenon and Chery for RMB3.315 billion, as part of a total investment of approximately RMB6.63 billion by the Majority Shareholder in Qoros, of which RMB6.5 billion was ultimately invested in Qoros’ visionequity. As a result, Kenon and Chery have 24% and 25% stakes in Qoros, respectively. Qoros updated its business license to reflect the change in its ownership in December 2017. In January 2019, Kenon agreed to sell half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros for a purchase price of RMB1,560 million (approximately US$227 million), which is based on the same post-investment valuation as the initial investment by the Majority Shareholder in Qoros. The sale is subject to design, manufacture, distribute,obtaining customary relevant third-party consents and service (through dealers) high quality cars. other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros, the Majority Shareholder will hold 63% and Chery will own 25%. For further information, see “Item 4.B Business Overview—Our Businesses—Qoros —Qoros’ Investment Agreement” and “Item 4.B Business Overview—Our Businesses—Qoros —2019 Qoros Sale Agreement.”
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Kenon has outstanding back-to-back guarantees to Chery in respect of Qoros’ debt of up to RMB288 million (approximately $44 million), with respect to debt in principal of RMB320 million (approximately $47 million), and has pledged a substantial portion of its interest in Qoros to support certain Qoros debt, as well as Chery’s guarantees of Qoros debt.
Qoros’ manufacturing facility in Changshu, China has a technical capacity of 150 thousand units per annum, which can be increased to approximately 220 thousand units per annum through the utilization of different shift models (and further increased through additional shift optimizations and improvementsmodels. Qoros sold approximately 62,000 vehicles in workday efficiency). Qoros sold2018, as compared to approximately 15,000 vehicles in 2017, as compared to approximately 24,000 vehicles in 2016. Qoros sold approximately 11,400 cars in the first quarter of 2018, a more than 200% increase as compared to approximately 3,700 cars sold in the first quarter of 2017, with a2017. A substantial number of such sales in Q1 2018 reflecting purchase orders purchases from an entity introduced by the NewMajority Shareholder in Qoros. Qoros Investor.
Qoros is currently focused on the Chinese passenger vehicle market, which experienced rapid growth in recent years driven by significant expansion of the Chinese economy. China iseconomy prior to 2017. In 2018, the largest vehicle marketsmarket contracted for the first time in 28 years, primarily due to the worldeconomy’s slowdown and the end of automobile tax incentives in terms of units sold (although growth rates have been lower in recent years).China. The table below sets forth domestic sales volumes of passenger vehicle models in China between 20122013 and 2017.2018.
New Energy Vehicle Market in China
The Chinese central government has stated that the NEV market is critical for the development of the Chinese automobile industry and China’s economic growth, and has implemented a number of policies to promote the growth of the market. Sales of NEV cars (which includes plug-in and battery electric vehicles) increased from approximately 290,000 units in 2016 to approximately 552,0001 million units in 2017, representing a growth rate significantly higher than that of internal combustion engine cars.2018.
Chinese national and regional governments have implemented various policies to promote the growth of the NEV market, including through purchase subsidies from central and local governments and purchase tax cuts.incentives. However, according to public reports, a number of these subsidies are expected to be gradually phased out over the next few years,reduced by 50% on average in 2019, which may affect the demand for NEVs in China.
Pricing Trends in the Chinese Passenger Vehicle Market
Qoros’ Description of Operations
Qoros designs, engineers and manufactures a new brand of automobiles manufactured in China, designed to deliver international standards of quality and safety, as well as innovative features. In 2017,2018, Qoros sold approximately 15,00062,000 cars, as compared to approximately 24,00015,000 cars in 2016. Qoros sold approximately 11,400 cars in the first quarter of 2018, a more than 200% increase as compared to approximately 3,700 cars sold in the first quarter of 2017 with a substantial number of such sales in Q1 2018 reflecting purchase orders introduced by the New Qoros Investor.Majority Shareholder in Qoros.
Models
Qoros currently sells C-segment models, including:
| · | Qoros 3 Sedan –launched in |
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| · | Qoros 3 Hatch –launched in |
| · | Qoros 3 City SUV –launched in |
| · | Qoros 5 SUV –launched in |
| · | Qoros 3GT –launched in |
Qoros’ platform has been designed to enable the efficient introduction of new models in the C- and D-segments. Qoros developed its vehicles in accordance with international standards of quality and safety, working in conjunction with global entities from both automotive and non-automotive industries.
Qoros' strategy contemplatesincludes the development of NEV models. Qoros has recently introduced an NEV model.model of the Qoros intendsSedan, the Qoros 3 EV500. Qoros is planning to increase its research and development expenditures with respect tointroduce additional NEV development.
Qoros’ Manufacturing: Property, Plants and Equipment
Qoros conducts its vehicle manufacturing and assembly operations at its 150 thousand unit per annum, 790,000 square meter factory by land size in Changshu, China, for which it has a land use right until 2062. Qoros’ international-standardThis technical capacity of the manufacturing facility incorporates comprehensive, flexible capabilities, including body assembly, paint shop, final vehicle assembly and end-of-line testing. Qoros’ paint shop utilizes advanced equipment and robotic technology, to contribute to the overall effectiveness and efficiency of Qoros’ painting operations.
Qoros’ Sourcing and Suppliers
Qoros sources the component parts necessary for its vehicle models from over 100 global suppliers. Qoros aims to establish long-term relationships with its suppliers as a means of building loyalty, achieving competitive pricing, and achieving component quality and prompt delivery. Qoros has implemented enterprise resource planning and management software to automate its procurement and inventory processes and to integrate them with its financial accounting system.
Qoros’ Commercial Agreements with Shareholders
Qoros sources its engines and certain spare parts from Chery in the ordinary course of Qoros’ business and there are platform sharing arrangements between Qoros and Chery, and Qoros has entered into various commercial agreements with respect to the provision of such supplies from Chery.
Qoros’ Patents and Licenses
Dealers
Qoros markets its vehicles in China primarily through a network of independent authorized retail dealers, with whom Qoros enters into non-exclusive relationships. As of December 31, 2017, 2018:
Qoros’ dealerships included 160 points of sales, 29 additional points of sales under construction and Memorandums of Understanding;
Qoros had 7396 full-service dealer stores,dealerships, providing Qoros’ customers with dealers and authorized salesmen, showrooms, and serviceservices and parts, under one roof; the remaining portion of Qoros’ dealership network comprises only showrooms. As of December 31, 2017, Qoros’ dealerships included 113 points of sales, 5 additional points of sales under constructionshowrooms; and Memorandums of Understanding. Qoros intends to create incentives for its high-performing dealers to open additional points of sales.
Qoros enters into a contract with each authorized dealer, agreeing to sell to the dealer all specified vehicle lines at wholesale prices and granting to the dealer the right to sell those vehicles to retail customers from an approved location. It is expected that Qoros’ dealers will offer the full vehicle model lineup offered by Qoros. Authorized Qoros dealers also offer parts, accessories, service and repairs for Qoros’ vehicles, using genuine Qoros parts and accessories obtained directly from Qoros. Qoros’ dealers are authorized to service Qoros’ vehicles under Qoros’ limited warranty program, and those repairs are required to be made only with Qoros’ parts. In addition, most of Qoros’ dealers also provide their customers access to retail financing, vehicle insurance and warranty packages. The dealership facilities are based on Qoros’ branded construction plans, to ensure consistency and quality, and are constructed by the dealer using its own capital resources. Dealers are entitled to sales rebates from Qoros if they achieve certain purchase targets or meet certain other criteria).operated 2 self-owned dealerships.
Auto Financing Program
Customer financing is available through dealers and financing packages are also offered by Chery Huiyin Motor Finance Service, Co. Ltd., or Huiyin, a Wuhu Chery affiliate. Qoros does not provide direct financing to customers at this time.
Qoros’ Competition
The passenger vehicle market in China is highly competitive, with competition from many of the largest global manufacturers (acting through joint ventures), including European, U.S., Korean and Japanese automakers, and established domestic manufacturers. As the size of the Chinese automotive market continues to increase, Qoros anticipates that additionalAdditional competitors both international and domestic, may seek to enter the Chinese automotive market and that market participants will act to maintain or increase their market share. For information on the risks related to Qoros’ competition, see “Item 3.D Risk Factors—Risks Related to Our Interest in Qoros—Qoros’ business is subject to intense competition.”market.
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As part of its strategy, Qoros has stated that it intends to develop an NEV vehicle.vehicles. For example, in December 2018, Qoros introduced its new NEV model, the Qoros 3 EV500. Qoros expects to experience significant competition in the NEV market, as OEMs are required to satisfy certain recently issued fuel consumption andregulations, under which the automakers must obtain a certain NEV credit management standards.score by 2019, which score is related to the number of NEVs the automaker produces.
Qoros’ Investment Agreement
In January 2018, Kenon announced the NewMajority Shareholder in Qoros Investor completed a transaction to purchaseacquired 51% of Qoros from Kenon and Chery for RMB3.315 billion (approximately $526$482 million), which iswas part of an investment structure to invest a total of approximately RMB6.63 billion (approximately $1,052$964 million) by the New Qoros Investor of which RMB6.5 billion will ultimately be investedMajority Shareholder in Qoros’ equity.Qoros. As a result, KenonKenon’s and Chery now haveChery’s interest in Qoros was reduced to 24% and 25% stakes in Qoros,, respectively. For purposes of this section, any references to Kenon will be deemed to include Quantum (Kenon's(Kenon’s wholly-owned subsidiary which owns Kenon'sKenon’s interest in Qoros) and any references to Chery will be deemed to include Wuhu Chery (the direct owner of Chery'sChery’s interest in Qoros).
The investment was made pursuant to an investment agreement among the NewMajority Shareholder in Qoros, Investor, Quantum, Wuhu Chery and Qoros. In connection with this investment, Kenon received total cash proceeds of RMB 1.69 billion ($268 million) and Chery received total cash proceeds of RMB 1.625 billion ($258 million). A description of the key terms of the investment agreement and the investment is set forth below. The investment also involved an amendment of the Qoros joint venture agreement which is described below.
In connection with this investment, Kenon received initial cash proceeds of RMB1.69 billion (approximately $246 million) and Chery received cash proceeds of RMB1.625 billion (approximately $236 million). The investment iswas based on an RMB6.5 billion pre-investment valuation of Qoros, excluding RMB1.9 billion (approximately $276 million) principal amount of existing shareholder loans.
For Kenon and Chery, this effectively required reinvestment of the proceeds received from the sale of their interests in Qoros, so the transaction did not involve any new money investment from Kenon or Chery.
The NewMajority Shareholder in Qoros Investor has advanced theirits proportionate share totallingtotaling RMB3.315 billion directly to Qoros. As a result, all funds for the investment, totalling RMB6.63 billion, have now been advanced by the New Qoros Investor.
At the time of this investment in Qoros, Kenon and Chery willhad outstanding loans to Qoros of RMB944 million. The investment agreement provided for repayment of a portion of these loans. The parties agreed that instead of Kenon and Chery reinvesting the full RMB1.65 billion each was originally required to contribute to Qoros (from the proceeds of the sale of their interest in Qoros), Kenon and Chery would use proceeds they received from the sale of their Qoros interests to partially fund their respective portions of the investment in Qoros, or to partially fund together with the conversion of existing shareholder loans. The transaction will not involve any new money invested from Kenon or Chery. In total, the investment agreement provides for Kenon to invest RMB1.56 billion and, as a result, Kenon retained RMB130 million, which funds were paid to Ansonia as further detailed below.
Kenon does not have any further obligations to invest in Qoros. Kenon used a portion of these funds to repay the outstanding loan of $77 million owed to Ansonia, Kenon’s major shareholder, which had previously been loaned directly to Quantum to support its financing of Qoros.
In addition, Qoros is required to pay to Kenon net interest payments on past shareholder loans as well as compensation for foreign exchange fluctuations in the total net amount of approximately $11 million, of which $8 million has been received to date.
Guarantee Obligations and Equity Pledges
Chery has guaranteed a portion of Qoros'Qoros’ obligations under its RMB3 billion and RMB700 million credit facilities, and Kenon has provided back-to-back guarantees to Chery in respect of a portion of Chery'sChery’s obligations. Kenon'sKenon’s back-to-back guarantee obligations are approximately RMB320RMB288 million (approximately $44 million) relating to Qoros loans in principal amount of RMB288 million.RMB320 million (approximately $47 million). In addition, Kenon and Chery have also pledged a significant portion of their equity interests in Qoros to secure Qoros'Qoros’ obligations under its RMB1.2 billion credit facility.
In connection with previous reductions in Kenon'sKenon’s back-to-back guarantee obligations, Kenon provided cash collateral to Chery that was used to fund shareholder loans on behalf of Chery for a total amount of RMB244 million and pledged a portion of Kenon'sKenon’s equity interests in Qoros to Chery. The agreements for this guarantee and pledge provide that in the event that Chery’s obligations under its guarantees are reduced, including through guarantee releases, Kenon is entitled to the proportionate return from Chery of the RMB244 million funding provided on Chery’s behalf and/or a release of the equity pledged to Chery.
As part of the investment, the NewMajority Shareholder in Qoros Investor willwas required to assume its pro rata share of the guarantees and equity pledges based on post-investment equity ownership in Qoros, which will beis subject to further adjustment following any future changes in the equity ownership in Qoros (including as a result of the exercise of the put option or investment right by a shareholder under the investment agreement)agreement or other acquisition of additional equity in Qoros).
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The NewMajority Shareholder in Qoros Investor has assumed its proportionate obligations with respect to the RMB3 billion and RMB700 million loan facilities, and as a result, in January 2018, Chery repaid Kenon RMB120 million (approximately $18 million2) out of the total RMB244 million (approximately $39 million) previously advanced, and a significant portion of the Qoros equity pledged by Kenon to Chery was released. These repayments and releases of equity pledges were required under the terms of the advances, which provided for repayment of the advances and release of pledges to Chery upon a reduction of guarantee obligations of Chery, and the investment by the New
The Majority Shareholder in Qoros Investor resulted in guarantee reductions for Chery requiring such repayment and releases from the pledge. The New Qoros Investor is still in the process of assuming its proportionate pledge obligations with respect to the RMB1.2 billion loan facility after which Kenon will alsois required to be proportionately released from its pledge obligations thereunder, subject to the Qoros bank lender consent. Substantially all of Kenon'sKenon’s equity in Qoros is currently pledged.
Repayment of Loans to Ansonia
Kenon iswas party to loan agreements with Kenon’s major shareholder Ansonia, which loan agreements were entered into in 2016 to provide loans to Kenon to fund Qoros. The total outstanding principal amount of the loans owing fromIn 2018, Kenon to Ansonia was approximately $75fully repaid $77 million (including interest) as of December 31, 2017.
Kenon’s Put Option; the New Qoros Investor'sMajority Shareholder in Qoros’ Right to make Further Investments in Qoros
The investment agreement provided Kenon with a put option over its remaining equity interest in Qoros, as follows:
During the three-year period beginning from the closing of the investment, Kenon has the right to cause the NewMajority Shareholder in Qoros Investor to purchase up to 50% of its remaining equity interest in Qoros, following the related capital increase for up to RMB1.56 billion, (approximately $248 million), being the price for 50% of Kenon's remaining 24% interest in Qoros, subject to adjustments for inflation. inflation; and
From the third anniversary of the closing until April 2023, Kenon has the right to cause the NewMajority Shareholder in Qoros Investor to purchase up to all of its remaining equity interests in Qoros for up to a total of RMB3.12 billion (approximately $495 million) (for Kenon's(for Kenon’s full 24% interest in Qoros), subject to adjustment for inflation. Another company within the Baoneng group effectively guarantees this put option by also serving as a grantor of the option. The put option requires six months’ notice for exercise.
During the two-year period from the closing of the investment, the NewMajority Shareholder in Qoros Investor has the right to increase its stake in Qoros to up to 67%, at the same price as the capital increase in the investment plus interest of 10% per annum from the closing of the Investment.investment.
The investment agreement provides that any changes in the equity holdings of Qoros by Kenon, Chery or the NewMajority Shareholder in Qoros, Investor, including as a result of the put option and investment right described above, will result in adjustments to the respective parties’ pro rata obligations of the Qoros bank guarantees and pledges described above according to their equity ownership in Qoros.
Pursuant to the investment agreement, the NewMajority Shareholder in Qoros Investor has agreed to introduce approximately 100,000 vehicle purchase orders to Qoros each year between 2018 and 2020 following the entry into further agreements with respect to these purchase orders. Such further agreements, which will need to set out specific details relating to models to be purchased, purchase price and other details, haveThis minimum number of purchases orders was not yet been fully executed and are expected to be executed gradually over time. While we expect that the New Qoros Investor will introduce meaningful vehicle purchase ordersmet in the 2018, the full amount of the vehicle purchase order commitment may not be met for 2018. For risks associated with this agreement, including the risk that the New Qoros Investor does not introduce some or all of the vehicle purchase orders it has agreed to introduce or the terms of such purchase orders, see “Item 3.D Risk Factors—Risks Related to Our Interest in Qoros— The New Qoros Investor may not satisfy its commitment to introduce vehicle purchase orders to Qoros.”
Governance of Qoros
Kenon's Agreement to Sell Half of its Remaining Interest in Qoros to the New Qoros Investor
In January 2019, Kenon agreed to sell half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros for a purchase price of RMB1,560 million (approximately US$227 million), which is based on the same post-investment valuation as the initial 2018 investment by the Majority Shareholder in Qoros. The sale is not being made pursuant to the put option described above, and Kenon retains its rights under the put option over its remaining 12% stake in Qoros. The sale is subject to obtaining customary relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros, the Majority Shareholder in Qoros will hold 63% and Chery will own 25%. Furthermore, the Majority Shareholder in Qoros will be required to assume its pro rata share of guarantees and equity pledges of Kenon and Chery based on this change in its equity ownership in Qoros.
Kenon retains its rights under the put option over its remaining 12% interest in Qoros. Kenon will evaluate its options with respect to its remaining stake in Qoros, including whether or not to exercise its rights under the put option, in accordance with its strategy and other relevant factors relating to its interest in Qoros. In addition, Kenon may in the future sell further portions or all of its remaining stake in Qoros to the Majority Shareholder in Qoros or otherwise.
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Qoros’ Joint Venture Agreement
We are party to a joint venture agreement, or the Joint Venture Agreement, entered into on February 16, 2007, which was recently amended to reflect the New Qoros Investor’sMajority Shareholder in Qoros’ 51% interest in Qoros as well as certain terms agreed pursuant to the investment agreement. Following completion of the sale described above under “—2019 Qoros Sale Agreement,” the Joint Venture Agreement shall be further amended to reflect the Majority Shareholder in Qoros’ 63% interest in Qoros. The Joint Venture Agreement sets forth certain rights and obligations of each of Quantum, the wholly-owned subsidiary through which we own our equity interest in Qoros, Wuhu Chery and the NewMajority Shareholder in Qoros Investor with respect to QorosQoros.
The Joint Venture Agreement is governed by Chinese law. Under the Joint Venture Agreement, certain matters require the unanimous approval of Qoros’ board of directors, while other matters require a two-thirds or a simple majority board approval. Matters requiring unanimous approval of the Qoros board include amendments to Qoros’ articles of association, changes to Qoros’ share capital, the merger, division, termination or dissolution of Qoros, the sale or otherwise disposal of all or a material part of Qoros’ fixed assets for an amount equal or greater than RMB200 million (approximately $29 million) and the issuance of debentures or the creation of third party security interests over any of Qoros’ material fixed assets (other than those provided in connection with legitimate Qoros loans). Matters requiring approval by two-thirds of the board include the acquisition of majority equity interests in another entity for an amount exceeding 5% of Qoros’ net asset value, termination of any material partnership or joint venture contract, profit distribution plans, the sale or otherwise disposal of all or a material part of Qoros’ fixed assets for an amount equal or greater than RMB60 million (approximately $9 million) but less than RMB200 million, and capital expenditures and investments which are equal to or greater than the higher of $4 million or 10% of the approved annual budget.
Pursuant to the terms of our Joint Venture Agreement, we have the right to appoint two of Qoros’ nine directors, Wuhu Chery has the right to appoint two of Qoros’ directors and the NewMajority Shareholder in Qoros Investor has the right to appoint the remaining five of Qoros’ directors. If the New Qoros Investor exercises its right to increase itsMajority Shareholder in Qoros’ stake in Qoros to upincreases to 67% (see “—Kenon’s Put Option; the New Qoros Investor's Right to make Further Investmentsthrough a new investment in Qoros,”), the board of directors of Qoros will be further adjusted such that Qoros will have a six-member board of directors, of which the NewMajority Shareholder in Qoros Investor will have the right to appoint four directors, while Kenon and Wuhu Chery will each have the right to appoint one director. The NewThe Majority Shareholder in Qoros Investor has the right to nominate Qoros’ Chief Executive Officer and Chief Financial Officer. The nomination of Qoros’ Chief Executive Officer and Chief Financial Officer are each subject to the approval of Qoros’ board of directors by a simple majority vote. Quantum and Wuhu Chery each have the right to nominate one of Qoros’ deputy Chief Financial Officers. Such nominations by Quantum and Wuhu Chery are subject to the approval of Qoros’ board of directors by a simple majority vote.
The Joint Venture Agreement restricts transfers of interests in Qoros by the shareholders (other than transfers to affiliates). Quantum has the right to transfer up to 50% of its interest in Qoros to a third-party at any time (subject to the New Qoros Investor’sMajority Shareholder in Qoros’ right of first refusal described below). Quantum may not assign the remaining 50% of its interest in Qoros to a third-party during the three-year period following the change in shareholding in Qoros pursuant to the investment agreement with the NewMajority Shareholder in Qoros Investor without the consent of the other joint venture partners. After the three-year lock-up period, Quantum may transfer all of its interest in Qoros to any third-party, subject to the rights of first refusal discussed below. During the five-year period following the closing of the investment, Wuhu Chery and the NewMajority Shareholder in Qoros Investor may not transfer any or all their interests in Qoros to any third-party without consent of the other joint venture partners (except for assignments in relation to an initial public offering of Wuhu Chery’s interest in Qoros).
Subject to the lock-up restrictions set forth above, if any of the joint venture partners elects to sell any of its equity interest in Qoros to a third party (i.e., other than an affiliate), the other joint venture partners have the right to purchase all, but not less than all, of the equity interests to be transferred, subject to certain conditions relating to the minimum price for such sale. In the event that more than one joint venture partner elects to exercise its right of first refusal, the shareholders shall purchase the equity interest to be transferred in proportion to their respective interests in Qoros at such time.
The Joint Venture Agreement also reflects Kenon’s put option and the New Qoros Investor’s call optionMajority Shareholder in relationQoros’ right to their interestsmake further investments in Qoros. For further information on the put and call option, see “—Qoros’ Investment Agreement— Kenon’s Put Option; the New Qoros Investor's Right to make Further Investments in Qoros.”
The Joint Venture Agreement expires in 2042. The Joint Venture Agreement terminates prior to this date only (i) if the joint venture partners unanimously agree to dissolve Qoros (ii) in the event of any other reasons for dissolution specified in the Joint Venture Agreement and Articles of Association of Qoros or (iii) upon occurrence of any other termination event, as specified in PRC laws and regulations. For further information on the risks related to the Joint Venture Agreement, see “
Changes to Qoros’Qoros' Management
In recent years, Qoros has made a number of changes at the executive management level. In 2018,level, including the New Qoros Investor has appointed appointment of a new chief executive officer, and chief financial officer, for Qoros.chief technology officer and chief operating officer in early 2019.
Qoros’ Legal Proceedings
During 2017,2018, Qoros was subject to various claims brought by certain of its suppliers and service providers claiming unpaid amounts. As of December 31, 2017,2018, the total amounts claimed are approximately RMB142 million.RMB125 million (approximately $18 million).
During 2017,2018, Qoros settled various outstanding claims previously brought by its suppliers and service providers. As of December 31, 2017, Qoros has settledproviders, in an amount of approximately RMB121 million, out of which approximately RMB39 million was paid by the end of 2017.RMB26 million.
Qoros’ Regulatory, Environmental and Compliance Matters
Qoros is subject to regulation, including environmental regulations, in China and the Jiangsu Province. Such regulations are becoming increasingly stringent and focus upon the reduction of emissions, the mitigation of remediation expenses related to environmental liabilities, the improvement of fuel efficiency, and the monitoring and enhancement of the safety features of Chinese vehicles. For example, in July 2020, the Chinese government has introduced stringent fuel consumption regulations whichregulation on emissions (Stage 6 Limits and Measurement Methods for Emissions from Light Duty Vehicles) will take effect, in 2020 for vehicles sold by Chinese automotive manufacturers. In order to comply with these fuel consumption standards, Qoros may need to alter the composition of its fleet of vehicles, which may include developing an electric vehicle.will require that new models meet certain emission standards. Qoros’ facility, activities and operations are also subject to continued monitoring and inspection by the relevant Chinese authorities. Qoros believes that it is in compliance with applicable Chinese government regulations.
ZIM
We have a 32% stake in ZIM, an international shipping company that operates in select markets. ZIM was founded in Israel in 1945, and has over 70 years of experience in the shipping industry providing customers with seaborne transportation and logistics services and solutions. As of December 31, 2017,2018, ZIM operated 8173 vessels, (ofof which 73 were owned and 7470 were chartered)chartered (including 5 vessels accounted under financial leases and 4 vessels accounted under sale and leaseback refinancing agreements), with a total shipping capacity of 385,974348,053 TEUs. As of December 31, 2017,2018, ZIM chartered 92%96% of its capacity, and approximately 63%62% of its charter leases by capacity have durations of less than one year.
As of December 31, 2017,2018, ZIM operated a global network (including lines operated pursuant to cooperation arrangements) of over 5060 weekly lines, calling at approximately 267230 port of calls in approximately 7270 countries. ZIM’s network includes strategically located hubs and regional feeder lines to increase geographical coverage. ZIM has cooperation agreements with other leading container liner companies and alliances,2M Alliance (as described below), allowing ZIM to increase its fleet utilization by sharing capacity, expand its service offering and benefit from cost savings. ZIM’s vessels have capacities ranging from less than 1,000 TEUs to approximately 11,000 TEUs. Within ZIM’s global network, ZIM offers a variety of services, including land transportation and logistical services, as well as specialized shipping solutions, such as the transportation of out-of-gauge cargo, refrigerated cargo and hazardous cargo.
Pursuant to ZIM’s articles of association, Kenon currently has the right to appoint up to 2 directors to ZIM’s board of directors (even if our interest in ZIM’s share capital otherwise entitles us to appoint more than 2 directors to ZIM’s board of directors). This right will expire if ZIM’s board of directors is comprised of more than nine directors, in which case Kenon will be entitled (alone or together with others) to appoint a number of directors that corresponds to its equity interest in ZIM.
ZIM’s Industry Update
In recent years, conditions in the shipping industry have been challenging due to a large supply-demand gap and an increase in vessel capacity. In 2016, freight rates were historically low, but began to increase moderatelyDuring 2017, in light of the second half of 2016Hanjin dissolution, carriers started implementing responsible capacity management, and on the aggregate, continued to increase in 2017, asincreased scrapping and slippage activities. As a result, of, among other factors, increased idle fleet levelsthe gap between supply and intensive scrapping activity, as well as the receivership of Hanjin, one of the leading companiesdemand narrowed, resulting in the shipping industry.improved market conditions. In addition, induring 2017, the demand for containerized goods increased as a result of global GDP growth which resulted in increased private consumption. These factors resulted in improved profitability for the shipping industry in 2017. However, in 2018, demand growth has been moderate, mainly driven by geopolitical instability and recession concerns, following many years of robust growth. A large number of new large-scale vessels were delivered in 2018 as capacity grew on a net basis by 5.7% compared to 2017. The ongoing overcapacity problem together with substantial increases in operational costs, mainly bunker prices and charter rates, have negatively impacted the industry’s profitability.
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The oversupply of vessel capacity which has negatively affectedincrease in tariffs and trade tensions between the shipping industry in recent years is expected to continue in the near future asU.S. and China and other countries have impacted the global fleet continuestrade environment. In order to increase. In response, carriersavoid the impact of additional tariffs, certain customers have elected to transport some of their cargo in Q4 2018 and vessel owners continued scrapping, as approximately 200 vessels representing approximately 664,717 TEUs and approximately 160 vessels (representing approximately 427,030 TEUs) were soldearlier in 2019, which may result in less demand for demolitionZIM’s services later in 2016 and 2017, respectively, thereby offsetting in part the increase in capacity from new vessels.2019.
In addition, the container shipping market has experienced significant consolidation as carriers look for operational savings that will improve efficiency and margins. In recent years, the shipping industry has experienced M&A activity (including, for example, the 2018 acquisition of OOCL by COSCO and 2018 merger of three Japanese carriers into an entity named “ONE”) and extensive industry consolidation, and M&A activity, resulting in rising market concentration levels.concentration.
In line with the trend towards consolidation, a number of large strategic alliances and cooperations have been reorganized or formed, including the Ocean Alliance (consisting of COSCO Shipping, CMA CGM Shipping, Evergreen Marine and Orient Overseas Container Line) and the Alliance (consisting of Hapag Lloyd, Yang Ming MOL, NYK Line and K Line Shipping).
ZIM’s Description of Operations
ZIM operates in the liner shipping sector and provides container space/allocation in connection with its operation of regular routes between fixed destinations, within and between trade zones, according to set schedules and anchoring at ports in accordance with a predetermined schedule and according to either pre-determined or spot rates. ZIM operates globally, although its key operational activities are conducted in the Trans-Pacific trade zone, the Asia (including Indian Sub-Continent)-Black Sea/ East Mediterranean Sea trade zones and the Intra-Asia trade zone. In 2017,2018, these trade zones accounted for approximately 70% of ZIM’s total carried volume (measured in TEUs).
ZIM competes with other liner shipping companies to provide transport services to customers worldwide. The market is significantly concentrated with the top five carriers accounting for approximately 64%63.2% of the global capacity, and the remaining top carriers each controlling less than 5%7% of the capacity as of December 2017.2018. ZIM controls approximately 2%1.4% of the global container shipping capacity and is ranked twelftheleventh among shipping carriers globally as of JanuaryDecember 2018 (in terms of TEU capacity) (as compared to a ranking of twelfth in January 2018 and sixteenth in January 2017, reflecting industry consolidation).
To compete in an oversupplied market and to minimize costs, the main containership operators have created, and are continuing to create and enter into alliances of cooperative operational arrangements. These alliances enable rationalization of the activities of the carriers, realization of economies of scale in the operation of vessels and utilization of port facilities, promotion of technical and economic progress and greater, more efficient utilization of container and vessel capacity.
In September 2018, ZIM entered into a strategic cooperation agreement with the 2M Alliance in the Asia-USEC trade zone. The term of the strategic cooperation is notseven years. The strategic cooperation includes the creation of a memberjoint network of an alliance. However,five loops between Asia and USEC, out of which one is operated by ZIM and four are operated by the 2M Alliance. In addition, ZIM and the 2M Alliance are permitted to swap slots on all five loops under the agreement and ZIM may purchase additional slots in order to meet its total demand in these trades. This strategic cooperation with the 2M Alliance enables ZIM to provide its customers with improved port coverage and transit time, while generating cost efficiencies. In January 2019, ZIM entered into a second strategic cooperation agreement with the 2M Alliance, which will include a combination of vessel sharing, slot exchange and purchase, and covers two additional trade zones: (i) Asia - East Mediterranean and (ii) Asia - American Pacific Northwest. The new cooperation agreement offers four dedicated lines with extensive port coverage and premium service levels. The new services are due to commence from Asia in March 2019, subject to regulatory approvals.
In addition, ZIM is party to a wide range of operational partnerships, including vessel sharing agreements, swap agreements, and slot purchase agreements with other carriers in most of the trade zones in which it operates. For further information on the risks related to competition within the shipping industry and ZIM’s participation in cooperative operational agreements,alliances, see “Item 3.D Risk Factors—Risks Related to Our Other Businesses—Risks Related to Our Interests in ZIM—ZIM does not benefit from the efficiencies of participating in strategic alliances and the ZIM’s ability to enter into suchstrategic alliances and the participationparticipate in operational partnerships in the shipping industry may beremains limited, which may adversely affect ZIM’s business.business, and ZIM faces risks related to its strategic cooperation agreement with the 2M Alliance.” In light of such industry dynamics, ZIM continues to monitor its operational costs and has implemented additional cost reduction practices in order to position itself as a more efficient and profitable carrier.
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The map below illustrates ZIM’s trade zones of operation, as of December 31, 2017,2018, and the percentage of TEUs transported by zone:
The following table sets forth a description of the major trade zones or sub-trade zones in which ZIM operates (including through cooperation agreements, e.g., with 2M Alliance), and the distribution of TEUs transported by ZIM within each zone, for each of 2018, 2017 2016 and 2015:2016:
Business Unit | Description of Business Unit | 2018 TEU Transported (%) | 2017 TEU Transported (%) | 2016 TEU Transported (%) | ||||
| Pacific | The Pacific BU consists of the Trans-Pacific trade zone, which covers trade between Asia (mainly China) and the east coast and west coast of the U.S., Canada, Central America and the Caribbean | 38.3 | 34.2 | 33.6 | ||||
| Cross Suez | The Cross Suez BU consists of the Asia-Europe trade zone, which covers trade between Asia and Europe through the Suez Canal, primarily through the Asia-Black Sea/Mediterranean Sea sub-trade zone | 14.7 | 15.9 | 16.5 | ||||
| Intra-Asia | The Intra-Asia BU consists primarily of the Intra-Asia trade zone, which covers trade within regional ports in Asia, as well as trade between Asia and Africa | 21.4 | 21.1 | 20.3 | ||||
| Atlantic | The Atlantic BU consists of the Trans-Atlantic trade zone, which covers the trade between the Mediterranean to U.S. east and west coasts and the Caribbean, as well as Intra trades which include the East Mediterranean, West Mediterranean and North Europe and the Mediterranean to West Africa trade | 18.5 | 21.3 | 21.4 | ||||
| Latin America | The Latin America BU consists of the Intra-America trade zone, which covers trade within regional ports in the Americas as well as trade between South American east coast and Asia and the Mediterranean to South America east coast via the Atlantic Ocean | 7.1 | 7.5 | 8.2 | ||||
| Total | 100.0 | 100.0 | 100.0 |
Our strategic cooperation agreement with the 2M Alliance entered into September 2018 (prior to the 2019 extension) relates to the Pacific trade zone in the table above.
| 2017 | 2016 | 2015 | ||||||||||||
| Business Unit | Description of Business Unit | TEUTransported(%) | TEU Transported (%) | TEUTransported(%) | ||||||||||
| Pacific | The Pacific BU consists of the Trans-Pacific trade zone, which covers trade between Asia (mainly China) and the east coast and west coast of the U.S., Canada, Central America and the Caribbean | 34.2 | 33.6 | 34.7 | ||||||||||
| Cross Suez | The Cross Suez BU consists of the Asia-Europe trade zone, which covers trade between Asia and Europe through the Suez Canal, primarily through the Asia-Black Sea/Mediterranean Sea sub-trade zone | 15.9 | 16.5 | 15.4 | ||||||||||
| Intra-Asia | The Intra-Asia BU consists primarily of the Intra-Asia trade zone, which covers trade within regional ports in Asia, as well as trade between Asia and Africa | 21.1 | 20.3 | 18.5 | ||||||||||
| Atlantic | The Atlantic BU consists of the Trans-Atlantic trade zone, which covers the trade between the Mediterranean to U.S. east and west coasts and the Caribbean, as well as Intra trades which include the East Mediterranean, West Mediterranean and North Europe and the Mediterranean to West Africa trade | 21.3 | 21.4 | 22.4 | ||||||||||
| Latin America | The Latin America BU consists of the Intra-America trade zone, which covers trade within regional ports in the Americas as well as trade between South American east coast and Asia and the Mediterranean to South America east coast via the Atlantic Ocean | 7.4 | 8.3 | 9.0 | ||||||||||
| Total | 100.0 | 100.0 | 100.0 | |||||||||||
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ZIM’s Description of Fleet
ZIM operates in the liner shipping sector and generates revenue from fees paid to it in exchange for transportation services provided by it (through deployment of its fleet of vessels it owns or charters to ZIM’s customers). As of December 31, 2017,2018, ZIM’s fleet included 8173 vessels (as compared to 7281 vessels as of December 31, 2016)2017). ZIM'sZIM’s fleet as of December 31, 20172018 consisted of 8071 container vessels and 12 vehicle transport vessel,vessels, of which 73 vessels were indirectly owned by ZIM (through subsidiaries established for vessel-holding purposes only) and 7470 vessels were chartered (5 of these are defined as(including 5 vessels accounted under financial leases)leases and 4 vessels accounted under sale and leaseback refinancing agreements). ZIM has re-delivery dates ranging from 20182019 to 2026. As of December 31, 2017,2018, the total capacity of ZIM’s fleet of vessels (both owned and chartered) was 385,974348,053 TEUs (compared to 322,566385,974 TEUs as of December 31, 2016)2017).
The following table sets forth summary information relating to ZIM’s vessels as of December 31, 2017,2018, differentiating between owned and chartered vessels, and the remaining period of the charter:
| Container Vessels | ||||||||||||||||
Number | Capacity (TEU) | Other Vessels | Total | |||||||||||||
| Vessels owned by ZIM | 3 | 15,031 | 3 | |||||||||||||
| Vessels chartered from parties related to ZIM | ||||||||||||||||
| Periods up to 1 year (from December 31, 2018) | 2 | 10,024 | 1 | 1 | 3 | |||||||||||
| Periods between 1 to 5 years (from December 31, 2018) | 2 | 8,442 | — | 2 | ||||||||||||
| Periods over 5 years (from December 31, 2018) | — | — | — | — | ||||||||||||
Vessels chartered from third parties2 | ||||||||||||||||
| Periods up to 1 year (from December 31, 2018) | 46 | 202,950 | 1 | 47 | ||||||||||||
| Periods between 1 to 5 years (from December 31, 2018) | 8 | 44,995 | — | 8 | ||||||||||||
| Periods over 5 years (from December 31, 2018) | 10 | 66,611 | 10 | |||||||||||||
| Total | 71 | 348,053 | 2 | 1 | 73 | |||||||||||
| Container Vessels | ||||||||||||||||
| Number | Capacity (TEU) | Other Vessels | Total | |||||||||||||
| Vessels owned by ZIM | 7 | 32,023 | - | 7 | ||||||||||||
| Vessels chartered from parties related to ZIM | ||||||||||||||||
| Periods up to 1 year (from December 31, 2017) | 2 | 8,500 | 1 | 1 | 3 | |||||||||||
| Periods between 1 to 5 years (from December 31, 2017) | 3 | 14,792 | - | 3 | ||||||||||||
| Periods over 5 years (from December 31, 2017) | - | - | - | - | ||||||||||||
| Vessels chartered from third parties | ||||||||||||||||
| Periods up to 1 year (from December 31, 2017) | 50 | 214,629 | - | 50 | ||||||||||||
| Periods between 1 to 5 years (from December 31, 2017) | 12 | 66,411 | - | 12 | ||||||||||||
| Periods over 5 years (from December 31, 2017) | 6 | 49,619 | - | 6 | ||||||||||||
| Total | 80 | 385,974 | 1 | 1 | 81 | |||||||||||
| (1) | Vehicle transport vessels. |
| (2) | Includes 5 vessels accounted under financial leases and 4 vessels accounted under sale and leaseback refinancing agreements (engaged in 2018). |
Industry analysts expect shipping companies’ deployments of larger vessels to increasecontinue increasing and, in particular, to increase in certain of the key trade zones in which ZIM operates and intends to increase its operations.operates. The recentcost per TEU transported on large vessels is less than the cost per TEU for smaller vessels (assuming the vessels are operating at full capacity). For example, the Panama CanalCanal’s 2016 expansion and increase inwhich increased the size of vessels that can pass through the canal is illustrative of the industry trend towards larger vessels. To remain competitive within the Asia-USEC trade zone, ZIM has increased the size of certain of its vessels in this trade zone but does not operateand entered into the maximum-sized vessels (e.g., 13,000-14,000 TEU vessels) in this zone. ZIM assessesstrategic cooperation with the size of its vessels in other routes.2M Alliance which operates larger vessels.
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Chartered Vessels
ZIM charters vessels under charter agreements for varying periods. With the exception of those vessels whose rates were set in connection with ZIM’s 2014 debt restructuring, ZIM’s charter rates wereare fixed at the time of entry into the charter, and depend upon market conditions existing at that time. As of December 31, 2017,2018, of the 7470 vessels chartered by ZIM under lease arrangements:
| · |
| · | 1 vessel was chartered under a “bareboat charter,” which consists of the chartering of a vessel for a given period of time against a charter fee, with the operation of the vessel handled by the charterer; and |
| · |
Subject to any restrictions in the applicable lease arrangement, the charterer determines the type and quantity of cargo to be carried as well as the ports of loading and discharging. ZIM’s vessels operate worldwide within the trading limits imposed by its insurance terms. TheExcept for the bareboat charter, the technical operation and navigation of ZIM’s vessels remain, at all times, the responsibility of the vessel owner, who is generally responsible for the vessel’s operating expenses, including the cost of crewing, insuring, repairing and maintaining the vessel, costs of spares and consumable stores, tonnage taxes and other miscellaneous expenses.
Fleet Management
ZIM provides its own operational and technical management services for each of the vessels that it owns.owns, as well as those it accounts for under sale and leaseback refinancing agreements.
ZIM operates vessels in accordance with the ISM Code and the International Ship and Port Facilities Security Code, or ISPS Code, in addition to developing, implementing and maintaining a safety management system in accordance with the ISM Code. In addition, ZIM follows the regulations of the International Maritime Organization, or IMO, and intends to make its vessels compliant with theIMO. The new IMO regulations expected to come into effect in 2020. These regulations2020 will require shipping companies to either(i) utilize fuels which emit less sulfur or(ii) install scrubbers on vessels to reduce the emission of sulfur or (iii) deploy new types of vessels using liquefied natural gas (LNG). ZIM intends to comply with the regulations when they become effective either by installing scrubbers or switching to fuels that emit less sulfur. For more information on this regulation see “Item 4.B Business Overview—Our Businesses—ZIM— ZIM’s Regulatory, Environmental and Compliance Matters.”
Non-Fleet Equipment
In addition to the vessels that ZIM owns and charters, ZIM owns and charters a significant number of shipping containers. As of December 31, 2017,2018, ZIM held approximately 360,000383 thousand container units with a total capacity of approximately 590,000632 thousand TEUs, of which approximately 78%75% were owned by ZIM (including under finance leases) and approximately 22%25% were chartered.
ZIM’s Customers
In 2017,2018, ZIM had more than 29,30032,285 customers. ZIM’s customers are divided into “direct customers”, including exporters and importers, and “forwarders,” these being non-vessel operating common carriers (i.e., entities engaged in assembling cargos from various customers and the forwarding thereof through a shipping company). In 2017, 32%2018, 39% of ZIM’s customers (in terms of transported volume) were “direct customers,” while the remainder were “forwarders.” ZIM does not depend upon any single customer.
ZIM’s Seasonality
Activity in the marine container shipping industry is affected by various seasonality factors. Generally, the first quarter of the calendar year is marked by a decrease in demand for shipping, and the third quarter is generally the strongest quarter with respect to shipping demand.
Recently, the seasonality factors have not been as apparent as they have been in the past. The marine shipping market is dynamic and volatile by its very nature and has been marked in recent years by relative instability. As global trends that affect the shipping market have been changing rapidly in recent years, it remains difficult to predict these trends and the shipping industry’s activities.
ZIM’s Legal Proceedings
Derivative Action Concerning ZIM Restructuring
During 2014 a petition for approval of a derivative action was submitted to the District Court in Tel Aviv by a shareholder of the Israeli Corporation Ltd., or IC, against, among others, IC and the ZIM. The petitioner argues that the transaction executed by IC in connection with its participation in ZIM’s restructuring deviates from the approval of IC'sIC’s shareholders meeting and that the condition precedent to the execution of IC’s participation in the restructuring, as approved by such meeting, regarding the transferability of the shares in ZIM was not fulfilled. The petitioner moves to have the defendants (other than IC and ZIM) to convene IC'sIC’s shareholders meeting to approve IC’s participation in the ZIM’s restructuring or have the defendants (other than IC) compensate IC in the amount of US$ 27.4 million which, as argued, reflects the damage caused to IC due to its participation in ZIM'sZIM’s restructuring, being the decreased value of ZIM’s shares held by IC in consideration therefore, due to the incompletion of the said condition precedent. During 2016, the derivative action was rejected by the court, followed by an appeal filed by the petitioner. No provisionpetitioner which was recordedrejected by the Supreme Court of Israel in relate to the said derivative action.February 2019.
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2016 Class Action—Local Charges
In January 2016, ZIM’s wholly-owned agency in Israel, along with other third party shipping agencies, was served with a filing of a class action. The applicant alleges, among other things, that the agency has, in breach of applicable port regulations, charged their customers higher rates for services rendered than are allowed and charged for services which are not included in the list of services detailed in the regulations. ZIM has not recorded a provision in relation to the class action.
Competition law issuesLaw Issues
ZIM is involved in a number of legal matters, including industry-wide investigations regarding competition law issues and applications to approve the filing of class actions, some of which may involve significant monetary amounts. The developments and/or resolutions of such matters, which include either negotiations or litigation, are subject to a high level of uncertainty that cannot be reliably quantified.
During the reported period,2017, ZIM has beenwas served, together with another defendant, with an application to approve the filing of a class action in Israel, related to alleged breaches of competition rules in respect of carriage of vehicles from South Korea. The applicants estimatehave asserted that the total damages caused to the class at a total of NIS 403 million (approximately $ 115$108 million) based on an expert opinion attached to the application. However, from a preliminary review of the opinion, it should be noted that the estimate is based on data which is not necessarily correct and/or relevant to ZIM.
In addition, ZIM representatives received subpoenas in connection with an investigation by the United States Department of Justice Antitrust Division into the container liner shipping industry in the United States. During 2018, ZIM is currently reviewing this case with itssubmitted certain internal documents to the United States Department of Justice Antitrust Division and ZIM’s legal advisors who areremained in contact with the Department of Justice regarding ZIM’s compliance with the subpoenas. AsIn February 2019, ZIM received notice from the United States Department of Justice Antitrust Division that the investigation is still inhas concluded without any adverse findings against either ZIM or its initial stages, it is too early to determine the outcome of this investigation and the possible exposure therefrom, if any.senior officers.
Court’s Ruling againstAgainst Shipping Agencies in certain jurisdictionsCertain Jurisdictions
In one jurisdiction, courts ruled against the operationcharging by certain shipping agencies of shipping agenciescertain fees in such jurisdiction, including a subsidiary of ZIM. The shipping agencies have appealed to the supreme court against this ruling. During 2018, ZIM’s subsidiary and additional shipping agencies entered into settlement negotiations.
Based on legal advice and management estimates, ZIM included a provision in its financial statements with respect to certain of the above-mentioned matters.
ZIM’s Regulatory, Environmental and Compliance Matters
Government and international regulation significantly affects the ownership and operation of vessels. ZIM is subject to many legal provisions relating to the protection of the environment, including with respect to the emissions of hazardous substances, SOx and NOx gas exhaust emissions, the operation of vessels while at anchor by means of generators, and the use of low-sulfur fuel. ZIM could be exposed to high costs in respect of environmental damages (to the extent that the costs are not covered by its insurance policies), criminal charges, and substantive harm to its operations and goodwill, if and to the extent that environmental damages are caused by its operations. ZIM instructs the crews of its vessels on the environmental regulatory requirements and operates in accordance with procedures that ensure its in compliance with such regulatory requirements. ZIM also insures its activities, where effective for it to do so, in order to hedge its environmental risks. ZIM’s vessels are also subject to the standards imposed by the IMO, the United Nations specialized agency with responsibility for the safety and security of shipping and the prevention of marine pollution by ships.
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ZIM has also taken steps to comply with the Chinese Ministry of Transportation regulations which stipulate a 0.5% sulfur content restriction on fuels used in all Chinese ports and the U.SU.S. National Oceanic and Atmosphere Administration'sAdministration’s seasonal 10 knot speed limit on Mid-Atlantic coastal areas between November 1, 2017 and April 30, 2018. These regulations may increase ZIM’s operational costs.
In addition, ZIM may be required to incur significant costs in connection with modifications to environmental regulations applicable to shipping companies. For example, ZIM will be required to comply with the new fuel regulation, known as “the Sulphur Cap,” which requires all marine carriers to use low sulfur fuel (up to 0.5% sulfur content, down from the current 3.5% requirement), currently expected to become effective in January 2020. The Sulphur Cap regulation, introduced by the IMO regulations relatingin 2016, is aimed at reducing marine pollution and emissions. All shipping companies will be obliged to sulfurcomply and to significantly reduce emissions whichon the high seas and in coastal area. The Sulphur Cap regulation will impact all the stakeholders in the industry and compliance with it is currently expected to create a significant cost impact and could also affect the supply of vessels in the market. Carriers can comply by (i) buying compliant fuel at higher prices; (ii) installing new cleaning systems on board vessels (scrubbers); or (iii) deploying new types of vessels using LNG. All three options are expected to come into effectresult in 2020. Insignificant costs for carriers and container shipping companies, including ZIM, may seek to implement a surcharge in order to compensate for the above described cost impact. See "Risk Factors—ZIM is subject to the IMO’s "2020" environmental regulations, and failure to comply with thesesuch regulations ZIM will be required to either use fuel oil which is more costly than that it currently uses or modify its vessels by installing scrubbers, either of which may entail significant costs.could have a material adverse effect on ZIM’s business."
ZIM is also subject to extensive regulation that changes from time to time and that applies in the jurisdictions in which shipping companies are incorporated, the jurisdictions in which vessels are registered (flag states), the jurisdictions governing the ports at which the vessels anchor, as well as regulations by virtue of international treaties and membership in international associations. Changes and/or amendments to the regulatory provisions applying to ZIM (e.g., the U.S.’s recent policy requiring the scanning of all cargo en route to the United States) could have a significant adverse effect on ZIM’s results of operations. Additionally, the non-compliance of a port with any of the regulations applicable to it may also adversely impact ZIM’s results of operations, by increasing ZIM’s operating expenses.
Additionally, ZIM is subject to competition regulations worldwide. For example, in the European Union, ZIM is subject to articles 101 and 102 of the Consolidated Version of the Treaty on the Functioning of the European Union. ZIM’s transport activities serving the U.S. ports are subject to the Shipping Act of 1984, as modified by the Ocean Shipping Reform Act of 1998. With respect to Israel, ZIM is subject to the general competition law established in the Israel Antitrust Law, 1988. In certain jurisdictions, exemptions from antitrust laws to certain agreements between ocean carriers that operate in the aforementioned jurisdictions, such as slot exchange agreements and other operational partnerships, are in effect. ZIM is party to certain operational and commercial partnerships with other carriers in the industry and each of those arrangements, as well as any future arrangements it becomes party to, must comply with the applicable antitrust regulations in order to remain protected and enforceable.
ZIM is also subject to Israeli regulation regarding, among other things, national security and the mandatory provision of ZIM’s fleet, environmental and sea pollution, and the Israeli Shipping Law (Seamen) of 1973, which regulates matters concerning seamen, and the terms of their eligibility and work procedures.
Finally, ZIM has taken steps to comply with the GDPR.
For further information on ZIM’s regulatory risks, see “Item 3.D Risk Factors—Risks Related to the Industries in Which Our Businesses Operate— A disruption in our and each of our business’ information technology systems, including incidents related to cyber security, could adversely affect our business operations,” “Item 3.D Risk Factors—Risks Related to Our Other Businesses—Risks Related to Our Interest in ZIM—ZIM is subject to environmental regulationand other regulations and failure to comply with such regulation could have a material adverse effect on ZIM’s business” and “Item 3.D Risk Factors—Risks Related to Our Other Businesses—Risks Related to Our Interest in ZIM—The shipping industry is subject to extensive government regulation and standards, international treaties and trade prohibitions and sanctions.”
ZIM’s Special State Share
In connection with the 2004 sale of the holdings of the State of Israel in ZIM to IC, ZIM ceased to be a “mixed company” (as defined in the Government Companies Law of Israel) and issued a Special State Share to the State of Israel. The objectives underlying the Special State Share are to (i) safeguard ZIM’s existence as an Israeli company, (ii) ensure ZIM’s operating ability and transport capacity, so as to enable the State of Israel to effectively access a minimal fleet in an emergency crisis, or for security purposes and (iii) prevent elements hostile to the State of Israel or elements liable to harm the State of Israel’s vital interests or its foreign or security interest or Israel’s shipping relations with foreign countries from having influence on ZIM’s management. In connection with the completion of ZIM’s restructuring plan in 2014, certain transferability restrictions imposed by the terms of the Special State Share were revised. The key terms and conditions of the revised Special State Share include the following requirements:
· | ZIM must be, at all times, a company incorporated and registered in Israel, whose headquarters and registered main office are domiciled in Israel; |
· | at least a majority of the members of ZIM’s board of directors, including the Chairman of the board, as well as the Chief Executive Officer or the person serving as its Chief Business Officer, whatever his/her title may be, must be Israeli citizens; |
· | any transfer of vessels shall be invalid vis-à-vis ZIM, its shareholders and any third party if, as a result thereof, the minimum fleet target mandated by the State of Israel will not be maintained and the holder of the Special State Share has not given prior written consent thereto; |
· | any holding and/or transfer of shares and/or allocation that confers possession of shares in ZIM at 35% or more of its issued share capital, or that vests the holder thereof with control over ZIM, including as a result of a voting agreement, shall be invalid vis-à-vis ZIM, its shareholders and any third party, if the holder of the Special State Share has not given prior written consent thereto; and |
· | any transfer of shares granting the owner a holding exceeding 24% but not exceeding 35%, shall require prior notice to the State of Israel, including full information regarding the transferor and the transferee, the percentage of the shares held by the transferee after the transaction will be completed, and the relevant information about the transaction, including voting agreements and agreements for the appointment of directors (if applicable). In any case, if the State of Israel determines that a transfer of such shares shall constitute potential harm to the State of Israel’s security, or any of its vital interests, or that it has not received the relevant information in order to make a decision, the State of Israel shall be entitled to notify the parties within 30 days that it opposes the transaction, and will be obligated to justify its opposition. In such a situation, the requestor of the transaction shall be entitled to transfer this matter to the competent court, which shall hear and rule on the subject in question. |
Any change, including an amendment or cancellation of the rights afforded to the State of Israel by the Special State Share shall be invalid with respect to ZIM, its shareholders and any third party, unless it is approved in advance and in writing by the State of Israel.
Kenon’s ownership of ZIM shares is subject to the terms and conditions of the Special State Share, which restricts Kenon’s ability to transfer its equity interest in ZIM to third parties. The terms of the State of Israel’s consent of Kenon’s and Idan Ofer’s status, individually and collectively, as a “Permitted Holder” of ZIM’s shares, stipulates, among other things, that Kenon’s transfer of the means of control of ZIM is limited if the recipient is required to obtain the State of Israel’s consent, or is required to notify the State of Israel of its holding of ZIM shares pursuant to the terms of the Special State Share, unless such consent was obtained by the recipient or the State of Israel did not object to the notice provided by the recipient. In addition, the terms of the consent provide that, if Idan Ofer’s ownership interest in Kenon is less than 36% or Idan Ofer ceases to be the controlling shareholder, or sole controlling shareholder of Kenon, then Kenon’s rights with respect to its shares in ZIM will be limited to the rights applicable to an ownership of 24% of ZIM, until or unless the State of Israel provides its consent, or does not object to, this decrease in Idan Ofer’s ownership or control. Therefore, if Mr. Ofer sells a portion of his interest in Kenon and owns less than 36% of Kenon, or ceases to be Kenon’s controlling shareholder, then Kenon’s right to vote and receive dividends in respect of its ZIM shares, for example, will be limited to those available to a holder of 24% of ZIM’s shares (even if Kenon holds a greater percentage of ZIM’s shares). “Control”, for the purposes of this consent, is as defined in the State of Israel’s consent, with respect to certain provisions. Additionally, the State of Israel may revoke Kenon’s permit if there is a material change in the facts upon which the State of Israel’s consent was based, or upon a breach of the provisions of the Special State Share by Kenon, Mr. Ofer, or ZIM. For information on the risks related to the State of Israel’s ownership of the Special State Share, including with respect to IC’s transfer of its interest in ZIM to us, see “Item 3.D Risk Factors —Risks Related to Our Other Businesses—Risks Related to Our Interest in ZIM—Israel holds a Special State Share in ZIM, which imposes certain restrictions on ZIM’s operations and our equity interest in ZIM.”
We have a 91% equity interest in Primus, an innovative developer and owner of a proprietary natural gas-to-liquid technology process.
Primus’ Description of Operations
Primus is an innovative developer of a proprietary liquids technology, the STG+ process, which is designed to produce liquid hydrocarbons from synthesis gas, or syngas, derived from natural gas (including synthetic natural gas) and other feedstocks (e.g., ethane). Primus’ STG+ process converts syngas into methanol, high-octanereformulated blend-stock for oxygen blending, or RBOB, gasoline or a stream miscible with crude.crude oil (synthetic crude). The availability of large shale gas reserves in the U.S. and the low cost of natural gas in relation to the cost of gasoline and methanol enables Primus to utilize domestically produced natural gas in its STG+ process.
Primus’ business strategy is focused on three primary activities:
| · | Gasoline Production. Primus intends to provide its STG+ process to convert natural gas into RBOB gasoline as blend-stock at industrial and chemical plant locations that have spare syngas capacity and in emerging international markets where low value natural gas can be converted to high value (usually imported) gasoline. |
| · | Gas Flaring Solutions. Primus offers gas flaring solutions to convert natural gas that would otherwise be flared into gasoline or crude oil diluent. Primus intends to deploy its STG+ technology for operators seeking to remain in compliance with strict anti-flaring regulations and monetize natural gas that would otherwise be flared. |
| · | Methanol Production. Primus intends to own, operate and develop, or license the technology for the operation and development of, methanol production plants to service local users of methanol who are located far from larger-scale methanol plants. |
Primus seeks to develop, build, own and operate a portfolio of facilities where the company can access low-cost natural gas feedstock and take advantage of lower product transportation costs resulting from locating producing assets closer to markets than competing sources.sources, including through joint ventures with equity partners. Primus seeks to generate revenues from the sale of methanol, gasoline, synthetic crude and stream miscible with crudemethanol from its operating plants as well as from construction management services, engineering fees, technology licensing fees, production royalties, and other opportunities the company identifies. Primus intends to finance the first series of plants through non-recourse project financing and is seeking a strategic partnerpartners to participate alongside Primus in the equity component of the investment. Primus has entered into non-binding term sheets with certain entities regarding the development of future projects. However, at this time none of the term sheets have resulted in definitive agreements and there is no certainty that such projects will be developed.
Primus’ STG+ process improves upon existing gas-to-liquid technologies by integrating all reactors into a single-loop process, thereby reducing capital and operating costs while increasing reliability and yield. Primus expects the STG+ process to operate on a smaller scale than the competing methanol-to-gasoline process utilized by other, non-traditional gasoline producers. Primus expects its customers to be able to distribute, store and pump its gasoline using existing fuel infrastructures and expects that the gasoline produced may be utilized in unmodified, conventional vehicles.
Between 2011 and 2013, Primus operated a pilot scale test facility at its headquarters in Hillsborough, New Jersey. Primus’ pilot plant consisted of two major units, the first being a wood pellet gasifier that produced syngas, and the second being the STG+ process. The STG+ process has been successfully validated at the pilot scale. Primus used the data obtained from such operations to optimize the design of its demonstration plant, which was completed in August 2013. Primus’ demonstration plant generates syngas from natural gas, and converts the syngas into methanol and high-octane gasoline. The demonstration plant has a nameplate production capacity for gasoline of 12.7 gallons per hour, or 100,000 gallons per year, and for methanol of 32.4 gallons per hour or 255,000 gallons per year, and was designed to replicate the key scale parameters of a larger plant, so as to minimize potential scale-up risks. Between 2013 and 2017, Primus successfully operated the demonstration plant for approximately 10,000 hours. The same reactor design and catalyst are in use in other sites in slightly different services around the world. In the fourth quarter of 2018, Primus operated the demonstration plant for 1250 hours to gather data on catalyst life, optimal operating conditions, and to obtain third party validation that Primus’ RBOB gasoline meets the required quality specifications for use in U.S. markets.
In the year ended December 31, 2017,2018, Primus did not generate materialgenerated $480,000 in revenues from its operations. As of December 31, 2017,2018, we have invested approximately $96$76 million (which consists of $32$43 million invested by Kenon and $64$23 million invested by IC prior to the spin-off) into Primus. In January 2018, we provided Primus an additional $3.0$7.0 million via convertible notes. In March 2019, we provided additional funding of $1 million via a convertible note.
Primus continues to rely on Kenon to fund its operations. In connection with Primus’ further development and our efforts to maximize its value, we may provide additional capital to Primus, in the form of debt or equity financing, if deemed appropriate to facilitate Primus’ operational and development capital requirements.
We own 91% of Primus and the remaining 9% is primarily held by Primus’ founders; on a fully diluted basis, giving effect to management share options, Kenon’s ownership interest in Primus is approximately 80%.
Primus’ Principal Markets; Customers
Primus intends to develop, build, own and operate methanol production plants in North America and develop, build, own and operate gasoline, synthetic crude, or methanol gasoline or stream miscible with crude production plants, including through joint ventures with equity partners, or license the technology for the operation and development of methanol or gasoline productionsuch plants, outside of North America. The intended off-takers of Primus’ methanol and gasoline are expected to primarily consist of local distributors or users of methanol who are located far from large-scale methanol production plants. In the United States, methanol isand gasoline are generally produced in the Gulf Coast and isare transported to off-takers throughout the country. Due to transportation costs, methanol customers located outside the Gulf Coast region pay a substantially higher price than customers around the Gulf Coast. Primus intends to construct and own equity in plants in such regions to capture the price spread resulting from the transportation costs and lower costs of natural gas.
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Primus intends to provide its gas flaring solutions to customers throughout the world, particularly those in gas-prone regions with strict gas flaring regulations. The production of oil results in the “flaring” of natural gas—a cheap method disposing of, rather than utilizing, associated natural gas. Such flaring has become a concern in many countries as a result of the associated emissions in greenhouse gases and participation in the World Bank’s Zero Routine Flaring by 2030 Initiative. As Primus’ STG+ process converts syngas into gasoline blendstock,blend stock, Primus can provide its potential customers with the technological tools to transform the natural gas associated with oil production and flaring into gasoline or a diluent to be blended into crude oil.
Potential customers of the gasoline, methanol and stream miscible withsynthetic crude produced by Primus’ technology include existing refiners of crude oil, industrial and chemical users, purchasers of oil-based fuels, and blenders of transportation fuels and direct end-users, such as retailers.
Primus is engaging in discussions with potential customers and joint venture partners with respect to potential projects, including for the construction of methanol plants, the conversion of syngas into gasoline and stream miscible withsynthetic crude and the provision of gas flaring solutions. Should Primus secure these potential projects, which may be located throughout the world, Primus may be compensated through a mix of revenues from sales to off-takers, construction management and engineering fees, technology licensing fees and production royalties. These projects also give Primus the opportunity to own equity in the project. At this time, these projects have not been secured.
Primus’ Raw Materials and Suppliers
In connection with the operation of Primus’ demonstration plant in the year ended December 31, 2017,2018, a single supplier provided Primus with its natural gas requirements, representing an immaterial amount of Primus’ operating expenses in the year ended December 31, 2017.2018.
Primus’ Competition
Primus seeks to operate as a producer of alternative liquids. Its competitors are expected to include other gas-to-liquids companies and companies using other feedstocks to produce syngas, such as ExxonMobil MTG, Haldor Topsøe TIGAS or other newly-established ventures that provide a different technological approach to the production of syngas. Primus also competes with traditional producers of gasoline and methanol. As Primus’ STG+ process is further developed to produce gasoline and methanol, Primus also expects to compete with the traditional and alternative producers of these fuels. Primus believes that its (i) direct synthesis of the desired product, (ii) high yield and cost-effective results, and (iii) selective process allows it to remain competitive with its competitors in both areas.
Primus’ Patents, Licenses, Etc.
Primus’ intellectual property portfolio includes: three issued U.S. patents on its core technology, the “Single Loop Process”, to produce liquid fuels from syngas; two issued U.S. patents on its first commercial product, specifically the “Fuel Composition”; and several additional patent applications and trade secrets that are generally categorized into the following areas: liquid fuel synthesis, liquid fuel composition, incremental improvements and customization, and biomass gasification.
Primus has also filed corresponding patent applications under the Patent Cooperation Treaty and has filed national phase applications in multiple countries for its base process patent. Primus actively evaluates its intellectual property portfolio so as to optimize its intellectual property strategy and to protect the authenticity and commercial value of its STG+ process.
Primus’ Property, Plants and Equipment
Primus’ fully operational 300 gallon-per-day integrated industrial demonstration plant located in Hillsborough, New Jersey, was successfully constructed in August 2013. The demonstration plant converts natural gas feedstock into syngas which is, in turn, converted into high-octane gasoline or methanol. The demonstration plant has a nameplate production capacity for gasoline of 12.7 gallons per hour, or 100,000 gallons per year, and for methanol of 32.4 gallons per hour or 255,000 gallons per year. Primus expects this demonstration plant to provide the performance data necessary for the design and development of other plants.
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Primus’ Regulatory, Environmental and Compliance Matters
Primus’ operations are affected by various local and foreign laws, rules, regulations and authorities. As a result, changes in various types of regulations could affect Primus’ business adversely. For example, the implementation of new safety, environmental or legal requirements could impact Primus’ ability to produce gasoline and methanol, or use the STG+ process. Furthermore, changes to the various regulations governing gas flaring could impact Primus’ ability to provide gas flaring solutions. The impact of these changes in regulation could adversely affect Primus’ business, financial condition and results of operations even where the specific regulations do not directly apply to Primus or to its technologies, products or services.
Discontinued Operations – Inkia Business
Sale of the Inkia Business
Share Purchase Agreement
The consideration for the sale was $1,332 million, consisting of (i) $935 million cash proceeds paid by the buyer, (ii) retained cash at Inkia of $222 million, and (iii) $175 million, which was deferred in the form of a Deferred Payment Obligation bearing interest of 8% per annum, payable in kind. The consideration was subject to post-closing adjustments which were not significant. The buyer also assumed Inkia'sInkia’s obligations under Inkia'sInkia’s $600 million 5.875% Senior Unsecured Notes due 2027. The sale was completed in December 2017. The final purchase price is subject to certain adjustments, including adjustments for working capital, debt and cash at closing.
The consideration that Inkia received in the transaction iswas before estimated transaction costs, management compensation, advisor fees, other expenses and taxes, which are estimated to bewere in the aggregate approximately $263 million, of which $27 million comprises taxes to be paid upon payment of the $175 million Deferred Payment Obligation. The estimated tax payment includes taxes payable in connection with a restructuring of some of the companies remaining in the Kenon group, which is intended to simplify Kenon’s holding structure. As a result of this restructuring, Kenon now holds its interest in OPC directly. Kenon does not expect any further tax liability in relation to any future sales of its interest in OPC.
This sale was consistent with Kenon’s strategy, which includes monetization of its business and distribution of proceeds to shareholders.
Use of Proceeds of Transaction
In January 2018, Kenon used a portion of the proceeds of the transaction to repay debt of IC Power ($43 million of net debt outstanding), and to repay its loan facility with Israel Corporation ($240 million including accrued interest, and $3 million withholding tax).
In December 2017, Kenon's shareholders authorized a capital reduction to enable a potential distribution of a portion of the proceeds received from the sale of the Inkia Business. The Singapore courts approved the capital reductionaddition, in FebruaryMarch 2018, and Kenon distributed $665 million in cash to its shareholders in March 2018 as a return of capital resulting from a capital reduction.shareholders.
Indemnification
In relation to the share purchase agreement for the sale, the sellers, Inkia and ICPDH, gave representations and warranties in respect of the Inkia Business and the transaction. Subject to a specified deductibles, caps and time limitations, the sellers have agreed to indemnify the buyer and its successors, permitted assigns, and affiliates, and its officers, employees, directors, managers, members, partners, stockholders, heirs and personal representatives from and against any and all losses arising out of:
| · | prior to their expiration |
| · | prior to their expiration upon the expiration of the statute of limitations applicable to breach of contract claims in New York, a breach of any of the |
| · | prior to their expiration thirty days after the expiration of the applicable statute of limitations, certain tax liabilities for pre-closing periods and certain transfer taxes, breach of certain tax representations and the incurrence of certain capital gain taxes by the transferred companies in connection with the transaction; and |
| · | without limitation with respect to time, a breach of any of the |
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The sellers'sellers’ obligation to indemnify Nautilus Inkia Holdings LLC shall not exceed the base purchase price.
The sellers'sellers’ indemnification obligations for any claims under the share purchase agreement that are agreed between the buyer and the Sellers,sellers, or that are subject to a final non-appealable judgment, will be supported by the following:following (all time periods running from December 31, 2017):
| · | IC |
| · | to the extent any indemnification obligations remain outstanding after the exercise of the above-described pledge (or payments of amounts equal to the value of the pledge), a deferral of $175 million of the purchase price in the form of a four-year $175 million |
| · | to the extent any obligations remain outstanding after |
Subject to certain terms and conditions, the terms of the pledge, the deferred payment agreement and the guarantee may each be extended if there are unresolved claims existing on the applicable expiration dates.
Pledge Agreement with respect to OPC Shares
In connection with the sale of the Inkia Business, ICP (which was the holder of Kenon'sKenon’s shares in OPC at the time of the sale) entered into a pledge agreement with the buyer of the Inkia Business (Nautilus Inkia Holdings LLC) to pledge OPC shares representing 25% of the outstanding shares of OPC as of the date of the pledge agreement in favor of the buyer to secure the sellers’ indemnification obligations under the share purchase agreement for the sale. Following the sale of the Inkia Business, ICP transferred all of its shares in OPC to Kenon. As a result, in February 2018, Kenon and the buyer entered into an amended pledge agreement, pursuant to which Kenon became the pledgor and assumed ICP’s obligations under the pledge agreement. The majority of Kenon’s OPC shares are subject to a lock-up period (imposed following OPC's initial public offering in August 2017), which restricts the amount of shares sold each month until 18 months after the IPO, pursuant to TASE regulation, and are held by the Lock-Up Trustee (as defined below).
Set forth below is a description some of the key provisions of the pledge agreement. The provisions described below are subject to certain conditions described in the agreement which is filed as an exhibit to this annual report.
Pledged Assets
Kenon has pledged 32,971,680 shares of OPC, representing 25% of the outstanding shares of OPC as of the date of the pledge agreement, plus related rights including distributions on those shares and proceeds of sales of such shares and including accounts in which such shares are currently held or may be held in the future and rights in respect of such shares against the trustee holding such shares, all as discussed below.
Secured Obligations
The pledged shares secure indemnification claims by the buyer that are "finally determined" (agreed“finally determined” (i.e., agreed by the parties or pursuant to a non-appealable judgment of a court with proper jurisdiction) under the share purchase agreement and obligations in connection with the pledge agreement and related preservation and foreclosure costs and expenses incurred by the buyer. The pledged shares and cash are held in an account in the name of a trust company, or the Lock-up Trustee, for the benefit ofthat Kenon which account and rights of Kenon against the trust company in connection therewith have beenhas pledged on a first priority basis in favor of the buyer. Additionally, Kenon pledged in favour of the buyer an account in the name of Kenon for the purpose of holding pledged shares that are released from the lock up. The secured obligations are reduced to the extent of indemnification payments to the buyer under the share purchase agreement and to the extent of the net proceeds from sales of shares upon enforcement of the pledge.
Certain Rights of Kenon with respect to the Pledged Shares
Kenon retains voting rights over the pledged shares unless an event of default under the pledge agreement has occurred and is continuing.
All dividends on the pledged shares are paid into the pledged account. Unless an event of default under the pledge agreement has occurred and is continuing,
| · | Kenon can withdraw dividends paid into that account as follows (i) in the first 365 days from November 24, 2017, if the 30-trading day volume weighted average price, or VWAP prior to drawing such dividends exceeds NIS14.45 Kenon can draw an amount up to 50% of cumulative net income of OPC from January 1, 2017 (such amount is referred to as the |
| · | in addition, on one occasion over the life of the pledge Kenon can draw from the pledged account its pro rata share of OPC dividends up to $25 million paid in respect of all of the pledged shares (by way of example if the company makes a distribution of US$50 million following the original effective date of the pledge agreement, Kenon is entitled to draw from the pledged account $6.25 million). OPC has not paid a dividend since the date the pledge was executed, and therefore Kenon has not made such draw. |
Kenon can sell pledged shares on arms’ length terms in cash at market prices or at customary discounts to market prices for such sales (provided that the discounts do not exceed 5% of market price, based on customary VWAP from such a sale on the TASE), provided that cash equal to the number of pledged shares sold multiplied by NIS 14.105 is deposited into the pledged account.
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Release of Pledged Shares
In the event of any indemnity claims in accordance withunder the share purchase agreement, pledged shares and cash shall be released in an amount equal to the indemnity payment, with the amount of pledged shares released calculated in accordance with the fair market value of OPC’s ordinary shares based on the 30-trading day VWAP of OPC shares prior to the release, and pledged cash is released prior to pledged shares.
Kenon may also release cash from the pledge by depositing additional OPC shares into the pledged account, with released cash being replaced by a number of OPC shares equal to the amount of cash released divided by the lower of (i) the 30-trading day VWAP of OPC shares prior to the release and (ii) NIS 14.105.
All pledged shares and cash remaining in the pledged account will be released on December 31, 2020, provided that if there are unresolved claims by the buyer for indemnity under the Inkia share purchase agreement, the pledge will continue to apply for pledged assets sufficient (in the case of pledged shares, based on a the 30-trading day VWAP prior to December 31, 2020) to cover an amount determined by Kenon and the buyer, each acting in good faith (or a third party evaluator or PricewaterhouseCoopers in case the parties cannot agree)agree on such evaluator) equal to a reasonable estimate of the amount ultimately payable on an unresolved claim (including interest and penalties) to be paid under the Inkia share purchase agreement, plus a reasonable estimate of the amount of costs and expenses that are expected to be incurred to resolve the claim plus 10% of the foregoing (the total amount is referred to as the reserve amount). To the extent that such unresolved indemnity claims which results in an extension of the pledge results in a claim amount actually paid exceeding 110% of the reserve amount, Kenon must pay the buyer interest in cash at a rate of 4% per annum on the difference between the amount paid and 110% of the reserve amount from December 31, 2020 until such payment, and to the extent that such unresolved indemnity claims which in an extension of the pledge results in a claim amount actually paid less than 90% of the reserve amount, the buyer must pay Kenon interest in cash at a rate of 4% per annum on the difference between the amount paid and 90% of the reserve amount from December 31, 2020 until the remaining pledged assets are released from the pledge.
Events of Default; Enforcement of Pledge
The pledge agreement contains events of default for events such as breaches of representations and warranties or undertakings, certain insolvency or bankruptcy events and a failure by Kenon to pay indemnification claims under the Inkia share purchase agreement which claims have been finally determined and are unpaid for three business days. Upon an event of default for a failure to pay a finally determined indemnification claim or a breach of the repeating representation confirming no insolvency or similar events relating to Kenon, the buyer may take customary enforcement measures, including enforcement of the pledges and sale of pledged shares. Upon any other event of default, the buyer may take possession of the pledged assets and exercise voting rights, but is may not dispose of the pledged assets.
Nautilus Energy TopCo LLC Deferred Payment Agreement
In December 2017, Inkia loaned $175 million to Nautilus Energy TopCo LLC, or Nautilus Energy, as a deferral of a portion of the purchase price for the sale of the Inkia Business. The loan accrues interest at 8% per annum, with such interest capitalized and added to the aggregate principal amount on an annual basis. The principal amount as of December 31, 2018 was $189 million. Under the deferred payment agreement, Nautilus Energy is subject to certain restrictions with respect to indebtedness, liens, disposals of all or substantially all of the assets of its group, and the general conduct of its group. Subject to the terms of the share purchase agreement, Nautilus Energy may offset its obligation to pay all or some of the aggregate principal amount outstanding under the deferred payment agreement in lieu of seeking a cash payment of a finally determined indemnity claim in an aggregate principal amount equal to the amount of any unpaid finally determined indemnification claim, provided that Nautilus Energy must first offset any indemnity claims first against IC Power'sPower’s pledge of OPC shares for the benefit of the buyer, Nautilus Inkia Holdings LLC (as described above). The loan matures in December 2021, but may be extended in certain circumstances if there is an unresolved indemnification claim outstanding at the scheduled maturity date. Upon a sale of all or substantially all of the assets of certain of Nautilus Energy'sEnergy’s subsidiaries domiciled in Peru, Nautilus Energy may either repay the loan in full, place the aggregate principal amount outstanding together with accrued and unpaid interest in escrow or cause ISQ Global Infrastructure Fund II, L.P. to guarantee Nautilus Energy'sEnergy’s obligations (which guarantee shall not be subject to release upon a cross-acceleration event).
The obligations of Nautilus Energy are secured with a share mortgage over its shares by Nautilus Energy Partners LLC and a share mortgage over the shares of the direct subsidiary of Nautilus Energy, Nautilus Inkia Holdings LLC. ISQ Global Infrastructure Fund II, L.P., an indirect parent of Nautilus Energy, has provided a guarantee of Nautilus Energy'sEnergy’s obligations under the deferred payment agreement until such time as there is a cross-acceleration of Nautilus Energy'sEnergy’s obligations under the deferred payment agreement.
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Inkia’s rights and obligations under the deferred payment agreement wereand related pledges have been transferred to ICP as of December 28, 2017.Kenon.
Kenon Guarantee
Pursuant to a guarantee agreement entered into in December 2017, Kenon has agreed to guarantee payment of Inkia'sInkia’s and ICPDH’s payment obligations under the share purchase agreement relating to the sale of the Inkia Business, including all of their indemnification obligations, subject to certain conditions. The guarantee is only enforceable to the extent that there remain payment obligations under the share purchase agreement after the buyer has exhausted in full its rights under the OPC share pledge and the deferred payment agreement as described above. The guarantee will expire in December 2020, provided that the term of the guarantee shall be extended to the extent that there remain indemnification obligations for which a claim has been made but not resolved at the scheduled expiration date.
Claims Relating to the Inkia Business
Set forth below is a description of the investment treaty claims that are being or may be pursued by Kenon or its subsidiaries and the other claims related to of the Inkia Business to which Kenon hasor its subsidiaries have rights.
The claims will require funding for legal expenses and Kenon is considering its options with respect to meeting these funding needs, including potentially third party funding for such claims in exchange for a portion of the awards or settlements.settlements (as described below). Kenon may also sell its rights under or the rights to proceeds resulting from claims.
Bilateral Investment Treaty ClaimClaims Relating to Peru
In June 2017 and November 2018, IC Power and Kenon respectively sent a NoticeNotices of Dispute to the GovernmentRepublic of Peru under the Free Trade Agreement between Singapore and the Republic of Peru, or the FTA, relating to two mattersdisputes described below, based on events that occurred while Kenon, through IC Power, owned and operated its formertheir Peruvian subsidiarysubsidiaries Kallpa and Samay I, later sold as part of the Inkia sale. The claim is ready todisputes may be broughtsubmitted to arbitration pursuant to the FTA subject to IC Power submittingthe fulfillment of certain procedural requirements, including the submission of a Notice of Intent one month in advance ofprior to the institution of arbitral proceedings. The FTA cooling off deadlines have been exhausted and the Notice of Intent is ripe to be provided as of this date. IC Power hasand Kenon have not yet quantified the claimtheir claims against the GovernmentRepublic of Peru, buthowever, the claim is any eventclaims are estimated to be valued in excess of $150 million. Set forth below is a summary of the claims.
IC Power and Kenon have entered into an agreement with a capital provider to provide capital for expenses in relation to the pursuit of their arbitration claims against the Republic of Peru and other costs. The obligations of Kenon and IC Power are secured by pledges relating to the agreement. Credit support has been provided relating to the obligations of Kenon and IC Power. The agreement contains certain representations and covenants by IC Power and the Kenon and events of default in event of breach of such representations and covenants.
Kenon and IC Power have no obligation to repay advances under the agreement except in the event that they receive proceeds from a successful award or settlement of the claims or in the event of a default by Kenon or IC Power, in which case the capital provider is entitled to a return of advances and can rely on credit support granted to the capital provider.
In the event that Kenon or IC Power received proceeds from a successful award or settlement of their claims, the capital provider will be entitled to be repaid the amount committed by the capital provider and to receive a substantial portion of the claim proceeds.
Secondary Frequency Regulation Claim
The Secondary Frequency Regulation, or SFR, is a complementary service required to adjust power generation in order to maintain the frequency of the system in certain situations. In March 2014, OSINERGMIN (the mining and energy regulator in Peru) approved Technical Procedure 22, or PR 22, establishing that the SFR would be provided through a firm and variable base provision. The firm base provision of the SFR would have priority onin the daily electricity dispatch to keep turbines permanently on to respond to frequency changes in the system. OSINERGMIN provided that the SFR service would be tendered through a bid.
In February 2016, COES (a committee made up of public and private entities with powers delegated to it by the Peruvian government to manage the Peruvian energy transmission grid), invited generation companies to bid for the provision of SFR, and Kallpa submitted a bid offering to provide the firm base provision of SFR. In April 2016, Kallpa was awarded the SFR firm base provision for three years, until July 2019 on an exclusive basis, independently of its declared variable generation costs, and in exchange for a Reserve Assignment Price of zero, plus certain reimbursable costs.
In June 2016, OSINERGMIN issued a resolution that materially modified PR 22 (or the(the Resolution). Under the Resolution, the firm base SFR provider can only render the SFR service can only be rendered when the generatorit is programmed for economicin the daily electricity dispatch (i.e. daily dispatch according to variable cost). Due to thisbased on its declared generation costs. This retroactive amendment to PR 22 withdrew Kallpa’s exclusive right to provide the exclusivityfirm base SFR service that had been awarded to it in dispatch that Kallpa had received through the bid process was withdrawn.April 2016. Kenon and IC Power suffered losses including, but not limited to, lost profits as a result of the Resolution.result.
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Transmission Tolls Claim
Until July 2016, the responsibility for the payment for the use of the secondary and complementary transmission systems was distributedapportioned between generators based on the use of each transmission line. OSINERGMIN identified the generators that made use of particular distribution lines and proceeded to determine payment based on actual use (or the “relevance of use” requirement).
However, in July 2016, OSINERGMIN issued a resolution, referred to as the Transmission Toll Resolution, eliminating the “relevance of use” requirement, replacing it with a methodology that required each generation company to pay for a number of transmission lines, irrespective of the transmission lines the company actually uses. The change in methodology benefited the state-owned electricity company,companies, including Electroperu, and caused significantto the detriment toof Kenon and IC Power’s Peruvian subsidiaries, causing significant losses to Kenon and IC Power itself.
The Guatemalan Tax Administrator, or SAT, issued in February 2015 certain binding tax opinions confirming the validity of certain deductions with respect to the referenced distributors. ICP subsequently acquired the distributors. The government of Guatemala changed in 2016 and there also were changes in the SAT management. Subsequently, and notwithstanding the binding tax opinions, the SAT filed a complaint in July 2016 against the distributors for alleged back taxes for thefiscal years 2011 and 2012, alleging that such companies improperly deducted interest and amortization of goodwill relating to the acquisition of the distributors in 2011 by their prior owner. In August 2016, the court hearing the SAT complaint ordered the distributors immediately to pay approximately $17 million in alleged back taxes for fiscal years 2011 and 2012, plus interest and fines within 60 days following the court order. The distributors paid such amount.
principal amount, with payment on interest and fines for fiscal years 2011 and 2012 subsequently deferred by the court pending recalculation.
In addition, in light of the SAT’s actions and instructions, to avoid court proceedings by the SAT concerning fiscal years 2013, 2014, and 2015, and to reduce interest obligations, upon instruction of the SAT, the distributors also revised their tax returns for fiscal years 2013, 2014, and 2015, and in August 2016 paid the SAT approximately $31 million, corresponding to alleged back taxes and interest for fiscal years 2013, 2014, and 2015.
In December 2016, the distributors paid an additional $26 million corresponding to the alleged finesinterest and interestfines on the principal amount. In light of the actions by the SAT, and in order to avoid complaints by the SAT concerningamount for fiscal years 2013, 2014,2011 and 2015, and any resulting fines and interest, upon instructions of the SAT, the distributors revised their tax returns for such years and paid a further amount of approximately $31 million, corresponding to alleged back taxes and interest for those fiscal years. 2012.
The total payments described above relatedrelating to fiscal years 2011 through 2015 amount to approximately $74 million in the aggregate. The distributors made suchall the foregoing payments subject to a broad reservation of rights, including but not limited to seeking restitution of such payments. The foregoing circumstances form part of the basis for the investment treaty arbitration, which is pending.
ICP commenced an investment treaty arbitration against the Republic of Guatemala in February 2018 pursuant to the Agreement between the Government of the State of Israel and the Government of the Republic of Guatemala for the Reciprocal Promotion and Protection of Investments, or the Treaty. ICP is seeking damages on the basis that Guatemala breached its obligations under the Treaty including through the treatment of DEORSA and DEOCSA, two electricity distributors which were subsidiaries of ICP.
Entitlement to Payments in Respect of Certain Proceedings and Claims
As discussed below, IC Power’s former subsidiary, Inkia, is pursuing claims or is entitled to receive certain payments from the buyer of the Inkia Business in connection with certain insurance and other claims held by companies within the Inkia Business or as a result of the resolution of, and/or a change in regulations or cash payments received relating to the transmission tolls claim or the SFR claim. These payments are subject to conditions, and may be subject to deduction for taxes incurred as a result of the relevant payment. Energuate Representation & Warranty Insurance ClaimsClaims.
Prior to the sale of the Inkia Business, DEORSA and DEOCSA and theirDEOCSA’s parent company ICPDH, made a claim under the representation & warranty insurance put in place during the acquisition of DEORSA and DEOCSA (the “Insurance Claim”). The Insurance Claim seeks coverage for among other things, taxes, interest and penalties paid in connection with the SAT tax claim in 2016, as described above. The maximum coverage under the insurance policy is $30 million. The insurer has disputed coverage for the Insurance Claim and that dispute has been submitted to arbitration, which is ongoing.
Kenon’s subsidiary ICPDH, which was not sold as part of the sale of the Inkia Business, has all rights to, and continues to pursue, the Insurance Claim, and the claims by DEORSA and DEOCSA were transferred to ICPDH.Claim. If any proceeds under this claim are received by DEORSA or DEOCSA, such proceeds must be paid to ICPDH.
Samay I Insurance Claims
Samay I has made an insurance claim for losses suffered as a result of the damage to the turbines at the Samay I Facility in 2016. The amount of the claim is approximately $25.3$25.3 million plus interest and costs.
costs. The buyer of the Inkia Business has agreed to use commercially reasonable efforts to pursue this claim, with Inkia required to pay the costs of pursuing the claim, and to pay to Inkia 75% of the insurance claim proceeds received by it.
In Q1 2019, an agreement was reached to settle the claim for $11.5 million. Kenon’s share of these proceeds is expected to be approximately $5 million.
Transmission Toll Regulation
In the event of certain changes in or revocation of regulation in Peru or a final court order relating to the Transmission Toll Resolution (described above under "“—Bilateral Investment Treaty Claims—Claims Relating to Peru—Transmission Tolls Claim"Claim”) which change, revocation or order has the effect of increasing operating profits of Kallpa or Samay I (which are part of the Inkia Business) then the buyer of the Inkia Business is required to pay or cause to be paid to Inkia in cash 75% of an amount equal to 70% of the increase in operating profits of Kallpa and Samay I attributable directly and solely to the changes in regulation through December 31, 2024.
In addition, in the event of any cash payments made to Kallpa or Samay I as a result certain changes in regulation in Peru relating to the Transmission Toll Resolution or as a result certain claims being pursued in Peru in connection with this resolution, the buyer is required to pay or cause to be paid in cash 75% of an amount equal to 70% of such cash proceeds.
Secondary Frequency Regulation Claim
In the event of certain changes to or revocation of PR 22 (as described under "“—Bilateral Investment Treaty Claims—Claims Relating to Peru—Secondary Frequency Regulation Claim"Claim”) which result in a cash payment to Kallpa or Samay I, the buyer is required to pay or cause to be paid in cash 75% of an amount equal to 70% of such cash proceeds.
Samay I S.A. Force Majeure Proceedings
In connection with the damage to the Samay I turbines in 2016, Samay I made a claim to the Peruvian Ministry of Energy and Mines, or MINEM, demanding that the unavailability to the system of the Samay I turbines was a force majeure event and therefore measures taken by MINEM should be reversed. The buyer of the Inkia Business has agreed, promptly following regulatory approval of the sale of the Inkia Business in Peru, to commence arbitration proceedings against MINEM to recover negative revenue adjustments of approximately $3 million on the basis that the unavailability of the turbines was a force majeure event.
Samay I is required to pay to Inkia 50% of the proceeds received from such proceedings, and Inkia is required to reimburse 50% of the costs in proceeding with the claim.
Bolivian Land
Inkia is entitled to appoint a broker to procure buyers for a plot of land in Bolivia owned by COBBEE (part of the Inkia Business) and consummate a sale of the land, with the sale terms subject to Inkia'sInkia’s consent. All proceeds from the sale must be paid to Inkia, after deduction of reasonable costs and expenses, brokerage fees and taxes.
| Country | Entity | Ownership Percentage (Rounded) | Fuel | Installed Capacity (MW)1 | ||||||||
| Peru | Kallpa | 75 | % | Natural Gas, Hydroelectric | 1,618 | |||||||
| Peru | Samay I | 75 | % | Diesel and Natural Gas | 632 | |||||||
| Nicaragua | Corinto | 65 | % | HFO | 71 | |||||||
| Nicaragua | Tipitapa Power | 65 | % | HFO | 51 | |||||||
| Nicaragua | Amayo I | 61 | % | Wind | 40 | |||||||
| Nicaragua | Amayo II | 61 | % | Wind | 23 | |||||||
| Guatemala | Puerto Quetzal | 100 | % | HFO | 55 | |||||||
| El Salvador | Nejapa | 100 | % | HFO | 140 | |||||||
| Panama | Kanan | 100 | % | HFO | 124 | |||||||
| Bolivia | COBEE | 100 | % | Hydroelectric, Natural Gas | 228 | |||||||
| Chile | Central Cardones | 87 | % | Diesel | 153 | |||||||
| Chile | Colmito | 100 | % | Natural Gas and Diesel | 58 | |||||||
| Dominican Republic | CEPP | 97 | % | HFO | 67 | |||||||
| Jamaica | JPPC | 100 | % | HFO | 60 | |||||||
| Panama | Pedregal | 21 | % | HFO | 54 | |||||||
| Total Capacity | 3,374 | |||||||||||
C. Organizational Structure
The chart below represents a summary of our organizational structure, excluding intermediate holding companies, as of April 9, 2018.5, 2019. This chart should be read in conjunction with the explanation of our ownership and organizational structure above.
| (1) | In January |
D. Property, Plants and Equipment
For information on our property, plants and equipment, see “Item 4.B Business Overview.”
Not Applicable.
This section should be read in conjunction with our audited consolidated financial statements, and the related notes thereto, for the years ended December 31, 2018, 2017 2016 and 2015,2016, included elsewhere in this annual report. Our financial statements have been prepared in accordance with IFRS. Our consolidated financial statements as of and for the year ended December 31, 2017 reflect the Inkia Business as discontinued operations and our consolidated financial statements as of and for the yearsyear ended December 31, 2016 and 2015 have been reclassified for comparative purposes to account for the Inkia Business as discontinued operations (see “Item 4.B Business Overview—Discontinued Operations—Inkia Business”).
The financial information below also includes certain non-IFRS measures used by us to evaluate our economic and financial performance. These measures are not identified as accounting measures under IFRS and therefore should not be considered as an alternative measure to evaluate our performance. In addition, all financial information below relating to Tower has been derived from financial statements that were prepared in accordance with U.S. GAAP.
Certain information included in this discussion and analysis includes forward-looking statements that are subject to risks and uncertainties, and which may cause actual results to differ materially from those expressed or implied by such forward-looking statements. For further information on important factors that could cause our actual results to differ materially from the results described in the forward-looking statements contained in this discussion and analysis, see “Special Note Regarding Forward-Looking Statements” and “Item 3.D Risk Factors.”
Business Overview
For a discussion of our strategy, see “Item 4.B Business Overview.”
Overview of Financial Information Presented
As a holding company, Kenon’s results of operations are impacted byprimarily comprise the financial results of each of its businesses. To effectively assessThe following table sets forth the method of accounting for our resultsbusinesses for each of operations, we supply detailed information on the financial results of our individual businesses and the impact such results have had on our consolidated results of operations. The analysis of each business’ impact on our results of continuing operations for thethree years ended December 31, 20172018 and 2016 depends upon the methodour ownership percentage as of accounting applicable to it as set forth in the following table:December 31, 2018:
Ownership Percentage | Method of Accounting | Treatment in Consolidated Financial Statements | ||||||||
| OPC | 76 | % | Consolidated | Consolidated | ||||||
| Qoros | %1 | Equity | Share in losses of associated companies, net of tax | |||||||
| ZIM | 32 | % | Equity | Share in losses of associated companies, net of tax | ||||||
| Other | ||||||||||
| Primus | 91 | % | Consolidated | Consolidated | ||||||
| (1) | In January 2018, our ownership in Qoros was reduced from 50% to 24% in connection with the investment in Qoros by the Majority Shareholder in Qoros. In January 2019, Kenon announced it had entered into an agreement to sell half of its remaining interest in Qoros (i.e. 12%) to the |
The results of the following companies are included in Kenon’s statements of profit and loss as share in losses of associated companies, net of tax, for the years set forth below, except as otherwise indicated: (i) Qoros and (ii) ZIM from June 30, 2014 and (iii) Tower until June 30, 2015.ZIM.
The following tables set forth selected financial data for Kenon’s reportable segments for the periods presented:
Year Ended December 31, 20171 | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | OPC | Quantum1 | Other2 | Adjustments3 | Consolidated Results | |||||||||||||||||||||||||||||||
| (in millions of USD, unless otherwise indicated) | (in millions of USD, unless otherwise indicated) | |||||||||||||||||||||||||||||||||||||||
| Sales | $ | 365 | $ | - | $ | 1 | $ | - | $ | 366 | $ | 363 | $ | — | $ | 1 | $ | — | $ | 364 | ||||||||||||||||||||
| Depreciation and amortization | (30 | ) | - | (1 | ) | - | (31 | ) | (30 | ) | — | — | — | (30 | ) | |||||||||||||||||||||||||
| Impairment of assets and investments | - | - | 29 | - | 29 | |||||||||||||||||||||||||||||||||||
| Financing income | 1 | - | 13 | (11 | ) | 3 | 2 | 10 | 48 | (32 | ) | 28 | ||||||||||||||||||||||||||||
| Financing expenses | (34 | ) | - | (47 | ) | 11 | (70 | ) | (27 | ) | (2 | ) | (33 | ) | 32 | (30 | ) | |||||||||||||||||||||||
| Share in (losses) income of associated companies | - | (121 | ) | 10 | - | (111 | ) | |||||||||||||||||||||||||||||||||
| Gain on third party investment in Qoros | — | 504 | — | — | 504 | |||||||||||||||||||||||||||||||||||
| Fair value loss on option | — | (40 | ) | — | — | (40 | ) | |||||||||||||||||||||||||||||||||
| Write back of financial guarantee | — | 63 | — | — | 63 | |||||||||||||||||||||||||||||||||||
| Share in losses of associated companies | — | (78 | ) | (27 | ) | — | (105 | ) | ||||||||||||||||||||||||||||||||
| Profit / (Loss) before taxes | $ | 23 | $ | (121 | ) | $ | (38 | ) | $ | - | $ | (136 | ) | $ | 36 | $ | 457 | $ | (31 | ) | $ | — | $ | 462 | ||||||||||||||||
| Income taxes | (9 | ) | - | (64 | ) | - | (73 | ) | (10 | ) | — | (1 | ) | — | (11 | ) | ||||||||||||||||||||||||
| Profit / (Loss) from continuing operations | $ | 14 | $ | (121 | ) | $ | (102 | ) | $ | - | $ | (209 | ) | $ | 26 | $ | 457 | $ | (32 | ) | $ | — | $ | 451 | ||||||||||||||||
Segment assets5 | $ | 936 | $ | - | $ | 1,468 | 6 | $ | - | $ | 2,404 | |||||||||||||||||||||||||||||
Segment assets4 | $ | 893 | $ | 92 | $ | 239 | 5 | $ | — | $ | 1,224 | |||||||||||||||||||||||||||||
| Investments in associated companies | - | 2 | 120 | - | 122 | — | 139 | 92 | — | 231 | ||||||||||||||||||||||||||||||
| Segment liabilities | 743 | - | 732 | 7 | - | 1,475 | 700 | — | 39 | 6 | — | 739 | ||||||||||||||||||||||||||||
Capital expenditure8 | 109 | - | 121 | - | 230 | |||||||||||||||||||||||||||||||||||
Capital expenditure7 | 100 | — | — | — | 100 | |||||||||||||||||||||||||||||||||||
| (1) |
| (2) | Includes the |
| (3) | “Adjustments” includes inter segment financing income and expense. |
| (4) | Includes investments in associates. |
| (5) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (7) | Includes the additions of Property, Plant and Equipment, or PP&E, and intangibles based on an accrual basis. |
89
Year Ended December 31, 20171 | ||||||||||||||||||||
OPC | Quantum2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 365 | $ | — | $ | 1 | $ | — | $ | 366 | ||||||||||
| Depreciation and amortization | (30 | ) | — | (1 | ) | — | (31 | ) | ||||||||||||
| Impairment of assets and investments | — | — | 29 | — | 29 | |||||||||||||||
| Financing income | 1 | — | 13 | (11 | ) | 3 | ||||||||||||||
| Financing expenses | (34 | ) | (6 | ) | (41 | ) | 11 | (70 | ) | |||||||||||
| Share in (losses) income of associated companies | — | (121 | ) | 10 | — | (111 | ) | |||||||||||||
| Profit / (Loss) before taxes | $ | 23 | $ | (127 | ) | $ | (32 | ) | $ | — | $ | (136 | ) | |||||||
| Income taxes | (9 | ) | — | (64 | ) | — | (73 | ) | ||||||||||||
| Profit / (Loss) from continuing operations | $ | 14 | $ | (127 | ) | $ | (96 | ) | $ | — | $ | (209 | ) | |||||||
Segment assets5 | $ | 940 | $ | 16 | $ | 1,448 | 6 | $ | — | $ | 2,404 | |||||||||
| Investments in associated companies | — | 2 | 120 | — | 122 | |||||||||||||||
| Segment liabilities | 743 | 75 | 657 | 7 | — | 1,475 | ||||||||||||||
Capital expenditure8 | 109 | — | 121 | — | 230 | |||||||||||||||
| (1) | Results for this period reflect the results of the Inkia |
| (2) |
| (3) | Includes the results of Primus and HelioFocus (which was liquidated in July 2017); the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter-segment financing income and expenses. |
| (5) | Excludes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC |
| (7) | Includes Kenon’s, IC Green’s and IC |
| (8) | Includes the additions of PP&E, and intangibles based on an accrual basis. |
Year Ended December 31, 20161 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 324 | $ | — | $ | — | $ | - | $ | 324 | ||||||||||
| Depreciation and amortization | (27 | ) | — | - | - | (27 | ) | |||||||||||||
| Impairment of assets and investments | - | — | 72 | - | (72 | ) | ||||||||||||||
| Financing income | 3 | — | 16 | (12 | ) | 7 | ||||||||||||||
| Financing expenses | (23 | ) | — | (36 | ) | 12 | (47 | ) | ||||||||||||
| Share in losses of associated companies | - | (143 | ) | (43 | ) | - | (186 | ) | ||||||||||||
| Provision of financial guarantee | - | — | (130 | ) | - | (130 | ) | |||||||||||||
| Profit/(Loss) before taxes | $ | 20 | $ | (143 | ) | $ | (305 | ) | $ | - | $ | (428 | ) | |||||||
| Income taxes | — | — | (2 | ) | - | (2 | ) | |||||||||||||
| Profit/(Loss) from continuing operations | $ | 20 | $ | (143 | ) | $ | (307 | ) | $ | - | $ | (430 | ) | |||||||
Segment assets5 | $ | 668 | $ | — | $ | 4,262 | 6 | $ | - | $ | 4,930 | |||||||||
| Investments in associated companies | - | 118 | 90 | - | 208 | |||||||||||||||
| Segment liabilities | 534 | — | 3,710 | 7 | - | 4,244 | ||||||||||||||
Capital expenditure8 | 73 | — | 245 | - | 318 | |||||||||||||||
Year Ended December 31, 20161 | ||||||||||||||||||||
OPC | Quantum2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
(in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 324 | $ | — | $ | — | $ | — | $ | 324 | ||||||||||
| Depreciation and amortization | (27 | ) | — | — | — | (27 | ) | |||||||||||||
| Impairment of assets and investments | — | — | 72 | — | (72 | ) | ||||||||||||||
| Financing income | 3 | — | 16 | (12 | ) | 7 | ||||||||||||||
| Financing expenses | (23 | ) | — | (36 | ) | 12 | (47 | ) | ||||||||||||
| Share in losses of associated companies | — | (143 | ) | (43 | ) | — | (186 | ) | ||||||||||||
| Provision of financial guarantee | — | — | (130 | ) | — | (130 | ) | |||||||||||||
| Profit/(Loss) before taxes | $ | 20 | $ | (143 | ) | $ | (305 | ) | $ | — | $ | (428 | ) | |||||||
| Income taxes | — | — | (2 | ) | — | (2 | ) | |||||||||||||
| Profit/(Loss) from continuing operations | $ | 20 | $ | (143 | ) | $ | (307 | ) | $ | — | $ | (430 | ) | |||||||
Segment assets5 | $ | 668 | $ | 2 | $ | 4,260 | 6 | $ | — | $ | 4,930 | |||||||||
| Investments in associated companies | — | 118 | 90 | — | 208 | |||||||||||||||
| Segment liabilities | 534 | — | 3,710 | 7 | — | 4,244 | ||||||||||||||
Capital expenditure8 | 73 | — | 245 | — | 318 | |||||||||||||||
| (1) | Results during this period have been reclassified to reflect the results of the Inkia Business as discontinued operations. For further information, see Note |
| (2) |
90
| (3) | Includes the results of Primus and HelioFocus (which was liquidated in July 2017); the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter-segment financing income and expenses. |
| (5) | Excludes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (7) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (8) | Includes the additions of PP&E and intangibles based on an accrual basis. |
Year Ended December 31, 20151 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 326 | $ | — | $ | — | $ | - | $ | 326 | ||||||||||
| Depreciation and amortization | (26 | ) | — | 1 | — | (25 | ) | |||||||||||||
| Asset impairment | - | — | (7 | ) | — | (7 | ) | |||||||||||||
| Financing income | 3 | — | 8 | — | 11 | |||||||||||||||
| Financing expenses | (26 | ) | — | (10 | ) | — | (36 | ) | ||||||||||||
| Share in (losses) income of associated companies | - | (196 | ) | 9 | — | 187 | ||||||||||||||
| Gain from distribution of dividend in kind | - | — | 210 | — | 210 | |||||||||||||||
| Profit / (Loss)before taxes | $ | 30 | $ | (196 | ) | $ | 199 | $ | — | $ | 33 | |||||||||
| Income taxes | (8 | ) | — | 1 | — | (9 | ) | |||||||||||||
| Profit / (Loss)from continuing operations | $ | 22 | $ | (196 | ) | $ | 198 | $ | — | $ | 24 | |||||||||
Segment assets5 | $ | 811 | $ | — | $ | 3,303 | 6 | $ | — | $ | 4,114 | |||||||||
| Investments in associated companies | - | 159 | 210 | — | 369 | |||||||||||||||
| Segment liabilities | 677 | — | 2,542 | 7 | — | 3,219 | ||||||||||||||
Capital expenditure8 | 18 | — | 556 | — | 574 | |||||||||||||||
The following tables set forth summary information regarding each of our equity-method accounting businesses for the periods presented.
| Year Ended December 31, 2017 | ||||||||||||||||
| Qoros | ZIM | Other | Total | |||||||||||||
| (in millions of USD) | ||||||||||||||||
| Income (loss) (100% of results) | $ | (242 | ) | $ | 6 | $ | - | $ | (236 | ) | ||||||
| Share of Income (loss) from Associates | (121 | ) | 10 | - | (111 | ) | ||||||||||
| Book Value | 2 | 120 | - | 122 | ||||||||||||
| Year Ended December 31, 2016 | ||||||||||||||||
| Qoros | ZIM | Other | Total | |||||||||||||
| (in millions of USD) | ||||||||||||||||
| Income (loss) (100% of results) | $ | (285 | ) | $ | (168 | ) | $ | — | $ | (453 | ) | |||||
| Share of Income (loss) from Associates | (143 | ) | (43 | ) | — | (186 | ) | |||||||||
| Book Value | 118 | 82 | 8 | 208 | ||||||||||||
| Year Ended December 31, 2015 | ||||||||||||||||||||
| Qoros | ZIM | Tower1 | Other | Total | ||||||||||||||||
| (in millions of USD) | ||||||||||||||||||||
| Income (loss) (100% of results) | $ | (392 | ) | $ | 2 | $ | (1 | ) | $ | — | $ | (391 | ) | |||||||
| Share of Income (loss) from Associates | (196 | ) | 10 | (1 | ) | — | (187 | ) | ||||||||||||
| Book Value | 159 | 201 | — | 9 | 369 | |||||||||||||||
Year Ended December 31, 2018 | ||||||||||||||||
Qoros | ZIM | Other | Total | |||||||||||||
(in millions of USD) | ||||||||||||||||
| Loss (100% of results) | $ | (330 | ) | $ | (126 | ) | $ | — | $ | (456 | ) | |||||
| Share of loss from Associates | (78 | ) | (27 | ) | — | (105 | ) | |||||||||
| Book Value | 139 | 92 | — | 231 | ||||||||||||
Year Ended December 31, 2017 | ||||||||||||||||
Qoros | ZIM | Other | Total | |||||||||||||
(in millions of USD) | ||||||||||||||||
| (Loss) income (100% of results) | $ | (242 | ) | $ | 6 | $ | — | $ | (236 | ) | ||||||
| Share of (Loss) income from Associates | (121 | ) | 10 | — | (111 | ) | ||||||||||
| Book Value | 2 | 120 | — | 122 | ||||||||||||
Year Ended December 31, 2016 | ||||||||||||||||
Qoros | ZIM | Other | Total | |||||||||||||
(in millions of USD) | ||||||||||||||||
| Loss (100% of results) | $ | (285 | ) | $ | (168 | ) | $ | — | $ | (453 | ) | |||||
| Share of Loss from Associates | (143 | ) | (43 | ) | — | (186 | ) | |||||||||
| Book Value | 118 | 82 | 8 | 208 | ||||||||||||
Qoros
Following the completion of the NewMajority Shareholder in Qoros Investor investment in 2018, we have a 24% equity interest in Qoros. In January 2019, Kenon agreed to sell half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros. The sale is subject to obtaining customary relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros.
We account for Qoros pursuant to the equity method of accounting and discuss Qoros’ results of operations in our discussion of our share in losses of associated companies, net of tax. Following completion of the sale of half of our remaining interest in Qoros as described in the preceding paragraph, we will no longer account for Qoros as an equity method investment.
ZIM
In July 2014, ZIM completed the restructuring of its outstanding indebtedness, which resulted in IC, and consequently, Kenon, owning 32% of the restructured ZIM as compared to IC’s previous interest in ZIM of approximately 99.7%. As a result of the restructuring, ZIM’s results of operations for all periods prior to June 30, 2014 are reflected as discontinued in Kenon’s results of operations and ZIM’s results of operations for the six months ended December 31, 2014 and the years ended December 31, 2015, 2016, 2017 and 20172018 are reflected in Kenon’s share in losses of associated companies, net of tax.
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Material Factors Affecting Results of Operations
Discontinued Operations
In December 2017, Inkia, a wholly-owned subsidiary of IC Power completed the sale of the Inkia Business, which includesincluded Inkia’s Latin American and Caribbean businesses, to I Squared Capital, an infrastructure private equity firm, for approximately $1,332 million.firm. As a result, the results of operations of the Inkia Business are reflected as discontinued operations in Kenon’s financial statements presented in this annual report.for the year ended December 31, 2017. Results for 2016 have been reclassified to reflect the classification of the Inkia Business as discontinued operations. Inkia still has certain obligations in relation to the sale of the Inkia Business, including certain indemnification obligations (see “Item 4.B Business Overview— Discontinued Operations – Inkia Business—Sale of the Inkia Business—Share Purchase Agreement—Indemnification), while Kenon holds the deferred payment agreement (see “—Nautilus Energy TopCo LLC Deferred Payment Agreement”), and has retained certain claims relating to the Inkia Business (see “— Claims Relating to Inkia Business Retained by Kenon”). For further information, see “Item 4.B Business Overview—Discontinued Operations—Inkia Business.” Furthermore, results during 2016 and 2015 have been reclassified to reflect the classification of the Inkia Business as discontinued operations.
OPC
Set forth below is a discussion of the material factors affecting the results of operations of OPC for the periods under review.
Sales—EA Tariffs
In Israel, sales by IPPs are generally made on the basis of PPAs for the sale of energy to customers, with prices predominantly linked to the tariff issued by the EA and denominated in NIS.
The EA operates a Time of Use tariff, which provides different energy rates for different seasons (e.g., summer and winter) and different periods of time during the day. Within Israel, the price of energy varies by season and demand period. For further information on Israel’s seasonality and the related EA tariffs, see “Item 4.B Business Overview—Our Businesses—OPC—Industry Overview— Overview of Israeli Electricity Generation Industry.”
The EA’s rates have affected OPC’s revenues and income in the periods under review.
Cost of Sales
OPC’s principal costs of sales are natural gas, transmission, distribution and system services costs, personnel, third-party services and maintenance costs.
The prices at which OPC-Rotem and OPC-Hadera purchase their natural gas from their sole natural gas supplier, the Tamar Group, is predominantly indexed to changes in the EA’s generation component tariff, pursuant to the price formula set forth in OPC-Rotem’s and OPC-Hadera’s supply agreements with the Tamar Group. As a result, increases or decreases in this tariff have a related effect on OPC-Rotem’s and PC-Hadera’s cost of sales and margins. Additionally, the natural gas price formula in OPC-Rotem’s and OPC-Hadera’s supply agreement is subject to a floor price mechanism.
As a result of previous declines in the EA’s generation component tariff, OPC-Rotem and OPC-Hadera began to paypaid the ultimate floorminimum price starting in November 2015 and Aprilas well as during 2016 respectively.to 2018 (excluding one month in 2018). Therefore, declines in the EA generation component tariff may not have a corresponding decline in OPC-Rotem’s natural gas expenses, due to the floorminimum price mechanism. and may lead to a decline in OPC-Rotem’s margins, which may have a material adverse effect on OPC’s business, results of operations and financial condition. For information on the risks associated with the impact of the EA’s generation tariff on OPC’s supply agreements with the Tamar Group, see “Item 3.D Risk Factors—Risks Related to OPC—Changes in the EA’s electricity rates may reduce OPC’s profitability.”
In JanuaryDecember 2018, the EA published the electricity tariffs for 2018,2019, which included an increase of the EA’s generation component tariff by 6.7%,approximately 3.3%. As a results, OPC-Rotem and OPC-Hadera’sresult, OPC-Rotem's gas prices may rise above their ultimate floor prices.the minimum price. For information on the risks associated with the impact of the EA’s generation tariff on OPC-Rotem’s supply agreement with the Tamar Group, see “Item 3.D Risk Factors—Risks Related to OPC— Changes in the EA’s electricity rates may reduce OPC’s profitability.” As ofOPC-Hadera's gas prices exceeded the date of this report, OPC-Hadera’s gasminimum price isin 2018 and are expected to be above the floor price.minimum price in 2019.
OPC’s costs for transmission, distribution and systems services vary primarily according to the quantity of energy that OPC sells. These costs are passed on to its customers. OPC incurs personnel and third-party services costs in the operation of its plants. These costs are usually independent of the volumes of energy produced by OPC’s plants. OPC incurs maintenance costs in connection with the ongoing and periodic maintenance of its generation plants. These costs are usually correlated to the volumes of energy produced and the number of running hours of OPC’s plants.
As planned, major overhaul maintenance work was completed between September and November 2018, which halted the OPC-Rotem plant’s operations along with the related energy generation activities for a 48-day period. During the maintenance, supply of electricity to OPC-Rotem’s private customers continued as usual using energy purchased by OPC, in accordance with the standards published by the EA and OPC-Rotem’s PPA agreement with the IEC. This resulted in a decrease in gas costs as well as the increase of costs for purchases of electricity from the IEC, which resulted in lost margins for OPC during the maintenance period.
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Income Taxes
OPC is subject to income tax in Israel. The corporate tax rates applicable in Israel as of December 31, 2018, 2017 and 2016 were 23%, 24% and 2015 were 24%, 25% and 26.5%, respectively. The corporate income tax decreased to 23% on January 1, 2018.
Changes in Exchange Rates
Fluctuations in the exchange rates between currencies in which certain of OPC'sOPC’s agreements are denominated (such as the U.S. Dollar and Euro) and the NIS, which is OPC’s functional and reporting currency, will generate either gains or losses on monetary assets and liabilities denominated in such currencies and can therefore affect OPC’s profitability. Furthermore, OPC is indirectly influenced by changes in the U.S. Dollar to NIS exchange rate as the IEC electricity tariff is partially linked to increases in fuel prices (mainly coal and gas) that are denominated in U.S. Dollars.
In addition, Kenon’s functional currency is the U.S. Dollar, so Kenon reports OPC’s NIS-denominated results of operationoperations and balance sheet items in U.S. Dollars, translating OPC’s results into U.S. Dollars at the average exchange rate (for results of operation) or rate in effect on the balance sheet date (for balance sheet items). Accordingly, changes in the U.S. Dollar to NIS exchange rate impact Kenon’s reported results for OPC.
In 2017, the U.S. Dollar continuedexperienced a period of weakening and, therefore, the exchange rate of the U.S. Dollar to the NIS continued to decline. In 2018, the U.S. Dollar was stronger versus the NIS as compared to 2017.
Qoros
Set forth below is a discussion of the material factors affecting the results of operations of Qoros for the periods under review.
In the years ended December 31, 20172018 and 2016,2017, Qoros incurred net losses of RMB1.6RMB2.2 billion (approximately $332 million) and RMB1.9RMB1.6 billion (approximately $238 million), respectively. Qoros expects to continue experiencing losses and negative cash flows until it achieves significantly higher levels of sales.
For the year ended December 31, 2017,2018, Qoros sold approximately 15,00062,000 cars, as compared to approximately 24,00015,000 cars in 2016. Qoros sold approximately 11,400 cars in the first quarter2017. A significant portion of 2018, a more than 200% increase as compared to approximately 3,700 cars sold in the first quarter of 2017, with a substantial number of suchvehicle sales in Q1 2018 reflecting purchase orderswere made to a leasing company introduced by the New Qoros Investor. Majority Shareholder in Qoros. Qoros’ ability to generate positive net income and cash flow from its operations will depend upon a variety of factors, particularly Qoros’ ability to sell its vehicles within its targeted price range and develop an effective dealer network.
In January 2018, Kenon announced the NewMajority Shareholder in Qoros Investor completed a transaction to purchase 51% of Qoros from Kenon and Chery for RMB3.315 billion (approximately $526 million), which is part of an investment structure to invest a total of approximately RMB6.63 billion (approximately $1,052 million) by the New Qoros Investor of which RMB6.5 billion will ultimately be invested in Qoros’ equity.Chery. As a result, Kenon and Chery now have 24% and 25% stakes in Qoros, respectively.Qoros. This investment has improved Qoros'Qoros’ liquidity, but Qoros may need to continue to secure additional financing to meet its operating expenses, including accounts payable, and debt service requirements until it increases its sales levels. Kenon may be required to make payments under its back-to-backhas given guarantees to Chery in respect of Qoros’ bank debt and pledges over Qoros shares byin the amount of RMB288 million (approximately $44 million). Quantum (Kenon’s subsidiary which owns Kenon’s interest in Qoros) may be enforced.has pledged the shares it holds in Qoros. In addition, if Qoros'Qoros’ other joint venture partners make additional equity investments in Qoros without Kenon also making its pro-rata investment, Kenon'sKenon’s interest in Qoros may be diluted. See “Item 3.D Risk Factors—Risks Related to Our Strategy and Operations— Some of our businesses have significant capital requirements.”
In January 2019, Kenon agreed to sell half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros. The sale is subject to obtaining customary relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros, the Majority Shareholder in Qoros will hold 63% and Chery will own 25%.
ZIM
In July 2014, ZIM completed its financial restructuring, which resulted in IC, and consequently, Kenon, owning 32% of the restructured ZIM as compared to IC’s previous interest in ZIM of approximately 99.7% and reduced ZIM’s outstanding indebtedness and liabilities (face value, including future off-balance sheet commitments in respect of operational leases and with respect to those parties participating in the restructuring) from approximately $3.4 billion to approximately $2 billion.. As a result, Kenon received a 32% equity interest in ZIM upon the consummation of the spin-off.
ZIM’s results of operations for the years ended December 31, 2015, 2016, 2017 and 20172018 are reflected in Kenon’s share in losses of associated companies, net of tax, pursuant to the equity method of accounting.
In addition, bunker prices and freight rates are material factors which affect ZIM’s results of operations. For a discussion of bunker prices and freight rates, see “Item 4.B Business Overview—Our Businesses—ZIM—ZIM’s Industry Update.”
The IMO’s Sulphur Cap regulations are also expected to impact bunker prices and are material factors which are expected to affect ZIM’s revenues and costs, see “Item 4.B Business Overview—Our Businesses—ZIM— ZIM’s Regulatory, Environmental and Compliance Matters.”
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Primus
In the year ended December 31, 2018, Primus generated $480,000 in revenues from its operations, while in each of the two years ended December 31, 2017, Primus did not generate material revenues from its operations.
Primus seeks to develop, build, own and operate facilities where the company can access low-cost natural gas feedstock and take advantage of lower product transportation costs resulting from locating producing assets closer to markets than competing sources.sources, including through joint ventures with equity partners. Primus seeks to generate revenues from the sale of methanol, gasoline and stream miscible withsynthetic crude from its operating plants as well as from construction management services, engineering fees, technology licensing fees, production royalties, and other opportunities the company identifies. Primus intends to finance the first series of plants through non-recourse project financing and is seeking a strategic partner to participate alongside Primus in the equity component of the investment.
Critical Accounting Policies and Significant Estimates
In preparing our financial statements, we make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our estimates and associated assumptions are reviewed on an ongoing basis and are based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements:
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Set forth below is a discussion of impairment analyses conducted by Kenon and its subsidiaries and associated companies. For further information on the estimates, assumptions and judgments involved in our accounting policies and significant estimates, see Note 2 to Kenon’s financial statements included in this annual report.
Impairment Analysis
For each reporting period, Kenon examines whether there have been any events or changes in circumstances which would indicate an impairment of one or more non-monetary assets or cash generating units, or CGUs. Additionally, when there are indications of an impairment, a review is made as to whether the carrying amount of the non-monetary assets or CGUs exceeds the recoverable amount and, if so, an impairment loss is recognized. An assessment of the impairment of the goodwill is performed once a year or when signs of an impairment exist.
Under IFRS, the recoverable amount of the asset or CGU is determined based upon the higher of (i) the fair value less costs of disposal and (ii) the present value of the future cash flows expected from the continued use of the asset or CGU in its present condition, including cash flows expected to be received upon the retirement of the asset from service and the eventual sale of the asset (value in use). The future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time-value of money and the risk specific to the asset or CGU.
The estimates regarding future cash flows are based upon past experience with respect to this asset or similar assets (or CGUs), and on Kenon’s businesses best possible assessments regarding the economic conditions that will exist during the remaining useful life of the asset or CGU. Such estimates rely on the particular business’ current development plans and forecasts. As the actual cash flows may differ, the recoverable amount determined could change in subsequent periods, such that an additional impairment loss may need to be recognized or a previously recognized impairment loss may need to be reversed.
Impairment Tests of ZIM
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As a result of improved operating conditions at ZIM throughout 2017, Kenon conducted another impairment analysis as of December 31, 2017. The analysis concluded that Kenon should reverse $29 million of the impairment recognized in 2016.
| Increase | Decrease | |||||||
| By 100 bps | ||||||||
| ($ millions) | ||||||||
| Discount rate | (170 | ) | 218 | |||||
| Terminal growth rate | 169 | (130 | ) | |||||
Adoption of New Accounting Standards in 2018 and 2019
IFRS 16
For annual periods beginning on or after January 1, 2018, IFRS 15 “Revenues from Contracts with Customers” has replaced the current guidelines regarding recognition of revenue from contracts with customers. IFRS 15 provides two approaches for recognition of revenue, and includes five stages for analysis of transactions in order to determine the timing of recognition of the revenue and the amount thereof. As of the date of this annual report, we have not yet adopted IFRS 15.
For more information on the impact of the adoption of these standards, see Note 3 to our financial statements included in this annual report.
Recent Developments
Kenon
In December 2017, Kenon’s wholly-owned subsidiary Inkia soldJanuary 2019, Kenon agreed to sell half of its power generationremaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros. The sale is subject to obtaining relevant third-party consents and distribution businessesother closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Latin AmericaQoros, the Majority Shareholder in Qoros will hold 63% and the Caribbean, the Inkia Business, to an entity controlled by I Squared Capital, an infrastructure private equity firm.Chery will own 25%. For further information, on the sale, see “Item 4.B Business Overview—Discontinued Operations—Inkia Business —Our Businesses—Qoros —2019 Qoros Sale of the Inkia Business.Agreement.” As a result of this sale, Kenon’s remaining power generation business consists of its 76% interest in OPC.
OPC
In April 2017,January 2019 OPC entered into agreements (including an option agreement)agreement for the acquisition of 95%the remaining 5% of the shares of Tzomet, Energy Ltd.,for consideration of approximately $7 million, which is developing a natural gas-fired power stationexpected to be completed in Israel with capacity of approximately 396 MW, for total consideration of $23 million,increments subject to adjustment. In August 2017, the EA received a letter from the from the Israel Concentration Committee stating that it believed that, for reasonsfulfillment of broad economy concentration (i.e. taking into account businesses owned by related entities of Kenon's controlling shareholder), OPC should not be granted a contingent license for the construction of the planned facility. In March 2018, OPC completed the acquisition of 95% of the shares of Tzomet Energy, althoughcertain milestones. Tzomet still requires (among other requirements) a license from the EA to proceed with construction of the planned facility. The total considerationpower station and remains subject to financial closing (expected to take place on January 1, 2020).
EA decision to grant conditional license for Tzomet project
In April 2019, the EA published its decision to grant Tzomet a conditional license for a 66-month term (which can be extended, subject to conditions) for the acquisition is estimated at approximately $23 million,construction of a 396MW conventional open-cycle power plant. Such conditional license remains subject to certain adjustments,the Israeli Minister of which $3.65 million was paid in March 2018, an additional $3.65 million is expected to be paid in the second quarter of 2018,Energy's approval and the remaining consideration will be paid at financial closingissuance of a guarantee by Tzomet. The grant of a permanent generation license to Tzomet, upon expiration of the Tzomet project.
A. Operating Results
Our consolidated/combined financial statements for the years ended December 31, 2018, 2017 2016 and 20152016 are comprised of OPC, Primus, HelioFocus (which was liquidated in July 2017), and the results of the associated companies (Qoros ZIM and Tower)ZIM).
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Our consolidated/combined results of operations for each of the periods presented are largely impacted by OPC, which generated net incomeprimarily comprise the results of $14 million, $20 million and $22 million in the years ended December 31, 2017, 2016 and 2015, respectively.OPC.
In December 2017, Inkia completed the sale of the Inkia Business, which consists of its Latin American and Caribbean businesses. The results of the Inkia Business are presented as discontinued operations in our consolidated/combined financial statements for the year ended December 31, 2017. Our consolidated financial statements as of and for the yearsyear ended December 31, 2016 and 2015 have been reclassified for comparative purposes to reflect the Inkia Business as discontinued operations.
Year Ended December 31, 20172018 Compared to Year Ended December 31, 20162017
The following tables set forth summary information regarding our operating segment results for the years ended December 31, 20172018 and 2016.2017.
Year Ended December 31, 20171 | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | OPC | Quantum1 | Other2 | Adjustments3 | Consolidated Results | |||||||||||||||||||||||||||||||
| (in millions of USD, unless otherwise indicated) | (in millions of USD, unless otherwise indicated) | |||||||||||||||||||||||||||||||||||||||
| Sales | $ | 365 | $ | - | $ | 1 | $ | - | $ | 366 | $ | 363 | $ | — | $ | 1 | $ | — | $ | 364 | ||||||||||||||||||||
| Depreciation and amortization | (30 | ) | - | (1 | ) | - | (31 | ) | (30 | ) | — | — | — | (30 | ) | |||||||||||||||||||||||||
| Impairment of assets and investments | - | - | 29 | - | 29 | |||||||||||||||||||||||||||||||||||
| Financing income | 1 | - | 13 | (11 | ) | 3 | 2 | 10 | 48 | (32 | ) | 28 | ||||||||||||||||||||||||||||
| Financing expenses | (34 | ) | - | (47 | ) | 11 | (70 | ) | (27 | ) | (2 | ) | (33 | ) | 32 | (30 | ) | |||||||||||||||||||||||
| Share in (losses) income of associated companies | - | (121 | ) | 10 | - | (111 | ) | |||||||||||||||||||||||||||||||||
| Gain on third party investment in Qoros | — | 504 | — | — | 504 | |||||||||||||||||||||||||||||||||||
| Fair value loss on option | — | (40 | ) | — | — | (40 | ) | |||||||||||||||||||||||||||||||||
| Write back of financial guarantee | — | 63 | — | — | 63 | |||||||||||||||||||||||||||||||||||
| Share in losses of associated companies | — | (78 | ) | (27 | ) | — | (105 | ) | ||||||||||||||||||||||||||||||||
| Profit / (Loss) before taxes | $ | 23 | $ | (121 | ) | $ | (38 | ) | $ | - | $ | (136 | ) | $ | 36 | $ | 457 | $ | (31 | ) | $ | — | $ | 462 | ||||||||||||||||
| Income taxes | (9 | ) | - | (64 | ) | - | (73 | ) | (10 | ) | — | (1 | ) | — | (11 | ) | ||||||||||||||||||||||||
| Profit / (Loss) from continuing operations | $ | 14 | $ | (121 | ) | $ | (102 | ) | $ | - | $ | (209 | ) | $ | 26 | $ | 457 | $ | (32 | ) | $ | — | $ | 451 | ||||||||||||||||
Segment assets5 | $ | 936 | $ | - | $ | 1,468 | 6 | $ | - | $ | 2,404 | |||||||||||||||||||||||||||||
Segment assets4 | $ | 893 | $ | 92 | $ | 239 | 5 | $ | — | $ | 1,224 | |||||||||||||||||||||||||||||
| Investments in associated companies | - | 2 | 120 | - | 122 | — | 139 | 92 | — | 231 | ||||||||||||||||||||||||||||||
| Segment liabilities | 743 | - | 732 | 7 | - | 1,475 | 700 | — | 39 | 6 | — | 739 | ||||||||||||||||||||||||||||
Capital expenditure8 | 109 | - | 121 | - | 230 | |||||||||||||||||||||||||||||||||||
Capital expenditure7 | 100 | — | — | — | 100 | |||||||||||||||||||||||||||||||||||
| (1) | Due to maintenance work, OPC-Rotem was not operational for two months in Q4 2018. |
| (2) | Subsidiary of Kenon that owns Kenon’s equity holding in Qoros. |
| (3) | Includes the results of Primus, the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter segment financing income and expense. |
| (5) | Includes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (7) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (8) | Includes the additions of Property, Plant and Equipment, or PP&E, and intangibles based on an accrual basis. |
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Year Ended December 31, 20171 | ||||||||||||||||||||
OPC | Quantum2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 365 | $ | — | $ | 1 | $ | — | $ | 366 | ||||||||||
| Depreciation and amortization | (30 | ) | — | (1 | ) | — | (31 | ) | ||||||||||||
| Impairment of assets and investments | — | — | 29 | — | 29 | |||||||||||||||
| Financing income | 1 | — | 13 | (11 | ) | 3 | ||||||||||||||
| Financing expenses | (34 | ) | (6 | ) | (41 | ) | 11 | (70 | ) | |||||||||||
| Share in (losses) income of associated companies | — | (121 | ) | 10 | — | (111 | ) | |||||||||||||
| Profit / (Loss) before taxes | $ | 23 | $ | (127 | ) | $ | (32 | ) | $ | — | $ | (136 | ) | |||||||
| Income taxes | (9 | ) | — | (64 | ) | — | (73 | ) | ||||||||||||
| Profit / (Loss) from continuing operations | $ | 14 | $ | (127 | ) | $ | (96 | ) | $ | — | $ | (209 | ) | |||||||
Segment assets5 | $ | 940 | $ | 16 | $ | 1,448 | 6 | $ | — | $ | 2,404 | |||||||||
| Investments in associated companies | — | 2 | 120 | — | 122 | |||||||||||||||
| Segment liabilities | 743 | 75 | 657 | 7 | — | 1,475 | ||||||||||||||
Capital expenditure8 | 109 | — | 121 | — | 230 | |||||||||||||||
| (1) | In December 2017, Inkia completed the sale of the Inkia Business. Results for this period reflect the results of the Inkia Business as discontinued operations. For further information, see Note |
| (2) |
| (3) | Includes the results of Primus and HelioFocus (which was liquidated in July 2017); the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter-segment financing income and expenses. |
| (5) | Excludes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (7) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (8) | Includes the additions of PP&E, and intangibles based on an accrual basis. |
Year Ended December 31, 20161 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 324 | $ | — | $ | — | $ | - | $ | 324 | ||||||||||
| Depreciation and amortization | (27 | ) | — | - | - | (27 | ) | |||||||||||||
| Impairment of assets and investments | - | — | (72 | ) | - | (72 | ) | |||||||||||||
| Financing income | 3 | — | 16 | (12 | ) | 7 | ||||||||||||||
| Financing expenses | (23 | ) | — | (36 | ) | 12 | (47 | ) | ||||||||||||
| Share in losses of associated companies | - | (143 | ) | (43 | ) | - | (186 | ) | ||||||||||||
| Provision of financial guarantee | - | — | (130 | ) | - | (130 | ) | |||||||||||||
| Profit/(Loss) before taxes | $ | 20 | $ | (143 | ) | $ | (305 | ) | $ | - | $ | (428 | ) | |||||||
| Income taxes | — | — | (2 | ) | - | (2 | ) | |||||||||||||
| Profit/(Loss)from continuing operations | $ | 20 | $ | (143 | ) | $ | (307 | ) | $ | - | $ | (430 | ) | |||||||
Segment assets5 | $ | 668 | $ | — | $ | 4,262 | 6 | $ | - | $ | 4,930 | |||||||||
| Investments in associated companies | - | 118 | 90 | - | 208 | |||||||||||||||
| Segment liabilities | 534 | — | 3,710 | 7 | - | 4,244 | ||||||||||||||
Capital expenditure8 | 73 | — | 245 | - | 318 | |||||||||||||||
Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||
ZIM | Qoros1 | ZIM | Qoros2 | |||||||||||||
| (in millions of USD) | ||||||||||||||||
| Revenues | $ | 3,248 | $ | 812 | $ | 2,978 | $ | 280 | ||||||||
| (Loss)/Income | (126 | ) | (330 | ) | 6 | (242 | ) | |||||||||
| Other comprehensive loss | (6 | ) | - | (4 | ) | — | ||||||||||
| Total comprehensive (loss)/income | $ | (132 | ) | $ | (330 | ) | $ | 2 | $ | (242 | ) | |||||
| Share of Kenon in total comprehensive (loss)/income | $ | (40 | ) | $ | (78 | ) | $ | 2 | $ | (121 | ) | |||||
| Adjustments | 13 | - | 8 | — | ||||||||||||
| Share of Kenon in total comprehensive (loss)/(loss) presented in the books | $ | (27 | ) | $ | (78 | ) | $ | 10 | $ | (121 | ) | |||||
| Total assets | $ | 1,826 | $ | 1,914 | $ | 1,802 | $ | 1,495 | ||||||||
| Total liabilities | 2,050 | 1,475 | 1,896 | 1,674 | ||||||||||||
| Book value of investment | 92 | 139 | 120 | 2 | ||||||||||||
| (1) | We owned 50% of Qoros until January 2018, when our equity interest in Qoros was reduced to 24% in connection with the initial investment by the Majority Shareholder in Qoros. In January 2019, we announced our entry into an agreement to sell half of our remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros. The sale is subject to obtaining customary relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, we will hold a 12% interest in Qoros. |
| (2) | We owned 50% of Qoros throughout 2017. |
Currency fluctuations in the U.S. Dollar to NIS exchange rate on the translation of OPC’s results from NIS into U.S. Dollars did not have a significant impact on the results of 2018 versus 2017 discussed below.
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Revenues
Our revenues (primarily representing OPC’s revenues) decreased by $2 million to $363 million for the year ended December 31, 2018 from $365 million for the year ended December 31, 2017.
The table below sets forth OPC’s revenue for 2018 and 2017, broken down by category.
| For the year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ millions | ||||||||
| Revenue from energy generated by OPC and sold to private customers | 225 | 233 | ||||||
| Revenue from energy purchased by OPC and sold to private customers | 39 | 20 | ||||||
| Revenue from private customers in respect of infrastructures services | 79 | 94 | ||||||
| Revenue from energy sold to the System Administrator | 4 | 3 | ||||||
| Revenue from sale of steam | 16 | 15 | ||||||
| Total | 363 | 365 | ||||||
OPC’s revenue from the sale of electricity to private customers derives from electricity sold at the generation component tariffs, as published by the EA, with some discount. Accordingly, changes in the generation component generally affects the prices paid under PPAs by customers of OPC-Rotem and OPC-Hadera. The weighted-average generation component tariff for 2018, as published by the EA in January 2018, was NIS 0.2816 per KW hour. In 2017, the weighted-average generation component tariff was NIS 0.264 per KW hour. This change in the weighted-average generation component tariff is attributed to the mix of consumption in the market. OPC’s revenues from sale of steam are linked partly to the price of gas and partly to the Israeli Consumer Price Index (CPI).
Set forth below is a discussion of the changes in revenues by category between 2018 and 2017.
| · | Revenue from energy generated by OPC and sold to private customers – decreased by $8 million in 2018, as compared to 2017, primarily as a result of (i) an $18 million decrease in revenues due to the lower availability of the OPC-Rotem power plant and (ii) $5 million one-off revenues in 2017, partially offset by a $12 million increase in revenues due to the higher generation component in 2018, as compared to 2017. |
| · | Revenue from energy purchased by OPC and sold to private customers – increased by $19 million in 2018, as compared to 2017, primarily as a result of increased energy purchased and sold by OPC in 2018 as compared to 2017, resulting from the lower availability of the OPC-Rotem power plant due to the maintenance at OPC-Rotem in 2018. |
| · | Revenue from private customers in respect of infrastructures services – decreased by $15 million in 2018, as compared to 2017, primarily as a result of (i) an $11 million decrease in the infrastructure tariffs in 2018, and (ii) a $2 million decrease due to past reconciliation of OPC’s customers in 2017. |
| · | Revenue from energy sold to the System Administrator – increased by $1 million in 2018, as compared to 2017, primarily as a result of higher sales volume to the System Administrator. |
| · | Revenue from sale of steam – increased by $1 million in 2018, as compared to 2017, primarily as of a result of higher steam consumption by customers. |
Cost of Sales and Services (excluding Depreciation and Amortization)
Our cost of sales (representing OPC’s cost of sales) decreased by $8 million to $258 million for the year ended December 31, 2018, as compared to $266 million for the year ended December 31, 2017.
The following table sets forth OPC’s cost of sales for 2018 and 2017.
| For the year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ millions | ||||||||
| Natural gas and diesel oil consumption | 118 | 130 | ||||||
| Payment to IEC for infrastructure services and purchase of electricity | 118 | 114 | ||||||
| Natural gas transmission | 7 | 7 | ||||||
| Operating expenses | 15 | 15 | ||||||
| Total | 258 | 266 | ||||||
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| · | Natural gas and diesel oil consumption – decreased by $12 million in 2018, as compared to 2017, primarily due to (i) a $6 million decrease as a result of scheduled maintenance at OPC-Rotem in 2018, (ii) a $3 million decrease as diesel oil consumption in 2017 was high due to a disruption in gas supply from the Tamar reservoir, and (iii) a $2 million reimbursement from IEC for diesel oil cost in prior years. |
| · | Payment to IEC for infrastructures services and purchase of electricity – increased by $4 million in 2018, as compared to 2017, primarily as a result of an approximately $17 million increase due to lower generation of the OPC-Rotem power plant, partially offset by (i) a $9 million decrease due to lower infrastructure service tariffs in 2018 and (ii) a $2 million decrease due to past reconciliation with OPC’s customers in 2017. |
Depreciation and Amortization
Our depreciation and amortization expenses (representing OPC’s depreciation and amortization expenses) remained largely consistent at $30 million for the year ended December 31, 2018 and the year ended December 31, 2017.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of payroll and related expenses, bad/doubtful debts, depreciation and amortization, and other expenses. Our selling, general and administrative expenses (excluding depreciation and amortization) decreased to approximately $34 million for the year ended December 31, 2018, compared to $56 million for the year ended December 31, 2017. This decrease was primarily driven by (i) a $9 million decrease in expenses at the Kenon holding company level, (ii) a $3 million decrease in expenses at IC Green and (iii) a $14 million decrease in expenses at holding companies related to Inkia partially offset by an increase in OPC’s selling, general and administrative expenses (as discussed below).
OPC’s selling, general and administrative expenses increased by $3 million, or 27%, to $14 million for the year ended December 31, 2018 from $11 million for the year ended December 31, 2017 primarily as a result of a $2 million increase in legal and professional fees and a $1 million increase in salaries and wages.
Financing Expenses, Net
Our financing expenses, net, decreased by $65 million to $2 million for the year ended December 31, 2018, compared to $67 million for the year ended December 31, 2017. This decrease was primarily driven by(i) $14 million interest income accrued in relation to the Inkia deferred payment consideration, (ii) $11 million interest received from Qoros, (iii) $28 million decrease in financing expenses at holding companies related to Inkia and (iv) the decrease in OPC’s financing expenses, net (as described below).
OPC’s financing expenses, net decreased by approximately $8 million to $25 million in 2018 from $33 million in 2017, primarily as a result of a $6 million early repayment fee incurred in 2017 in respect of the early repayment in full of OPC’s mezzanine loan.
Gain on Third Party Investment in Qoros
As a result of the Qoros transaction completed in January 2018, Kenon recognized a gain on third party investment in Qoros of approximately $504 million for the year ended December 31, 2018. The gain includes recognition of Kenon’s put option in relation to Qoros, which was initially valued at approximately $130 million. It was subsequently reduced by approximately $40 million to approximately $90 million as a result of fair value assessment at December 31, 2018.
Provision of Financial Guarantee
We recorded a provision of financial guarantee in the amount of $44 million relating to Kenon’s back-to-back guarantee obligations to Chery in respect of Qoros bank debt in the year ended December 31, 2017.
In 2018, Kenon reduced its previously recorded liability in respect of Kenon’s back-to-back guarantee obligations to Chery to zero as a result of Kenon’s assessment of a lower probability that it would be required to make payments under the guarantees following the investment by the Majority Shareholder in Qoros in 2018.
Share In Income (Losses) of Associated Companies, Net of Tax
Our share in losses of associated companies, net of tax decreased to approximately $105 million for the year ended December 31, 2018, compared to approximately $111 million for the year ended December 31, 2017. Set forth below is a discussion of income (losses) for our associated companies and the share in income (losses) of associated companies, net of tax.
Qoros
Our share in Qoros’ comprehensive loss decreased to approximately $78 million for the year ended December 31, 2018, compared to losses of approximately $121 million for the year ended December 31, 2017. Although we now have a 24% equity interest in Qoros, we held a 50% stake in Qoros prior to the Majority Shareholder in Qoros’ investment and therefore recognized 50% of the net loss of Qoros in 2018 until January 8, 2018 and 24% of Qoros loss from January 9, 2018 and we recognized 50% Qoros’ loss in 2017. Furthermore, in January 2019, Kenon agreed to sell half of its remaining interest in Qoros (i.e. 12%) to the Majority Shareholder in Qoros. The sale is subject to obtaining customary relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros. A discussion of Qoros’ results of operations (on a 100% basis) for 2018 and 2017 is set forth below.
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Qoros’ revenues increased by 185% to RMB5,389 million in 2018, as compared to RMB1,886 million in 2017. Qoros’ increased revenues in 2018 reflect an approximately 313% increase in car sales from approximately 15,000 cars in 2017 to approximately 62,000 in 2018. A substantial portion of car sales in 2018 included orders from a leasing company introduced by the Majority Shareholder in Qoros, in accordance with the investment agreement.
Qoros’ cost of sales increased by 183% to RMB6,410 million in 2018, as compared to RMB2,262 million in 2017. The increase in cost of sales is primarily due to the increase in the number of cars sold, as well as an increase in depreciation and amortization to RMB766 million in 2018, as compared to RMB615 million in 2017.
Qoros’ loss increased to RMB2.2 billion for the year ended December 31, 2018, as compared to RMB1.6 billion for the year ended December 31, 2017.
ZIM
Pursuant to the equity method of accounting, our share in ZIM’s results of operations was loss of approximately $27 million for the year ended December 31, 2018 and income of approximately $9 million for the year ended December 31, 2017. Set forth below is a summary of ZIM’s consolidated results for the year ended December 31, 2018 and 2017:
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
| (in millions of USD) | ||||||||
| Sales | $ | 3,248 | $ | 2,978 | ||||
| Cost of sales | 3,100 | 2,697 | ||||||
| Gross profit | 148 | 281 | ||||||
| Operating (loss)/profit | (29 | )* | 135 | |||||
| (Loss)/profit before taxes on income | (106 | ) | 25 | |||||
| Taxes on income | (14 | ) | (14 | ) | ||||
| (Loss)/profit after taxes on income | (120 | ) | 11 | |||||
| (Loss)/profit for the period | $ | (120 | ) | $ | 11 | |||
(*) Includes an impairment of $38 million with respect to certain vessels classified as held for sale.
ZIM carried approximately 2,914 thousand TEUs in 2018, representing an 11% increase as compared to 2017, in which ZIM carried approximately 2,629 thousand TEUs. The average freight rate per TEU in 2018 was $973 per TEU, as compared to $995 per TEU in 2017. ZIM’s revenues increased by 9% in 2018 to approximately $3.2 billion, as compared to approximately $3.0 billion in 2017, mainly due to the increase in carried quantities. ZIM’s operating expenses and cost of services increased by 15% to approximately $3.0 billion, as compared to approximately $2.6 billion in 2017, primarily as a result of the increase in bunker expenses, charter hire expenses and cargo handling expenses.
ZIM publishes its results on its website. For more information, see www.ZIM.com. This website, and any information referenced therein, is not incorporated by reference herein.
Tax Expenses
Our taxes on income decreased by $62 million to $11 million for the year ended December 31, 2018 from $73 million for the year ended December 31, 2017. This decrease was primarily driven approximately $63 million in tax expenses incurred in 2017 in connection with a planned restructuring of some of the companies remaining in the Kenon group to simplify the holding structure.
Profit (Loss) For the Year
As a result of the above, our profit for the year amounted to $445 million for the year ended December 31, 2018, compared to a profit of $269 million for the year ended December 31, 2017.
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Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The following tables set forth summary information regarding our operating segment results for the years ended December 31, 2017 and 2016.
Year Ended December 31, 20171 | ||||||||||||||||||||
OPC | Quantum2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 365 | $ | — | $ | 1 | $ | — | $ | 366 | ||||||||||
| Depreciation and amortization | (30 | ) | — | (1 | ) | — | (31 | ) | ||||||||||||
| Impairment of assets and investments | — | — | 29 | — | 29 | |||||||||||||||
| Financing income | 1 | — | 13 | (11 | ) | 3 | ||||||||||||||
| Financing expenses | (34 | ) | (6 | ) | (41 | ) | 11 | (70 | ) | |||||||||||
| Share in (losses) income of associated companies | — | (121 | ) | 10 | — | (111 | ) | |||||||||||||
| Profit / (Loss) before taxes | $ | 23 | $ | (127 | ) | $ | (32 | ) | $ | — | $ | (136 | ) | |||||||
| Income taxes | (9 | ) | — | (64 | ) | — | (73 | ) | ||||||||||||
| Profit / (Loss) from continuing operations | $ | 14 | $ | (127 | ) | $ | (96 | ) | $ | — | $ | (209 | ) | |||||||
Segment assets5 | $ | 940 | $ | 16 | $ | 1,448 | 6 | $ | — | $ | 2,404 | |||||||||
| Investments in associated companies | — | 2 | 120 | — | 122 | |||||||||||||||
| Segment liabilities | 743 | 75 | 657 | 7 | — | 1,475 | ||||||||||||||
Capital expenditure8 | 109 | — | 121 | — | 230 | |||||||||||||||
| (1) | In December 2017, Inkia completed the sale of the Inkia Business. Results |
| (2) |
| (3) | Includes the results of Primus and HelioFocus (which was liquidated in July 2017); the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter-segment financing income and expenses. |
| (5) | Excludes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (7) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (8) | Includes the additions of PP&E, and intangibles based on an accrual basis. |
Year Ended December 31, 20161 | ||||||||||||||||||||
OPC | Quantum2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
(in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 324 | $ | — | $ | — | $ | — | $ | 324 | ||||||||||
| Depreciation and amortization | (27 | ) | — | — | — | (27 | ) | |||||||||||||
| Impairment of assets and investments | — | — | 72 | — | (72 | ) | ||||||||||||||
| Financing income | 3 | — | 16 | (12 | ) | 7 | ||||||||||||||
| Financing expenses | (23 | ) | — | (36 | ) | 12 | (47 | ) | ||||||||||||
| Share in losses of associated companies | — | (143 | ) | (43 | ) | — | (186 | ) | ||||||||||||
| Provision of financial guarantee | — | — | (130 | ) | — | (130 | ) | |||||||||||||
| Profit/(Loss) before taxes | $ | 20 | $ | (143 | ) | $ | (305 | ) | $ | — | $ | (428 | ) | |||||||
| Income taxes | — | — | (2 | ) | — | (2 | ) | |||||||||||||
| Profit/(Loss) from continuing operations | $ | 20 | $ | (143 | ) | $ | (307 | ) | $ | — | $ | (430 | ) | |||||||
Segment assets5 | $ | 668 | $ | 2 | $ | 4,260 | 6 | $ | — | $ | 4,930 | |||||||||
| Investments in associated companies | — | 118 | 90 | — | 208 | |||||||||||||||
| Segment liabilities | 534 | — | 3,710 | 7 | — | 4,244 | ||||||||||||||
Capital expenditure8 | 73 | — | 245 | — | 318 | |||||||||||||||
| (1) | Results during this period have been reclassified to reflect the results of the Inkia Business as discontinued operations. For further information, see Note 27 to our financial statements included in this annual report. |
| (2) | Subsidiary of Kenon that owns Kenon’s equity holding in Qoros. |
| (3) | Includes the results of Primus and HelioFocus (which was liquidated in July 2017); the results of ZIM, as an associated company; as well as Kenon’s and IC Green’s holding company and general and administrative expenses. |
| (4) | “Adjustments” includes inter-segment financing income and expenses. |
| (5) | Excludes investments in associates. |
| (6) | Includes Kenon’s, IC Green’s and IC Power holding company assets. |
| (7) | Includes Kenon’s, IC Green’s and IC Power holding company liabilities. |
| (8) | Includes the additions of PP&E and intangibles based on an accrual basis. |
The following table sets forth summary information regarding the results of operations of our equity-method businesses for the periods presented:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2017 | 2016 | |||||||||||||||
| ZIM | Qoros | ZIM | Qoros | |||||||||||||
| (in millions of USD) | ||||||||||||||||
| Revenues | $ | 2,978 | $ | 280 | $ | 2,539 | $ | 377 | ||||||||
| Income/(Loss) | 6 | (242 | ) | (168 | ) | (285 | ) | |||||||||
| Other comprehensive income/(loss) | (4 | ) | - | (13 | ) | — | ||||||||||
| Total comprehensive income/(loss) | $ | 2 | $ | (242 | ) | $ | (181 | ) | $ | (285 | ) | |||||
| Share of Kenon in total comprehensive income/(loss) | $ | 2 | $ | (121 | ) | $ | (57 | ) | $ | (143 | ) | |||||
| Adjustments | 8 | - | 9 | — | ||||||||||||
| Share of Kenon in total comprehensive income/(loss) presented in the books | $ | 10 | $ | (121 | ) | $ | (48 | ) | $ | (143 | ) | |||||
| Total assets | $ | 1,802 | $ | 1,495 | $ | 1,704 | $ | 1,534 | ||||||||
| Total liabilities | 1,896 | 1,674 | 1,804 | 1,469 | ||||||||||||
| Book value of investment | 120 | 2 | 82 | 118 | ||||||||||||
Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
ZIM | Qoros | ZIM | Qoros | |||||||||||||
| (in millions of USD) | ||||||||||||||||
| Revenues | $ | 2,978 | $ | 280 | $ | 2,539 | $ | 377 | ||||||||
| Income/(Loss) | 6 | (242 | ) | (168 | ) | (285 | ) | |||||||||
| Other comprehensive loss | (4 | ) | — | (13 | ) | — | ||||||||||
| Total comprehensive income/(loss) | $ | 2 | $ | (242 | ) | $ | (181 | ) | $ | (285 | ) | |||||
| Share of Kenon in total comprehensive income/(loss) | $ | 2 | $ | (121 | ) | $ | (57 | ) | $ | (143 | ) | |||||
| Adjustments | 8 | — | 9 | — | ||||||||||||
| Share of Kenon in total comprehensive income/(loss) presented in the books | $ | 10 | $ | (121 | ) | $ | (48 | ) | $ | (143 | ) | |||||
| Total assets | $ | 1,802 | $ | 1,495 | $ | 1,704 | $ | 1,534 | ||||||||
| Total liabilities | 1,896 | 1,674 | 1,804 | 1,469 | ||||||||||||
| Book value of investment | 120 | 2 | 82 | 118 | ||||||||||||
Revenues
Our revenues (representing OPC’s revenues) increased by $41 $41 million to $365$365 million for the year ended December 31, 2017 from $324 million for the year ended December 31, 2016. As OPC’s revenues are denominated in NIS, translation of its revenues to U.S. Dollars had a positive impact of $21 million. Excluding the impact of fluctuations in the U.S. Dollar to NIS exchange rate on the translation of OPC'sOPC’s results from NIS into U.S. Dollars, revenues increased by $20 million, primarily as a result of (i) a $17$17 million increase due to the higher electricity tariffs in 2017 as compared to 2016 and increased volume of sales to private customers and (ii) $3 million collected from customers for sales in prior periods, which payments had been delayed due to a delay in availability of relevant data.data.
Cost of Sales and Services (excluding Depreciation and Amortization)
Our cost of sales (representing OPC’s cost of sales) increased by $16 million to $267 million for the year ended December 31, 2017, as compared to $251 million for the year ended December 31, 2016. Translation of OPC’s cost of sales to US Dollars increased its cost of sales by $16 million. Excluding the impact of exchange rate fluctuations on the translation of OPC'sOPC’s cost of sales from NIS into US Dollars, cost of sales decreased by $1 million, primarily as a result of (i) a $9 million decrease in energy purchases due to the increased availability of the OPC-Rotem station (in 2016 the OPC-Rotem power plant incurred a scheduled major maintenance) and (ii) a $4 million decrease in gas costs, as the gas price is indexed to the US Dollar (this impact was partially offset by higher quantities of gas purchased in 2017). These effects were partially offset by a $11 million increase in payments to IEC due to the increase in infrastructure and system cost rates and $1 million in payments made to IEC in connection with payments made for prior periods which had been delayed due to a delay in availability of relevant data.
Depreciation and Amortization
Our depreciation and amortization expenses (representing OPC’s depreciation and amortization expenses) increased by $4 million to $31 million for the year ended December 31, 2017 from $27 million for the year ended December 31, 2016. Excluding the impact of fluctuations in the U.S. Dollar to NIS exchange rate on the translation of OPC'sOPC’s results from NIS into U.S. Dollars, depreciation and amortization expenses increased by 6%, primarily as a result of maintenance work that was carried out earlier than scheduled, which increased the amounts of fixed assets and accordingly depreciation.
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Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of payroll and related expenses, bad/doubtful debts, depreciation and amortization, and other expenses. Our selling, general and administrative expenses (excluding depreciation and amortization) increased to approximately $56 million for the year ended December 31, 2017, compared to $47 million for the year ended December 31, 2016. This increase was primarily driven by (i) OPC’s selling, general and administrative expenses (as discussed below) and (ii) approximately $6 million in additional payroll and professional fees incurred at the Kenon level in connection with the disposal of the Inkia business, the partial disposal of Qoros and related restructuring of remaining Kenon entities.
OPC’s selling, general and administrative expenses increased by $3 million, or 46%, to $11 million for the year ended December 31, 2017 from $8 million for the year ended December 31, 2016. Excluding the impact of fluctuations in the U.S. Dollar to NIS exchange rate on the translation of OPC'sOPC’s results from NIS into U.S. Dollars, OPC’s selling, general and administrative expenses increased by 37%, primarily as a result of (i) a $2 million increase in payroll and directors’ fees and a one-off grant and (ii) a $1 million increase in professional and legal service fees in 2017.
Impairment of Assets and Investments
In 2016, Kenon recognized an impairment loss of $72 million with respect to its investment in ZIM in 2016. Kenon conducted the impairment test as a result of conditions in the container shipping market during 2016.
In 2017, Kenon did not recognize any impairment of its investments. However, as a result of improved operating conditions at ZIM throughout 2017, Kenon conducted another impairment analysis as of December 31, 2017. The analysis concluded that Kenon should reverse $29 million of the impairment recognized in 2016.
Financing Expenses, Net
Our financing expenses, net, increased by $27 million, or 68%, to $67 million for the year ended December 31, 2017, compared to $40 million for the year ended December 31, 2016. This increase was primarily driven by the increase in OPC’s financing expenses, net (as described below).
OPC’s financing expenses, net increased by approximately $13$13 million to $33$33 million in 2017 from $20$20 million in 2016,, primarily as a result of (i) a $6 million early payment (make-whole) fee incurred as a result of the early repayment in full of OPC’s mezzanine loan in May 2017, (ii) a $3 million increase in financing expenses relating to OPC’s August 2017 bond issuance (iii) a $3 million increase due to impact of exchange rate fluctuations, and (iv) a $1 million increase in expenses as a result of fluctuations in the CPI.
Provision of Financial Guarantee
We recorded a provision of financial guarantee in the amount of $130 million in the year ended December 31, 2016. In light of Kenon’s strategy and Qoros’ limited liquidity as of June 30, 2016, Kenon increased its previously recorded liability of $30 million to $160 million in respect of Kenon’s back-to-back guarantee obligations to Chery. For further information on Kenon’s back-to-back guarantee obligations to Chery, including Kenon’s agreement to fund shareholder loans to Qoros in connection with the full release of Kenon’s obligations under its back-to-back guarantees to Chery, see “Item 5.B Liquidity and Capital Resources— Kenon’s Liquidity and Capital Resources—Kenon’s Commitments and Obligations—Back-to-Back Guarantees Provided to Chery.”
We did not record on our income statement any further provision of financial guarantee in the year ended December 31, 2017. In 2017, Kenon reduced its previously recorded liability in respect of Kenon’s back-to-back guarantee obligations to Chery to $44 million by providing additional shareholder loans to Qoros on behalf of Chery.
Share In Income (Losses) of Associated Companies, Net of Tax
Our share in losses of associated companies, net of tax decreased by 40% to approximately $111 million for the year ended December 31, 2017, compared to approximately $186 million for the year ended December 31, 2016. Set forth below is a discussion of income (losses) for our material associated companies and the share in income (losses) of associated companies, net of tax.
Qoros
Our share in Qoros’ comprehensive loss decreased to approximately $121 million for the year ended December 31, 2017, compared to losses of approximately $143 million for the year ended December 31, 2016. Although we now have a 24% equity interest in Qoros, we held a 50% stake in Qoros prior to the New Qoros Investor’sMajority Shareholder Qoros’ investment in 2018 and therefore recognized 50% of the net loss of Qoros in 2017 (RMB1,612 million) and 2016 (RMB1,897 million). A discussion of Qoros’ results of operations (on a 100% basis; Kenon’s share is 24%) for 2017 and 2016 is set forth below.
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Qoros’ revenues decreased by 25% to RMB1,886 million in 2017, as compared to RMB2,512 million in 2016. Qoros’ decreased revenues in 2017 reflect an approximately 38% decrease in car sales from approximately 24,000 cars in 2016 to approximately 15,000 cars in 2017.
Qoros’ cost of sales decreased by 25% to RMB2,262 million in 2017, as compared to RMB3,009 million in 2016. The decrease in cost of sales is primarily due to the decrease in the number of cars sold, as well as a decrease in depreciation and amortization to RMB615 million in 2017, as compared to RMB659 million in 2016.
Qoros’ research and development expenses increased by 58% to RMB322 million in 2017, as compared to RMB204 million in 2016, reflecting increased expenses incurred for the research and development activities of a Qoros car model.
Qoros’ selling, general and administrative expenses decreased by 21% to RMB605 million in 2017, as compared to RMB763 million in 2016. The decrease reflects a reduction in advertising, marketing and promoting and consulting fees.
Primarily as a result of the foregoing, Qoros’ loss decreased to RMB1.6 billion for the year ended December 31, 2017, as compared to RMB1.9 billion for the year ended December 31, 2016.
ZIM
Pursuant to the equity method of accounting, our share in ZIM’s results of operations was income of approximately $10 million and loss of $48 million for the year ended December 31, 2017 and 2016, respectively. Set forth below is a summary of ZIM’s consolidated results for the year ended December 31, 2017 and 2016:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
| (in millions of USD) | ||||||||
| Sales | $ | 2,978 | $ | 2,539 | ||||
| Cost of sales | 2,697 | 2,480 | ||||||
| Gross profit | 281 | 59 | ||||||
| Operating profit (loss) | 135 | (52 | ) | |||||
| Profit (loss) before taxes on income | 25 | (145 | ) | |||||
| Taxes on income | (14 | ) | (19 | ) | ||||
| Profit (loss) after taxes on income | 11 | (164 | ) | |||||
| Profit (loss) for the period | $ | 11 | $ | (164 | ) | |||
ZIM carried approximately 2,629 thousand TEUs in 2017, representing an 8% increase as compared to 2016, in which ZIM carried approximately 2,429 thousand TEUs. The average freight rate per TEU in 2017 was 995 thousand TEUs, as compared to 902 thousand TEUs in 2016. ZIM’s revenues increased by 17% in 2017 to approximately $3.0 billion, as compared to approximately $2.5 billion in 2016, due to the increase in carried quantities, as well as the increase in industry container freight rates. ZIM’s operating expenses and cost of services increased by 9% to approximately $2.6 billion, as compared to approximately $2.4 billion in 2016, primarily as a result of an increase in cargo handling expenses, as well as an increase in bunker prices.
ZIM publishes its results on its website. For more information, see www.ZIM.com. This website, and any information referenced therein, is not incorporated by reference herein.
Tax Expenses
Our taxes on income increased by $71$71 million to $73$73 million for the year ended December 31, 2017 from $2 million for the year ended December 31, 2016. This increase was primarily driven by approximately $63$63 million in tax expenses incurred in connection with a planned restructuring of some of the companies remaining in the Kenon group, which will simplify the holding structure. There was also an increase in OPC’s tax expenses (as described below).
OPC’s tax expenses increased to $9 million for the year ended December 31, 2017, as compared to $66 thousand for the year ended December 31, 2016, primarily as a result of lower tax on income reported in 2016 due to the reduction in corporate tax rates in 2016, which reduced deferred tax liabilities.
Net Income For the Year From Discontinued Operations (After Taxes)
Our net income for the year ended December 31, 2017 from discontinued operations (after taxes) is comprised of the results of the Inkia Business and the gain on disposal of the Inkia Business.
Revenues for the year2017 from discontinued operations increased to approximately $1,777 million for the year ended December 31, 2017, compared to approximately $1,517 million for the year ended December 31, 2016.
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Operating income for the year2017 from discontinued operations increased to approximately $152 million for the year ended December 31, 2017, compared to approximately $92 million for the year ended December 31, 2016.
Our net income for the year2017 from discontinued operations (after taxes) increased to approximately $79 million for the year ended December 31, 2017, compared to approximately $35 million for the year ended December 31, 2016.
Our 2017 results attributable to discontinued operations includes a net gain (after tax) on the sale of discontinued operations of $397$397 million.
For more information on discontinued operations, see Note 2927 to our financial statements included in this annual report.
Profit (Loss) For the Year
As a result of the above, our profit for the year amounted to $269$269 million for the year ended December 31, 2017, compared to a loss of $394 million for the year ended December 31, 2016.
Year Ended December 31, 20161 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 324 | $ | — | $ | — | $ | - | $ | 324 | ||||||||||
| Depreciation and amortization | (27 | ) | — | - | - | (27 | ) | |||||||||||||
| Impairment of assets and investments | - | — | (72 | ) | - | (72 | ) | |||||||||||||
| Financing income | 3 | — | 16 | (12 | ) | 7 | ||||||||||||||
| Financing expenses | (23 | ) | — | (36 | ) | 12 | (47 | ) | ||||||||||||
| Share in losses of associated companies | - | (143 | ) | (43 | ) | - | (186 | ) | ||||||||||||
| Provision of financial guarantee | - | — | (130 | ) | - | (130 | ) | |||||||||||||
| Profit / (Loss) before taxes | $ | 20 | $ | (143 | ) | $ | (305 | ) | $ | - | $ | (428 | ) | |||||||
| Income taxes | — | — | (2 | ) | - | (2 | ) | |||||||||||||
| Profit / (Loss) from continuing operations | $ | 20 | $ | (143 | ) | $ | (307 | ) | $ | - | $ | (430 | ) | |||||||
Segment assets5 | $ | 668 | $ | — | $ | 4,262 | 6 | $ | - | $ | 4,930 | |||||||||
| Investments in associated companies | - | 118 | 90 | - | 208 | |||||||||||||||
| Segment liabilities �� | 534 | — | 3,710 | 7 | - | 4,244 | ||||||||||||||
Capital expenditure8 | 73 | — | 245 | - | 318 | |||||||||||||||
Year Ended December 31, 20151 | ||||||||||||||||||||
| OPC | Qoros2 | Other3 | Adjustments4 | Consolidated Results | ||||||||||||||||
| (in millions of USD, unless otherwise indicated) | ||||||||||||||||||||
| Sales | $ | 326 | $ | — | $ | — | $ | - | $ | 326 | ||||||||||
| Depreciation and amortization | (26 | ) | — | 1 | — | (25 | ) | |||||||||||||
| Asset impairment | - | — | (7 | ) | — | (7 | ) | |||||||||||||
| Financing income | 3 | — | 8 | — | 11 | |||||||||||||||
| Financing expenses | (26 | ) | — | (10 | ) | — | (36 | ) | ||||||||||||
| Share in (losses) income of associated companies | - | (196 | ) | 9 | — | 187 | ||||||||||||||
| Gain from distribution of dividend in kind | - | — | 210 | — | 210 | |||||||||||||||
| Profit / (Loss) before taxes | $ | 30 | $ | (196 | ) | $ | 199 | $ | — | $ | 33 | |||||||||
| Income taxes | (8 | ) | — | (1 | ) | — | (9 | ) | ||||||||||||
| Profit / (Loss) from continuing operations | $ | 22 | $ | (196 | ) | $ | 198 | $ | — | $ | 24 | |||||||||
Segment assets5 | $ | 811 | $ | — | $ | 3,303 | 6 | $ | — | $ | 4,114 | |||||||||
| Investments in associated companies | - | 159 | 210 | — | 369 | |||||||||||||||
| Segment liabilities | 677 | — | 2,542 | 7 | — | 3,219 | ||||||||||||||
Capital expenditure8 | 18 | — | 556 | — | 574 | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2016 | 2015 | |||||||||||||||||||
| ZIM | Qoros | ZIM | Qoros | Tower1 | ||||||||||||||||
| (in millions of USD) | ||||||||||||||||||||
| Revenues | $ | 2,539 | $ | 377 | $ | 2,991 | $ | 232 | $ | 462 | ||||||||||
| Income/(Loss) | (168 | ) | (285 | ) | 2 | (392 | ) | (1 | ) | |||||||||||
| Other comprehensive income/(loss) | (13 | ) | — | (2 | ) | — | — | |||||||||||||
| Total comprehensive income/(loss) | $ | (181 | ) | $ | (285 | ) | $ | — | $ | (392 | ) | $ | (1 | ) | ||||||
| Share of Kenon in total comprehensive income/(loss) | $ | (57 | ) | $ | (143 | ) | $ | — | $ | (196 | ) | $ | — | |||||||
| Adjustments | 9 | — | 10 | — | (1 | ) | ||||||||||||||
| Share of Kenon in total comprehensive income/(loss) presented in the books | $ | (48 | ) | $ | (143 | ) | $ | 10 | $ | (196 | ) | $ | (1 | ) | ||||||
| Total assets | $ | 1,704 | $ | 1,534 | $ | 1,912 | $ | 1,665 | $ | — | ||||||||||
| Total liabilities | 1,804 | 1,469 | 1,834 | 1,635 | — | |||||||||||||||
| Book value of investment | 82 | 118 | 201 | 159 | — | |||||||||||||||
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in millions of USD) | ||||||||
| Sales | $ | 2,539 | $ | 2,991 | ||||
| Cost of sales | 2,480 | 2,775 | ||||||
| Gross profit | 59 | 216 | ||||||
| Operating profit (loss) | (52 | ) | 98 | |||||
| Profit (loss) before taxes on income | (145 | ) | 5 | |||||
| Taxes on income | (19 | ) | 2 | |||||
| Profit (loss) after taxes on income | (164 | ) | 7 | |||||
| Profit (loss) for the period | $ | (164 | ) | $ | 7 | |||
B. Liquidity and Capital Resources
Kenon’s Liquidity and Capital Resources
As of December 31, 2017,2018, Kenon had approximately $62$38 million in cash on an unconsolidated basis and no material gross debt of $240 million.debt.
Under its dividend policy, OPC has stated that it intends to issue a dividend of 50% net income. The issuance of dividends is subject to board of directors discretion. In 2019, OPC declared a dividend of NIS 36 million (approximately $10 million).
We believe that Kenon’s working capital (on a stand-alone basis) is sufficient for its present requirements. Our principal needs for liquidity are expenses related to our day-to-day operations. We may also incur expenditures related to investments in our businesses, our back-to-back guarantees to Chery with respect to Qoros’ indebtedness and expenses we may incur in connection with legal claims and other rights we retained in connection with the sale of the Inkia Business. Our businesses are at various stages of development, ranging from early stage companies to established, cash generating businesses, and some of these businesses will require significant financing, via equity contributions or debt facilities, to further their development, execute their current business plans, and become or remain fully-funded. We may, in furtherance of the development of our businesses, make further investments, via debt or equity financings, in our remaining businesses.
As of December 31, 2018, Kenon has outstanding guarantee obligations to Chery of RMB320RMB288 million, with respect to Qoros’ debt in principal of RMB288RMB320 million. During 2017, Kenon undertook various steps to reduce its back-to-back guarantee obligations, which were RMB850 million as of December 31, 2016. In 2016 and 2017, Kenon entered into agreements with Chery to provide financing to Qoros in connection with a release of Kenon’s back-to-back guarantee obligations to Chery. Pursuant to these agreements, during 2017 Kenon funded shareholder loans of RMB488 million (of which RMB244 million was advanced on behalf of Chery) to Qoros, reducing Kenon’s back-to-back guarantee obligations to Chery from RMB850 million to RMB320 million, with respect to debt in principal of RMB288 million.
In connection with Kenon'sKenon’s sale of its Inkia Businesses,Business, Kenon has given a three-year guarantee of Inkia’s indemnification obligations to the buyer of the Inkia Business. For further information, see “Item 4.B Business Overview— Discontinued Operations – Inkia Business—Sale of the Inkia Business—Kenon Guarantee.”
Kenon may not have sufficient liquidity to satisfy payment obligations under the guarantees described above.above. In the event that Kenon is required to make such payments, it would need to obtain such funds from its businesses, which may include OPC (via dividends, loans or advances, or the repayment of loans or advances to us, which may be funded by sales of assets or minority interests in our businesses), or obtain external financing, which may result in dilution of shareholders (in the event of equity financing) or additional debt obligations for the company (in the event of debt financing).
We intend to adhere to our capital allocation principles which seek to limit cross-allocation of funds and capital contributions to our businesses, via debt or equity financings or the provisions of guarantees. Nevertheless, the cash resources on Kenon’s balance sheet may not be sufficient to fund additional investments that we deem appropriate in our businesses or meet our guarantee obligations. As a result, Kenon may seek additional liquidity from its businesses. For a description of our capital allocation principles, see “Item 4.B Business Overview.” For further information on the risks related to the significant capital requirements of our businesses, see “Item 3.D Risk Factors—Risks Related to Our Strategy and Operations—Some of our businesses have significant capital requirements.” For a discussion of our outstanding commitments and obligations, see “—Kenon’s Commitments and Obligations.” For a discussion of the capital requirements of each of our businesses, see below.
Consolidated Cash Flow Statement
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Cash and cash equivalents decreased to approximately $131 million for the year ended December 31, 2018, as compared to approximately $1,417 million for the year ended December 31, 2017, primarily as a result of (i) the $665 million capital reduction in March 2018, (ii) the $100 million dividend paid in December 2018 and (iii) the repayment of loans totaling $418 million during the year. The following table sets forth our summary cash flows from our operating, investing and financing activities for the years ended December 31, 2018 and 2017:
Year Ended December 31, | ||||||||
2018 | 20171 | |||||||
| (in millions of USD) | ||||||||
Continuing operations | ||||||||
| Net cash flows provided by operating activities | ||||||||
| OPC | 86 | 114 | ||||||
| Adjustments and Other | (34 | ) | (42 | ) | ||||
| Total | 52 | 72 | ||||||
| Net cash flows provided by / (used in) investing activities | 42 | (232 | ) | |||||
| Net cash flows (used in) / provided by financing activities | (1,217 | ) | 200 | |||||
| Net change in cash from continuing operations | (1,123 | ) | 40 | |||||
| Net change in cash from discontinued operations | (155 | ) | 1,033 | |||||
| Cash—opening balance | 1,417 | 327 | ||||||
| Effect of exchange rate fluctuations on balances of cash and cash equivalents | (8 | ) | 17 | |||||
| Cash—closing balance | $ | 131 | $ | 1,417 | ||||
(1) Results reflect the results of the Inkia Business as discontinued operations. For further information, see Note 27 to our financial statements included in this annual report.
Cash Flows Provided by Operating Activities
Net cash flows from operating activities decreased to $52 million for the year ended December 31, 2018 compared to $72 million for the year ended December 31, 2017. The decrease is primarily explained by the decrease in OPC’s cash provided by operating activities as discussed below.
Cash flows provided by OPC’s operating activities decreased to $86 million for the year ended December 31, 2018 from $114 million for the year ended December 31, 2017, primarily as a result of a decrease in working capital mainly as a result of higher gas payments in 2018 due to timing differences.
Cash Flows Provided by / (Used in) Investing Activities
Net cash flows provided by our investing activities increased to approximately $42 million for the year ended December 31, 2018, compared to cash flows used in investing activities of approximately $232 million for the year ended December 31, 2017. This increase was primarily driven by proceeds from the Qoros transaction of $188 million and reduced outflows from OPC’s investing activities as described below.
Cash flows used in OPC’s investing activities decreased to $102 million for the year ended December 31, 2018 from $158 million for the year ended December 31, 2017, primarily as a result of $29 million higher deposits into restricted cash in 2017 related to debt service funds and assurance of guarantees and $38 million higher investments at OPC-Rotem and OPC-Hadera in 2017.
Cash Flows (Used in) / Provided by Financing Activities
Net cash flows used in financing activities of our consolidated businesses was approximately $1,217 million for the year ended December 31, 2018, compared to cash flows provided by financing activities of approximately $200 million for the year ended December 31, 2017. The net outflow in 2018 is primarily explained by (i) the $665 million capital reduction in March 2018, (ii) the $100 million dividend paid in December 2018, (iii) the repayment of loans totaling $418 million in the year and the decrease in OPC cash flows provided by financing activities as described below.
Cash flows used in OPC’s financing activities decreased to $34 million for the year ended December 31, 2018, as compared to $163 million provided by OPC’s financing activities for the year ended December 31, 2017, primarily as a result of $100 million proceeds from issuance of shares in 2017 and $88 million proceeds from the issuance of debentures in 2017.
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Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Cash and cash equivalents increased to approximately $1,417 million for the year ended December 31, 2017, as compared to approximately $327 million for the year ended December 31, 2016,, primarily as a result of our receipt of the proceeds from the sale of the Inkia Business in December 2017. The following table sets forth our summary cash flows from our operating, investing and financing activities for the years ended December 31, 2017 and 2016:
Year Ended December 31, | ||||||||
20171 | 20162 | |||||||
| (in millions of USD) | ||||||||
Continuing operations | ||||||||
| Net cash flows used in operating activities | ||||||||
| OPC | 114 | 25 | ||||||
| Adjustments and Other | (42 | ) | (39 | ) | ||||
| Total | 72 | (14 | ) | |||||
| Net cash flows used in investing activities | (232 | ) | (99 | ) | ||||
| Net cash flows provided by financing activities | 200 | 149 | ||||||
| Net change in cash from continuing operations | 40 | 36 | ||||||
| Net change in cash from discontinued operations | 1,033 | (99 | ) | |||||
| Cash—opening balance | 327 | 384 | ||||||
| Effect of exchange rate fluctuations on balances of cash and cash equivalents | 17 | 6 | ||||||
| Cash—closing balance | $ | 1,417 | $ | 327 | ||||
| Year Ended December 31, | ||||||||
| 2017 | 20161 | |||||||
| (in millions of USD) | ||||||||
Continuing operations | ||||||||
| Net cash flows used in operating activities | ||||||||
| OPC | 114 | 25 | ||||||
| Adjustments and Other | (42 | ) | (39 | ) | ||||
| Total | 72 | (14 | ) | |||||
| Net cash flows used in investing activities | (232 | ) | (99 | ) | ||||
| Net cash flows provided by financing activities | 200 | 149 | ||||||
| Net change in cash from continuing operations | 40 | 36 | ||||||
| Net change in cash from discontinued operations | 1,033 | (99 | ) | |||||
| Cash—opening balance | 327 | 384 | ||||||
| Effect of exchange rate fluctuations on balances of cash and cash equivalents | 17 | 6 | ||||||
| Cash—closing balance | $ | 1,417 | $ | 327 | ||||
| (1) | Results reflect the results of the Inkia Business as discontinued operations. For further information, see Note 27 to our financial statements included in this annual report. |
| (2) | Results during this period have been reclassified to reflect the results of the Inkia Business as discontinued operations. For further information, see Note |
Cash Flows Provided by / (Used in) Operating Activities
Net cash flows provided by operating activities increased to $72 million for the year ended December 31, 2017 compared to $14 million net cash flows used in operating activities for the year ended December 31, 2016. The increase is primarily explained by the increase in OPC’s cash provided by operating activities as discussed below.
Cash flows provided by OPC’s operating activities increased to $114 million for the year ended December 31, 2017 from $25 million for the year ended December 31, 2016, primarily as a result of (i) a one-off payment of $43 million in system management costs that was made in 2016, (ii) an $18 million increase in working capital and (iii) the increase in the company’s revenues.
Cash Flows Used in Investing Activities
Net cash flows used in our investing activities increased to approximately $232 million for the year ended December 31, 2017, compared to approximately $99 million for the year ended December 31, 2016. This increase was primarily driven OPC’s investing activities as described below.
Cash flows used in OPC’s investing activities increased to $158 million for the year ended December 31, 2017 from $19 million for the year ended December 31, 2016, primarily as a result of (i) the increase in the amount of fixed assets purchased, primarily due to a $39 million additional investment in the Hadera project (ii) a $21 million deposit into a trust account in relation to the agreement with the Tamar Group, (iii) $21 million contributed in relation to corporate guarantees, (iv) a $7 million increase in restricted cash in respect of guarantees issued by OPC-Rotem and OPC-Hadera in 2017 and (v) a $50 million release of restricted cash in 2016 due to the partial prepayment of the mezzanine loan.
Cash Flows Provided by Financing Activities
Net cash flows provided by the financing activities of our consolidated businesses increased by 34% to approximately $200 million for the year ended December 31, 2017, compared to approximately $149 million for the year ended December 31, 2016. This increase was primarily driven by OPC’s financing activities as described below.
Cash flows provided by OPC’s financing activities increased by $59 million, or 57%, to $163 million for the year ended December 31, 2017, as compared to $104 million provided by OPC’s financing activities for the year ended December 31, 2016, primarily as a result of contributions of (i) $100 million in proceeds from OPC’s IPO, (ii) $88 million in proceeds from OPC’s bond issuance, (iii) $137 million from the drawdown of loans relating to the Hadera project and (iv) a $39 million decrease in the amount of dividends distributed in 2017 as compared to 2016. These effects were partially offset by OPC’s debt repayments in the total amount of $140 million in relation to its mezzanine loan, parent company loan, current portion of long-term debt and reconciliation of intercompany debt, as compared to $51 million debt repayments in 2016.
Net Change in Cash from Discontinued Operations
Net change in cash from discontinued operations in 2017 includes approximately $793 million net cash inflows resulting from the sale of the Inkia Business.
| Year Ended December 31, | ||||||||
20161 | 20151 | |||||||
| (in millions of USD) | ||||||||
Continuing Operations | ||||||||
| Net cash flows (used in) / provided by operating activities | ||||||||
| OPC | 25 | 81 | ||||||
| Adjustments and Other | (39 | ) | (21 | ) | ||||
| Total | (14 | ) | 60 | |||||
| Net cash flows used in investing activities | (99 | ) | (99 | ) | ||||
| Net cash flows provided by financing activities | 149 | 69 | ||||||
| Net change in cash from continuing operations | 36 | 30 | ||||||
| Net change in cash from discontinued operations | (99 | ) | (244 | ) | ||||
| Cash—opening balance | 384 | 610 | ||||||
| Effect of exchange rate fluctuations on balances of cash and cash equivalents | 6 | (12 | ) | |||||
| Cash—closing balance | $ | 327 | $ | 384 | ||||
Kenon’s Commitments and Obligations
As of December 31, 2017,2018, Kenon had consolidated liabilities of $1,475 million. In January 2018, the $200$739 million, IC Credit Facility was repaid.primarily consisting of OPC liabilities.
In addition, as of the date of this annual report, Kenon has obligations under its back-to-back guarantees provided by it to Chery, which amounted to RMB320RMB288 million, with respect to debt in principal of RMB288RMB320 million, plus interest and certain fees. For further information on, and an overview of, the guarantees provided by Kenon in respect of Qoros’ debt, see “—Back-to-Back Guarantees Provided to Chery.”
Set forth below is a summary of these obligations.
Back-to-Back Guarantees Provided to Chery
Kenon provided back-to-back guarantees to Chery in respect of certain of Qoros’ RMB3 billion EXIM bank credit facility and its RMB700 million EXIM bank loan facilities. As of December 31, 2017, the outstanding amount of these back-to-back guarantees was RMB320 million (plus certain interest and fees), with respect to debt in principal of RMB288 million.
In 2016 and 2017, Kenon entered into agreements with Chery to provide financing to Qoros in connection with a release of Kenon’s back-to-back guarantee obligations to Chery (which were RMB850 million as of December 31, 2016). Pursuant to these agreements, during 2017, Kenon funded shareholder loans of RMB488 million (of which RMB244 million was advanced on behalf of Chery) to Qoros, reducing Kenon’s back-to-back guarantee obligations to Chery from RMB850 million to RMB320 million, with respect to debt in principal of RMB288 million.million.
In January 2018, Kenon announced the NewMajority Shareholder in Qoros Investor’s completion of a transaction to purchaseacquired 51% of Qoros from Wuhu Chery and Kenon which is part of an investment structure to invest a total of approximately RMB6.63 billion in Qoros.Kenon. As a result, Kenon now has aKenon’s stake was reduced to 24% stake, in Qoros, with the 51% controlling interest owned by the NewMajority Shareholder in Qoros Investor and the remaining 25% interest owned by Wuhu Chery.
As of December 31, 2017, Qoros had2018, the outstanding shareholder loans in the principal amount of RMB944these back-to-back guarantees was RMB288 million (plus certain interest and fees), with respect to eachdebt in principal of Kenon and Chery.
The following discussion sets forth the liquidity and capital resources of each of our businesses.
OPC’s Liquidity and Capital Resources
As of December 31, 2017,2018, OPC had cash and cash equivalents of $147$88 million. OPC’s total outstanding consolidated indebtedness was $618$587 million as of December 31, 2017.2018.
OPC’s principal sources of liquidity have traditionally consisted of cash flows from operating activities, short- and long-term borrowings, OPC’s bond issuance and OPC'sOPC’s 2017 initial public offering.
In addition, OPC is limited in usage of certain deposits and cash, with such restricted deposits and cash constituting an aggregate amount of $76$98 million and $23$76 million as of December 31, 20172018 and 2016,2017, respectively.
OPC’s principal needs for liquidity generally consist of capital expenditures related to the development and construction of generation projects (including OPC-Hadera, Tzomet and other projects OPC may pursue), capital expenditureexpenditures relating to maintenance (e.g., maintenance and diesel inventory), working capital requirements (e.g., maintenance costs that extend the useful life of OPC’s plants) and other operating expenses. OPC believes that its liquidity is sufficient to cover its working capital needs in the ordinary course of OPC’s business.
OPC’s Material Indebtedness
As of December 31, 2017,2018, OPC had cash and cash equivalents of $147$88 million, deposits and restricted cash of $76$98 million, and total outstanding consolidated indebtedness of $618$587 million, consisting of $30$23 million of short-term indebtedness, including the current portion of long-term indebtedness, and $588$564 million of long-term indebtedness. All of OPC'sOPC’s debt is denominated in NIS.
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The following table sets forth selected information regarding OPC’s principal outstanding short-term and long-term debt, as of December 31, 2017:2018:
| Outstanding Principal Amount as of December 31, 2017 | Interest Rate | Final Maturity | Amortization Schedule | ||||
| ($ millions) | |||||||
| OPC-Rotem: | |||||||
Financing agreement1 | 383 | 4.7%-5.4%, CPI linked | June 2031 | Quarterly principal payments to maturity | |||
| OPC-Hadera: | |||||||
Financing agreement2 | 144 | 3.4%-3.9%, CPI linked (2/3 of the loan) 4.8%-5.4% (1/3 of the loan) | 18 years from commercial operations date of Hadera power plant | Quarterly principal payments to maturity, commenting 6 months following commercial operations of Hadera power plant | |||
| OPC Energy: | |||||||
Bonds3 | 91 | 4.45% | December 2030 | Semi-annual principal payments to maturity | |||
| Total | 618 | ||||||
Outstanding Principal Amount as of December 31, 2018 | Interest Rate | Final Maturity | Amortization Schedule | ||||
| ($ millions) | |||||||
| OPC-Rotem: | |||||||
Financing agreement1 | 336 | 4.9%-5.4%, CPI linked | June 2031 | Quarterly principal payments to maturity | |||
| OPC-Hadera: | |||||||
Financing agreement2 | 172 | 3.4%-3.9%, CPI linked (2/3 of the loan) 4.8%-5.4% (1/3 of the loan) | 18 years from commercial operations date of Hadera power plant | Quarterly principal payments to maturity, commenting 6 months following commercial operations of Hadera power plant | |||
| OPC: | |||||||
Bonds3 | 79 | 4.45% (commencing from the date of registration for trading on the stock exchange) | December 2030 | Semi-annual principal payments to maturity | |||
| Total | 587 | ||||||
| (1) | Represents NIS |
| (2) | Represents NIS |
| (3) | Represents NIS |
The debt instruments to which OPC and its operating companies are party to require compliance with financial covenants. Under each of these debt instruments, the creditor has the right to accelerate the debt or restrict the company from declaring and paying dividends if, at the end of any applicable period the applicable entity is not in compliance with the defined financial covenants ratios.
The instruments governing a substantial portion of the indebtedness of OPC operating companies contain clauses that would prohibit these companies from paying dividends or making other distributions in the event that the relevant entity was in default on its obligations under the relevant instrument.
For further information on OPC’s financing arrangements, see Note 15 to our financial statements included in this annual report.
OPC-Rotem Financing Agreement
In January 2011, OPC-Rotem entered into a financing agreement with a consortium of lenders led by Bank Leumi Le-Israel Ltd., or Bank Leumi, for the financing of its power plant project. As part of the financing agreement, the lenders committed to provide OPC-Rotem a long-term credit facility, including several types of lines of credit., in the overall amount of NIS 1,800 million.million (approximately $474 million). Currently, there are two available lines of credit in the total amount of NIS 15NIS21 million (approximately $4 million) and a working capital line of credit. Furthermore, as part of the financing agreement, certain restrictions were provided with respect to distributions of dividends and repayments of OPC-Rotem’s shareholders’ loans, commencing from the third year after the completion of OPC-Rotem’s power plant. The lock-up period prohibiting distributions ended in June 2015. The financing agreement contains additional restrictions and limitations, including:
| · | minimum liquidity, loan life coverage ratios and debt service coverage ratios covenants; and |
| · | other non-financial covenants and limitations such as restrictions on asset sales, pledges investments and incurrence of debt, as well as reporting obligations |
The loans are CPI-linked and are repayable on a quarterly basis beginning in the fourth quarter of 2013 until 2031.
OPC-Hadera Financing
In July 2016, OPC-Hadera entered into a NIS 1 billion senior facility agreement with Israel Discount Bank Ltd. and Harel Company Ltd. to finance the construction of OPC-Hadera’s power plant in Hadera. Pursuant to the agreement, the lenders undertook to provide OPC-Hadera with financing in several facilities (including a term loan facility, a standby facility, a debt service reserve amount, or DSRA, facility to finance the DSRA deposit, a guarantee facility to facilitate the issuance of bank guarantees to be issued to third parties, a VAT facility (for the construction period only)), a hedging facility (for the construction period only), and a working capital facility (for the operation period only).
In December 2017, Israel Discount Bank Ltd. assigned 43.5% of its share in the long-term credit facility (including the facility for variances in construction and related costs) to Clal Pension and Femel Ltd. and Atudot Pension Fund for Salaried and Self-employed Ltd.
Some of the loans under the facility agreement are CPI-linked, while others accrue interest at the rates specified in the relevant agreement. The loans will be repaid in quarterly installments according to repayment schedules specified in the agreement. The financing will mature 18 years after the commencement of repayments in accordance with the provisions of the agreement (whichwhich will commence approximately half a year following the commencement of commercial operation of the OPC-Hadera construction plant.
In connection with the senior facility agreement, liens were placed on some of OPC-Hadera’s existing and future assets and on certain OPC and OPC-Hadera rights, in favor of Israel Discount Bank Ltd., as collateral agent on behalf of the lenders,lenders. The senior facility agreement also contains certain restriction in respect of distributionsrestrictions and repayments of shareholder loans.limitations, including:
| · | minimum liquidity, loan life coverage ratios and debt service coverage ratios covenants; and |
| · | other non-financial covenants and limitations such as restrictions on dividend distributions, repayments of shareholder loans, asset sales, pledges investments and incurrence of debt, as well as reporting obligations. |
As of December 31, 2017,2018, following the full investment of the project’s equity contribution, OPC-Hadera has made three drawings in the aggregate amount of NIS 494616 million (approximately $164 million) under the NIS 1 billion loan agreement relating to the project. In the first quarter of 2018, OPC fourth disbursement was made in the amount of NIS22 million.
OPC Bonds
In May 2017, OPC issued Bonds (Series A) to classified investors under a private placement, which were listed for trade on the Institutional Continuous Trading Platform. The bonds, with a par value of NIS 320 million ($92(approximately $85 million), bear annual interest at the rate of 4.95% and are redeemable,repayable, interest and a portion of principal, and interest, every six months, commencing on June 30, 2018 (on June 30th and December 30th of every calendar year) through December 30, 2030. The outstanding principal amount as of December 31, 2018 is NIS 294 million. Under the terms, the interest on the bonds will be reduced by 0.5% in the event of their listing for trade on the main list of the TASE. The bonds have received a rating of A3 from Midroog and A- from S&P Global Ratings Maalot Ltd.
In August 2017, OPC listed the bonds for trade in the stock exchange underin connection with an issuance and the listing of its shares for trade and accordingly, from that date, interest on the bonds (series A) was reduced by 0.5% and is 4.45% per year. According to the trust deed from May 2017, OPC has registered, in favor of the trustee on behalf of the bond holders, a first-ranking floating charge, unlimited in amount, on all of its assets. The floating charge will not preclude OPC from pledging specific assets and the performance of other asset dispositions by OPC.
Additionally, OPC has created a reserve for the servicing of the debt, out of the issuance consideration, in the amount of 1218 months of interest up to the commencement of repayment of the principal of the bonds, and will pay 1218 months of principal and interest payments subsequent to the commencement of the bonds'bonds’ principal repayment.repayment (this period was originally 12 months, but was increased to 18 months following an amendment to the terms of the bonds through bondholder consent). The trust account in which the reserve was deposited will be pledged in favor of the trustee on behalf of the bond holders. As of December 31, 2017,2018, the deposit for the debt service fund amounts to approximately NIS 1847 million ($5(approximately $13 million).
The trust deed contains customary clauses for calling for the immediate redemption of the bonds, including events of breach, insolvency, liquidation proceedings, receivership, stay of proceedings and creditors'creditors’ arrangements, certain types of restructuring, material downturn in the position of OPC. The bondholders'bondholders’ right to call for immediate redemption also arises upon: (1) the occurrence of certain events of loss of control by Kenon; (2) the call for immediate repayment of other debts (or guarantees) of OPC or of OPC-Hadera or OPC-Rotem in certain predefined minimum amounts; (3) a change in the area of operation of OPC such that OPC'sOPC’s main area of activity is not in the energy sector in Israel, including electricity generation in power plants and with renewable energy sources; (4) in the event that a rating is discontinued over a certain period of time, and the rating of the bond falls below the level of Baa3 (or BBB); and (5) in the event of suspending trading for a certain time period if the bonds are listed for trade on the main list of the stock exchange.
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Furthermore, the trust deed includes an undertaking by OPC to comply with covenants on the basis of its stand-alone financial statements: debt coverage ratio of at least 1.05 (to be reviewed commencing in the financial statements as at June 30, 2018), minimum equity of NIS 80 million (approximately $21 million) and an equity-to-balance sheet ratio of at least 12.5%. As at December 31, 2017,2018, the equity attributed to OPC’s shareholders amounted to approximately NIS 600 thousand678 million (approximately $181 million) and the equity-to-balance sheet ratio was 65%70%.
The trust deed also includes an undertaking by OPC to monitor the rating by a rating agency and for mandatory early redemption in the event of the sale of means of control in OPC-Rotem and OPC-Hadera.
Additionally, restrictions imposed on distributions, provision of loans to related parties and repayment of loans to related parties, are included as set forth in the trust deed, including compliance with certain covenants.
The terms of the bonds also provide for the possible raising of the interest rate in certain cases of lowering the rating, in certain cases of breach of financial covenants, and in certain cases of use of the reserve for servicing the debt where the reserve is not sufficiently funded within the time frame that is set forth in the trust deed. The ability of OPC to expand the series of the bonds has been limited under certain circumstances, including maintaining the rating of the bonds at its level shortly prior to the expansion of the series and the lack of breach.
Additionally, should OPC raise additional bonds that are not secured (or that are secured with a pari passu ranking floating charge), these will not have preference over the bonds (Series A) upon liquidation.
Qoros’ Liquidity and Capital Resources
Qoros’ cash and cash equivalents was RMB1,024 million as of December 31, 2018, compared to approximately RMB77 million as of December 31, 2017, compared to approximately RMB465 million as of December 31, 2016. Following the completion of the New Qoros Investor investment, we2017. We have a 24% equity interest in Qoros and, and we do not exercise control over Qoros’ cash and cash equivalents.
Qoros’ principal sources of liquidity are cash flows from car sales, cash inflows received from financing activities, including long-term loans, short-term facilities and capital contributions (in the form of equity contributions or convertible or non-convertible shareholder loans), and cash flows from car sales.. Qoros has fully utilized its RMB3 billion syndicated credit facility, RMB1.2 billion syndicated credit facility and its RMB700 million credit facility, and may require additional financing, including the renewal or refinancing of its working capital facilities, to fund its development and operations.
Qoros has historically relied upon capital contributions, loans,shareholder funding as well as bank facilities supported by guarantees and pledges from its shareholders, and third party loans supported by its shareholders to fund its development and operations. The increase in vehicle sales in 2018 has significantly increased cash flows from operations.
As of December 31, 2017,2018, Qoros had total loans and borrowings (excluding shareholder loans) of RMB4.8RMB5.1 billion and current liabilities (excluding shareholder loans) of RMB3.3RMB6.5 billion includinglargely made up of trade and other payables, of RMB2.7 billion, and current assets of RMB1.5RMB5.0 billion, including cash and cash equivalentssignificant trade receivables from our largest customer. See “Item 3.D. Risk Factors—Risk Factors Related to Our Interest in Qoros— Qoros sells a majority of RMB77 million.its vehicles to a single purchaser.” Qoros uses a portion of its liquidity to make debt service payments. Qoros ishas been required to make amortizing principal payments on its RMB3 billion, RMB1.2 billion and RMB700 million facilities since 2018 and the repayment requirements will increase significantly in 2018.2019 and in future years.
Although the January 2018 investment in Qoros by the Majority Shareholder in Qoros has improved Qoros'Qoros’ liquidity position, Qoros will require additional liquidity and will continue to manage its trade payables, accrued expenses and other operating expenses in connection with the management of its liquidity requirements and resources. For further information on the risks related to the effect of Qoros’ liquidity situation on its relationship with its supplies,suppliers, see “Item 3.D. Risk Factors—Risk Factors Related to Our Interest in Qoros—Qoros is dependent upon its suppliers.”
Until Qoros achieves significantly higher levels of sales, Qoros will need to secure additional financing to meet its operating expenses (including accounts payable) and debt service requirements. If Qoros is not able to raise additional financing as required, it may be unable to continue operations, and Kenon may be required to make payments under its back-to-back guarantees to Chery in respect of Qoros’ bank debt and pledges over Qoros shares by Quantum (Kenon’s subsidiary which owns Kenon’s interest in Qoros) may be enforced.
Alternatively, the Baoneng groupMajority Shareholder in Qoros (or its related entities), Chery or other investors, may choose to make additional investments in Qoros (without a corresponding Kenon investment) which may result in a dilution of Kenon’s interest. For information on the risks related to Qoros’ liquidity, see “Item 3.D Risk Factors—Risks Related to Our Interest in Qoros—Qoros depends on funding to further its development and, until it achieves significant sales levels, to meet its operating expenses, financing expenses, and capital expenditures.”
Material Indebtedness
As of December 31, 2017,2018, Qoros had total loans and borrowings (excluding shareholder loans) of RMB4.8RMB5.1 billion, consisting of non-current loans and borrowings of RMB4.2RMB3.3 billion and current loans and borrowings of RMB600 million (excluding shareholder loans).RMB1.7 million. Set forth below is a discussion of Qoros’ material indebtedness.
RMB3 Billion Syndicated Credit Facility
On July 23, 2012, Qoros entered into a consortium financing agreement with a syndicate of banks for the ability to draw down loans, in either RMB or USD, up to an aggregate maximum principal amount of RMB3 billion. The RMB loans bear interest at the 5-year interest rate quoted by the People’s Bank of China from time to time and the USD loans bear interest at LIBOR + 4.8% per annum. Outstanding loans are repayable within ten years from July 27, 2012, the first draw down date. The first and second scheduled repayment dates were in July 2015 and January 2016, respectively. Subsequent repayment dates occur every six months after the preceding repayment date. In July 2017, Qoros’ lenders approved the rescheduling of principal payments under Qoros’ RMB3 billion facility originally scheduled to be made in 2017 and 2018, with substantially all of the principal payments now scheduled to be made between 2019 and 2022 (with small payments scheduled to be made in 2018).2022.
Qoros’ RMB/USD dual currency fixed rate credit facility is secured by Qoros’ manufacturing facility, the land use right for the premises on which such manufacturing facility is located, and its equipment, and properties, and several guarantees, including a joint, but not several, guarantee from each of Chery and Changshu Port. Loans under this facility are severally guaranteed by (i) Changshu Port for up to 50% of amounts outstanding under this loan, or up to RMB1.5 billion, plus related interest and fees and (ii) Chery for up to 50% of amounts outstanding under this loan, or up to RMB1.5 billion, plus related interest and fees. Kenon has outstanding a back-to-back guarantees to Chery of RMB320RMB288 million, with respect to debt in principal of RMB288RMB320 million, of which a portion is in respect of Chery’s guarantee of this facility. For further information on Kenon’s back-to-back guarantee obligations to Chery see “—Kenon’s Liquidity and Capital Resources—Kenon’s Commitments and Obligations—Back-to-Back Guarantees Provided to Chery.”
Qoros’ syndicated credit facility contains financial, affirmative and negative covenants, events of default or mandatory prepayments for contractual breaches, including certain changes of control, and for material mergers and divestments, among other provisions. Although Qoros’ debt-to-asset ratio is currently higher, and its current ratio is lower, than the allowable ratios set forth in the terms of the syndicated credit facility, in 2016, the lenders under Qoros’ syndicated credit facility waived Qoros’ compliance with the financial covenants under this facility through the first half of 2020. Should Qoros’ debt-to-asset ratio continue to exceed, or its current ratio continue to be less than, the permitted ratios in any period after the waiver period, and Qoros’ syndicated lenders do not waive such non-compliance or revise such covenants so as to ensure Qoros’ compliance, Qoros’ lenders could accelerate the repayment of borrowings due under Qoros’ RMB3 billion syndicated credit facility.
As of December 31, 2017,2018, the aggregate amount outstanding on this loan was approximately RMB2.5 billion.
RMB1.2 Billion Syndicated Credit Facility
In July 2014, Qoros entered into a consortium financing agreement with a syndicate of banks for the ability to draw loans, in either RMB or USD, up to an aggregate maximum principal amount of RMB1.2 billion for the research and development of C-platform derivative models. The RMB loans bear interest at the 5-year interest rate quoted by the People’s Bank of China from time to time plus 10.0% of such quoted rate and the USD loans bear interest at LIBOR plus 5.0% of such rate per annum. Outstanding loans are repayable within ten years from August 19, 2014, the first draw down date. The first scheduled repayment was made in August 2017 with subsequent repayment dates occurring every six months after the preceding repayment date.
In connection with Kenon’s 2016 and 2017 funding of shareholder loans to Qoros, pursuant to which Kenon’s back-to-back guarantee obligations to Chery were partially released, Quantum pledged equity in Qoros to Chery to secure the back-to-back guarantee reductions (i.e., if Chery is required to make payments on its guarantee of Qoros’ debt, then to the extent that Chery makes payments that would have been reimbursed by Kenon but for the back-to-back guarantee reduction, Chery will be entitled to enforce this pledge). Chery may also borrow from Quantum some of Qoros’ outstanding equity to meet its pledge obligations under the RMB1.2 billion credit facility. The number of Qoros shares pledged to Chery is subject to adjustment from time to time. In certain circumstances, Quantum must pledge additional shares (to the extent it has unencumbered shares) (e.g., if additional shares must be pledged under the credit facility), and in other circumstances the pledged shares may be released and the borrowed shares must be returned (e.g., in the event that Quantum is required to pledge additional shares to secure the RMB1.2 billion credit facility)..The Majority Shareholder in Qoros is required to assume its pro rata share of the pledge obligations by shareholders of Qoros under this facility and is still in the process of assuming its proportionate pledge obligations.
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The syndicated loan agreement includes covenants (including financial covenants) and events of default and acceleration provisions.
As of December 31, 2017,2018, the aggregate principal amount outstanding on this loan was approximately RMB1.17 billion.
RMB700 Million Syndicated Credit Facility
In May 2015, Qoros entered into a RMB700 million facility with a bank consortium for the purpose of research and development into a hybrid electric vehicle. Under the facility, Qoros can draw down loans in either RMB or USD, up to an aggregate principal amount of RMB700 million. The loan agreement covers a period of 102 months starting in May 2015, and is secured by a guarantee by Chery and a pledge over Qoros’ 90 vehicle patents. The RMB loan bears the 5-year interest rate quoted by the People’s Bank of China +10%, and the USD loan bears interest of LIBOR+3.5% per annum. Qoros is required to make principal repayments under this facility beginning in 2018. The facility includes covenants and event of default provisions.
The RMB700 million is guaranteed by Chery. We provided a back-to-back guarantee to Chery in respect of this facility and also pledged shares to Chery. For further information on Kenon’s back-to-back guarantee obligations to Chery, see “—Kenon’s Liquidity and Capital Resources—Kenon’s Commitments and Obligations—Back-to-Back Guarantees Provided to Chery.”
As of December 31, 2017, Qoros drew down a total of RMB700 million, and2018, the aggregate principal amount outstanding on this loan is RMB700 million.RMB0.6 billion.
Working Capital Facilities
Qoros is party to various short-term and working capital facilities. As of December 31, 2017,2018, the balance of these facilities was RMB345RMB856 million.
Qoros may require additional financing, including the renewal or refinancing of its working capital facilities. For further information on the risks related to Qoros’ liquidity, see “Item 3.D Risk Factors—Risks Related to Our Interest in Qoros—Qoros depends on funding to further its development and, until it achieves significant sales levels, to meet its operating expenses, financing expenses, and capital expenditures.”
Shareholder Loans
As of December 31, 2017,2018, Qoros had no outstanding shareholder loans in the principal amount of RMB944 million to each of Kenon and Chery.loans.
ZIM’s Liquidity and Capital Resources
As of December 31, 2017,2018, ZIM had an aggregate amount of $158$186 million in cash and cash equivalents, similaras compared to its$158 million of cash and cash equivalents as of December 31, 2016.2017.
During the year ended December 31, 2017,2018, ZIM generated $231$225 million from operating activities, used $94generated $51 million infrom investing activities and used $140$243 million in financing activities.
ZIM has a significant amount of debt and other liabilities. As of December 31, 2017,2018, ZIM had approximately $1.5 billion of outstanding loans and liabilities to be repaid between 20182019 through 2030, of which $313$292 million of principal (including short term borrowings and current maturities of long-term debt) is scheduled to be repaid during 2018.2019.
ZIM expects to finance its short-term debt obligations and other liabilities through expected cash flow generation from operating activities, in addition to cash on hand. ZIM may also obtain funds from additional sources including debt issuance and/or other financing transactions and/or sale of assets and/or fund raising activities, including initial public offering or listing and/or re-finance its debt obligations by engaging potential new lenders and existing lenders in order to exchange existing maturities to debt vehicles with longer maturities.
Many of the financing agreements relating to ZIM’s debt facilities contain covenants and limitations, including: (a) minimum liquidity, fixed charge coverage ratio and total leverage covenants; and (b) other non-financial covenants and limitations such as restrictions on dividend distribution, asset sales, investments and incurrence of debt, as well as various reporting obligations. During 2016, in light of the continued unfavorable container shipping market conditions, ZIM took various steps to address its liquidity and financial position, including by obtaining waivers from its creditors fromfor compliance fromwith certain financial covenants and deferring certain payments. ZIM obtained additional waivers from its creditors for compliance with certain covenants in July 2018 (except for the minimum liquidity requirement, which continues to apply) and is required to comply with these covenants beginning onin March 31, 2018,2020, and repay the deferred amounts on a straight line basis, during a period of up to 36 months, ending on December 31, 2020.
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ZIM is continuing to pursue strategies to improve ZIM’s commercial and operational processes, and aims to reduce ZIM’s operational expenses and improve ZIM’s profitability. However, there is no assurance as to the extent of the effectiveness such activities or when, if at all, the results of such activities will be reflected in ZIM’s liquidity and capital resources. For further information on the risks related to ZIM’s liquidity, see “Item 3.D Risk Factors—Risks Related to Our Other Businesses—Risks Related to our Interest in ZIM— ZIM is highly leveraged and may be unable to comply with its financial covenants or meet its debt service or other obligations.”
Primus’ Liquidity and Capital Resources
As of December 31, 2017,2018, Primus had cash and cash equivalents of approximately $0.3$1.3 million.
The implementation of Primus’ business plan requires additional capital to enable Primus to continue to develop its commercial operations. Primus expects such funding to be provided by us either through capital contributions or shareholder loans, or to the extent Primus pursues projects, through contributions from strategic partners or debt financing. There is no certainty that additional financing will be provided to Primus.
Primus’ principal liquidity requirements relate to its operating expenses and investments in various development projects. A lack, or delay, of financing could delay, or prevent completely, Primus’ research and commercial development or result in its immediate liquidation or dissolution.
Primus continues to rely on Kenon to fund its operations. In connection with Primus’ further development and our efforts to maximize its value, we may provide additional capital to Primus, in the form of debt or equity financing, if deemed appropriate to facilitate Primus’ operational and development capital requirements. Through our wholly-owned subsidiary IC Green, we have provided Primus a total of $35.4$43 million (including accrued interest) via a series of convertible notes through December 31, 2017.2018. In January 2018, we provided Primus an additional $3.0$7.0 million via convertible notes. In March 2019, we provided additional funding of $1 million via a convertible note.
Material Indebtedness
Primus does not have any material indebtedness, other than related party indebtedness.
C. Research and Development, Patents and Licenses, Etc.
D. Trend Information
The following key trends contain forward-looking statements and should be read in conjunction with “Special Note Regarding Forward-Looking Statements” and “Item 3.D Risk Factors.” For further information on the recent developments of Kenon and our businesses, see “Item 5. Operating and Financial Review and Prospects—Recent Developments.”
Trend Information
OPC
In JanuaryDecember 2018, the EA published its generation component tariff updatethe electricity tariffs for 2018,2019, which increasedincluded an increase of the EA’s generation component tariff by approximately 6.7%, from NIS 264 per MWh to NIS 282 per MWh.3.3%. For further information, see “ItemItem. 5. Operating and Financial Review and Prospects—Material Factors Affecting Results of Operations—OPC—Sales—EA Tariffs.”
OPC-Hadera is in the process of constructing a plant. Following delays in the plant’s construction and operation, the plant is currently expected to reach COD in the third quarter of 2019. See “Item 4.B Business Overview—OPC—OPC’s Description of Operations—OPC-Hadera.”
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Qoros
In light of increased competition in the Chinese automotive market in recent years and the phase-out in 2018 of the purchase tax incentives for conventional vehicles, dealers and OEMs have offered customers a variety of inducements to purchase vehicles, including price reductions. In line with many of its competitors, Qoros announcedoffered various incentives for vehicle purchases, including price reductions on all its vehicle models.reductions. In 2017,2018, dealers and OEMs continued to reduce prices and offer further inducements to purchase vehicles. Qoros expects the downward pressure on vehicle prices to continue for the next few years.
The SUV segmentcentral government and local governments in China continueshave indicated that subsidies for NEV will be reduced in coming years which will inevitably increase the costs to experience growth as compared to sedans.the consumers, which may cause temporary pressure for the electric vehicle market.
ZIM
For further information on the conditions affecting the shipping industry, see “Item 4.B Business Overview—Our Businesses—ZIM—ZIM’s Industry UpdateUpdate..”
E. Off-Balance Sheet Arrangements
Neither Kenon nor any of its subsidiaries are party to off-balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth Kenon’s contractual obligations (including future interest payments) and commercial commitments as of December 31, 2017:2018, which consist of OPC’s contractual obligations (including future interest payments) and commercial commitments:
| Payments Due by Period | ||||||||||||||||||||
| Total | Less than One Year | One to Three Years | Three to Five Years | More than Five Years | ||||||||||||||||
| ($ millions) | ||||||||||||||||||||
Kenon’s stand-alone contractual obligations1 | $ | 240 | 2 | $ | 240 | 2 | $ | - | $ | - | $ | - | ||||||||
| Overseas Investment Peru Facility | $ | 101 | 3 | $ | 101 | 3 | $ | - | $ | - | $ | - | ||||||||
OPC’s consolidated contractual obligations4 | $ | 926 | $ | 120 | $ | 125 | $ | 133 | $ | 548 | ||||||||||
| Total contractual obligations and commitments | $ | 1,267 | $ | 461 | $ | 125 | $ | 133 | $ | 548 | ||||||||||
Payments Due by Period1 | ||||||||||||||||||||
Total | Less than One Year | One to Three Years | Three to Five Years | More than Five Years | ||||||||||||||||
| ($ millions) | ||||||||||||||||||||
| OPC’s consolidated contractual obligations | ||||||||||||||||||||
| Trade Payables | $ | 47 | $ | 47 | $ | — | $ | — | $ | — | ||||||||||
| Other payables | 3 | 3 | — | — | — | |||||||||||||||
| Bonds | 104 | 7 | 12 | 31 | 54 | |||||||||||||||
| Loans | 697 | 39 | 56 | 166 | 436 | |||||||||||||||
| Total contractual obligations and commitments | $ | 851 | 96 | 68 | 197 | 490 | ||||||||||||||
| (1) | Excludes Kenon’s back-to-back guarantees to Chery as well as obligations under agreement with capital provider relating to Peru BIT claim and |
sale agreement for the Inkia Business. For further information on Note 19 to our financial statements included in this annual report. |
| Payments Due by Period | ||||||||||||||||||||
| Total | Less than One Year | One to Three Years | Three to Five Years | More than Five Years | ||||||||||||||||
| ($ millions) | ||||||||||||||||||||
| Trade Payables | $ | 58 | $ | 58 | $ | - | $ | - | $ | - | ||||||||||
| Other payables | 6 | 6 | - | - | - | |||||||||||||||
| Bonds | 126 | 13 | 20 | 22 | 71 | |||||||||||||||
| Loans | 736 | 43 | 105 | 111 | 477 | |||||||||||||||
| Total contractual obligations and commitments | $ | 926 | 120 | 125 | 133 | 548 | ||||||||||||||
G. Safe Harbor
See “Special Note Regarding Forward-Looking Statements.”
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A. Directors and Senior Management
Board of Directors
The following table sets forth information regarding our board of directors:
| Name | Age | Function | Original Appointment Date | Current Term Begins | Current Term Expires | Age | Function | Original Appointment Date | Current Term Begins | Current Term Expires | ||||||||||
| Antoine Bonnier | 35 | Board Member | 2017 | 2018 | 36 | Board Member | 2016 | 2018 | 2019 | |||||||||||
| Laurence N. Charney | 71 | Chairman of the Audit Committee, Compensation Committee Member, Board Member | 2016 | 2017 | 2018 | 72 | Chairman of the Audit Committee, Compensation Committee Member, Board Member | 2016 | 2018 | 2019 | ||||||||||
| Barak Cohen | 37 | Board Member | 2018 | 2018 | 2019 | |||||||||||||||
| Cyril Pierre-Jean Ducau | 39 | Chairman of the Board, Nominating and Corporate Governance Committee Chairman | 2014 | 2017 | 2018 | 40 | Chairman of the Board, Nominating and Corporate Governance Committee Chairman | 2014 | 2018 | 2019 | ||||||||||
| N. Scott Fine | 61 | Audit Committee Member, Compensation Committee Chairman, Board Member | 2014 | 2017 | 2018 | 62 | Audit Committee Member, Compensation Committee Chairman, Board Member | 2014 | 2018 | 2019 | ||||||||||
| Bill Foo | 61 | Board Member, Nominating and Corporate Governance Committee Member | 2017 | 2017 | 2018 | 61 | Board Member, Nominating and Corporate Governance Committee Member | 2017 | 2018 | 2019 | ||||||||||
| Aviad Kaufman | 47 | Compensation Committee Member, Board Member, Nominating and Corporate Governance Committee Member | 2014 | 2017 | 2018 | 48 | Compensation Committee Member, Board Member, Nominating and Corporate Governance Committee Member | 2014 | 2018 | 2019 | ||||||||||
| Arunava Sen | 57 | Board Member, Audit Committee Member | 2017 | 2017 | 2018 | 58 | Board Member, Audit Committee Member | 2017 | 2018 | 2019 | ||||||||||
Our constitution provides that, unless otherwise determined by a general meeting, the minimum number of directors is five and the maximum number is 12.
Senior Management
| Name | Age | Position | ||
| Mark Hasson | Chief Financial Officer |
Biographies
Directors
Antoine Bonnier. Mr. Bonnier is currently a Managing Director of Quantum Pacific (UK) LLP and serves as a member of the board of directors of Club Atletico de Madrid SAD, Pacific Drilling S.A. and of Primus Green Energy, Inc., each of which may be associated with the same ultimate beneficiary, Mr. Idan Ofer. Mr. Bonnier was previously a member of the investment team of Quantum Pacific Advisory Limited from 2011 to 2012. Prior to joining Quantum Pacific Advisory Limited in 2011, Mr. Bonnier was an Associate in the Investment Banking Division of Morgan Stanley & Co. During his tenure there, from 2005 to 2011, he held various positions in the Capital Markets and Mergers and Acquisitions teams in London, Paris and Dubai. Mr. Bonnier graduated from ESCP Europe Business School and holds a Master of Science in Management.
Laurence N. Charney. Mr. Charney currently serves as the chairman of our audit committee. Mr. Charney retired from Ernst & Young LLP in June 2007, where, over the course of his more than 35-year career, he served as Senior Audit Partner, Practice Leader and Senior Advisor. Since his retirement from Ernst & Young, Mr. Charney has served as a business strategist and financial advisor to boards, senior management and investors of early stage ventures, private businesses and small to mid-cap public corporations across the consumer products, energy, high-tech/software, media/entertainment, and non-profit sectors. His most recent directorships also include board tenure with Pacific Drilling S.A., along with Kenon, as well as Marvel Entertainment, Inc. (through December 2009), Pacific Drilling S.A. (through November 19, 2018) and TG Therapeutics, Inc. (from March 2012 through the current date). Mr. Charney is a graduate of Hofstra University with a Bachelor’s Degree in Business Administration (Accounting), and has also completed an Executive Master’s program at Columbia University. Mr. Charney maintains active membership with the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants.
Barak Cohen. Mr. Cohen is a Managing Director of Quantum Pacific (UK) LLP and a board member of OPC, Qoros and Inkia, each of which may be associated with the same ultimate beneficiary, Mr. Idan Ofer. In September 2018, Mr. Cohen was appointed to the board of directors of Kenon, having served as Co-CEO of Kenon till that time. Prior to serving as Kenon’s Co-CEO, Mr. Cohen served as Kenon’s Vice President of Business Development and Investor Relations from 2015 to September 2017. Prior to joining Kenon in 2015, Mr. Cohen worked in various capacities at Israel Corporation (IC) since 2008 most recently as Israel Corporation’s Senior Director of Business Development and Investor Relations. IC is one of the largest Israeli based diversified holding companies with multibillion dollar asset base. Prior to joining Israel Corporation, Mr. Cohen held positions at Lehman Brothers (UK) and Ernst & Young (Israel). Mr. Cohen holds bachelor’s degrees in Economics, summa cum laude, and Accounting & Management, magna cum laude, both from Tel Aviv University.
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Cyril Pierre-Jean Ducau. Mr. Ducau is the Chief Executive Officer of Ansonia Holdings Singapore B.V.Ansonia. and the Managing DirectorChief Executive Officer of QuantumEastern Pacific Ventures Limited.Shipping Pte Ltd. He is also a member of the board of directors of Pacific Drilling S.A., Quantum Pacific Shipping Services Pte. Ltd.Ansonia and Ansonia Holdings Singapore B.V.,IC Power, as well as other private companies, each of which may be associated with the same ultimate beneficiary, Mr. Idan Ofer. He was previously Head of Business Development of Quantum Pacific Advisory Limited in London from 2008 to 2012.2012 and acted as Director and Chairman of Pacific Drilling SA between 2011 and 2018. Prior to joining Quantum Pacific Advisory Limited, Mr. Ducau was Vice President in the Investment Banking Division of Morgan Stanley & Co. International Ltd. in London and, during his tenure there from 2000 to 2008, he held various positions in the Capital Markets, Leveraged Finance and Mergers and Acquisitions teams. Prior to that, Mr. Ducau gained experience in consultancy working for Arthur D. Little in Munich and investment management with Credit Agricole UI Private Equity in Paris. Mr. Ducau graduated from ESCP Europe Business School (Paris, Oxford, Berlin) and holds a Master of Science in business administration and a Diplom Kaufmann.
N. Scott Fine. Mr. Fine is the Chief Executive Officer and Chairman of CTD Holdings Inc., a biotechnology company focused on developing novel therapeutics based on cyclodextrin technologies. Mr. Fine is also a director of Pacific Drilling S.A. Mr. Fine has been involved in investment banking for over 35 years, working on a multitude of debt and equity financings, buy and sell side mergers and acquisitions, strategic advisory work and corporate restructurings. Much of his time has been focused on transactions in the healthcare and consumer products area, including time with The Tempo Group of Jakarta, Indonesia. Mr. Fine was the lead investment banker on the IPO of Keurig Green Mountain Coffee Roasters and Central European Distribution Corporation, or CEDC, a multi-billion-Dollar alcohol company. He was also involved in an Equity Strategic Alliance between Research Medical and the Tempo Group. Mr. Fine continued his involvement with CEDC, serving as a director from 1996 until 2014, during which time he led the CEDC Board’s successful efforts in 2013 to restructure the company through a pre-packaged Chapter 11 process whereby CEDC was acquired by the Russian Standard alcohol group. He also served as Sole Directorsole director of Better Place Inc. from 2013 until 2015. In that role, Mr. Fine successfully managed the global wind down of the company in a timely and efficient manner which was approved by both the Delaware and Israeli courts. Mr. Fine devotes time to several non-profit organizations, including through his service on the Board of Trustees for the IWM American Air Museum in Britain. Mr. Fine has been a guest lecturer at Ohio State University’s Moritz School of Law.
Bill Foo. Dr. Bill Foo is a director and corporate advisor of several private, listed and non-profit entities, including Mewah International Inc., CDL Hospitality Trusts, Tung Lok Restaurants (2000) Ltd., M&C REIT Management Ltd and chairing the Salvation Army and Heartware Network Youth Charity organizations. In May 2017, Dr. Foo was appointed to the board of directors of Kenon, having served as a director of IC Power between November 2015 and January 2018. Prior to his retirement, Dr. Foo worked in financial services for over 30 years, including serving as CEO of ANZ Singapore and South East Asia Head of Investment Banking for Schroders. Dr. Foo has also worked in various positions at Citibank and Bank of America and has been a director of several listed and government-related entities, including International Enterprise Singapore (Trade Agency), where he chaired the Audit Committee for several years. Dr. Foo has a Master’s Degree in Business Administration from McGill University and a Bachelor of Business Administration from Concordia University and an honorary Doctor of Commerce from James Cook University Australia.
Aviad Kaufman. Mr. Kaufman is the Chief FinancialExecutive Officer of Quantum Pacific (UK) LLP, the chairman of IC, a board member of Israel Chemicals Ltd., and other private companies, each of which may be associated with the same ultimate beneficiary, Mr. Idan Ofer. From 2008 until 2012,2017, Mr. Kaufman served as Chief Financial Officer of Quantum Pacific (UK) LLP (and its predecessor Quantum Pacific Advisory Limited.Limited). From 2002 until 2007, Mr. Kaufman served as Director of International Taxation and fulfilled different senior corporate finance roles at Amdocs Ltd. Previously, Mr. Kaufman held various consultancy positions with KPMG. Mr. Kaufman is a certified public accountant and holds a Bachelor’s Degree in Accounting and Economics from the Hebrew University in Jerusalem (with distinction), and a Master’s of Business Administration in Finance from Tel Aviv University.
Arunava Sen. Mr. Sen is CEO and Managing Director of Coromandel Advisors Pte Ltd, a Singapore-based company that provides strategic and transactional advice to global investors in the infrastructure and clean energy sectors. In May 2017, Mr. Sen was appointed to the board of directors of Kenon, having served as a director of IC Power between November 2015 and January 2018. Between August 2010 and February 2015, Mr. Sen was CEO and Managing Director of Lanco Power International Pte Ltd, a Singapore-registered company focused on the development of power projects globally. Previously, Mr. Sen held several senior roles at Globeleq Ltd, a Houston-based power investment company, including COO, CEO—Latin America and CEO—Asia. In 1999, Mr. Sen cofounded and was COO of Hart Energy International, a Houston-based company that developed and invested in power businesses in Latin America and the Caribbean. Mr. Sen currently serves as a member of the investment committee of Armstrong Asset Management Pte Ltd. A qualified Chartered Accountant, Mr. Sen holds a B.Com. degree from the University of Calcutta and an M.S. degree in Finance from The American University in Washington, DC.
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Robert Rosen. Mr. Rosen has served as Co-CEOCEO of Kenon since September 2017. Prior to becoming Co-CEO,CEO, Mr. Rosen served as General Counsel of Kenon sinceupon joining Kenon in 2014. Prior to joining Kenon in 2014, Mr. Rosen spent 15 years in private practice with top tier law firms, including Linklaters LLP and Milbank, Tweed, Hadley and McCloy LLP. During his time in private practice, Mr. Rosen was primarily involved in cross-border public and private capital markets offerings and other securities transactions, as well as with the purchase and sale of U.S. and international distressed assets, private equity investments and structured finance transactions and SEC filings and related advice.transactions. Mr. Rosen is admitted to the Bar in the state of New York, holds a Bachelor’s degree with honors from Boston University and a JD and MBA, both from the University of Pittsburgh, where he graduated with high honors.
Mark Hasson. Mr. Hasson has served as Chief Financial Officer at Kenon Holdings Ltd. since October 2017. Prior to this role, Mr. Hasson served as Vice President of Finance at Kenon. Prior to joining Kenon in 2017, Mr. Hasson served in various senior finance positions in Singapore and Australia. He holds a Bachelor’s degree in Finance and Accounting from the University of Cape Town in South Africa and is a Chartered Accountant (Institute of Chartered Accountants in England and Wales).
B. Compensation
We pay our directors compensation for serving as directors, including per meeting fees.
For the year ended December 31, 2017,2018, the aggregate compensation accrued (comprising remuneration and the aggregate fair market value of equity awards granted) for our directors and executive officers was approximately $6$3 million.
For further information on Kenon’s Share Incentive Plan 2014 and Share Option Plan 2014, see “Item 6.E Share Ownership.”
C. Board Practices
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the NYSE’s rules for domestic U.S. issuers, provided that we disclose which requirements we are not following and describe the equivalent home country requirement.
We have elected to apply the corporate governance rules of the NYSE that are applicable to U.S. domestic registrants that are not “controlled” companies, except in the case of our nominating and governance committee, as one of the members of our nominating and corporate governance committee is non-independent under NYSE standards.
Board of Directors
Our constitution gives our board of directors general powers to manage our business. The board of directors, which consists of seveneight directors, oversees and provides policy guidance on our strategic and business planning processes, oversees the conduct of our business by senior management and is principally responsible for the succession planning for our key executives. Cyril Pierre-Jean Ducau serves as our Chairman.
Director Independence
Pursuant to the NYSE’s listing standards, listed companies are required to have a majority of independent directors. Under the NYSE’s listing standards, (i) a director employed by us or that has, or had, certain relationships with us during the last three years, cannot be deemed to be an independent director, and (ii) directors will qualify as independent only if our board of directors affirmatively determines that they have no material relationship with us, either directly or as a partner, shareholder or officer of an organization that has a relationship with either us or IC. Ownership of a significant amount of our shares, by itself, does not constitute a material relationship.
Although we are permitted to follow home country practice in lieu of the requirement to have a board of directors comprised of a majority of independent directors, we have determined that we are in compliance with this requirement and that a majority of our board of directors is independent according to the NYSE’s listing standard. Our board of directors has affirmatively determined that each of Antoine Bonnier, Arunava Sen, Aviad Kaufman, Bill Foo, Laurence N. Charney and N. Scott Fine, representing six of our seveneight directors, are currently “independent directors” as defined under the applicable rules and regulations of the NYSE.
Election and Removal of Directors
See “Item 10.B Constitution.”
Service Contracts
None of our board members have service contracts with us or any of our businesses providing for benefits upon termination of employment.
Indemnifications and Limitations on Liability
For information on the indemnification and limitations on liability of our directors, see “Item 10.B Constitution.”
Committees of our Board of Directors
We have established three committees, which report regularly to our board of directors on matters relating to the specific areas of risk the committees oversee: the audit committee, the nominating and corporate governance committee, and the compensation committee. Although we are permitted to follow home country practices with respect to our establishment of the nominating and corporate governance and compensation committees, we have determined that we are in compliance with the NYSE’s requirements in these respects, except that one of the members of our nominating and corporate governance committee is non-independent under NYSE standards.
Audit Committee
We have established an audit committee to review and discuss with management significant financial, legal and regulatory risks and the steps management takes to monitor, control and report such exposures; our audit committee also oversees the periodic enterprise-wide risk evaluations conducted by management. Specifically, our audit committee oversees the process concerning:
| · | the quality and integrity of our financial statements and internal controls; |
| · | the compensation, qualifications, evaluation and independence of, and making a recommendation to our board for recommendation to the annual general meeting for appointment of, our independent registered public accounting |
| · | the performance of our internal audit function; |
| · | our compliance with legal and regulatory requirements; and |
| · | review of related party transactions. |
The members of our audit committee, Laurence N. Charney, N. Scott Fine and Arunava Sen, are independent directors. Our board of directors has determined that Laurence N. Charney is an audit committee financial expert, as defined under the applicable rules of the SEC, and that each of our audit committee members has the requisite financial sophistication as defined under the applicable rules and regulations of each of the SEC and the NYSE. Our audit committee operates under a written charter that satisfies the applicable standards of each of the SEC and the NYSE.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee oversees the management of risks associated with board governance, director independence and conflicts of interest. Specifically, our nominating and corporate governance committee is responsible for identifying qualified candidates to become directors, recommending to the board of directors candidates for all directorships, overseeing the annual evaluation of the board of directors and its committees and taking a leadership role in shaping our corporate governance.
Our nominating and corporate governance committee considers candidates for director who are recommended by its members, by other board members and members of our management, as well as those identified by any third-party search firms retained by it to assist in identifying and evaluating possible candidates. The nominating and corporate governance committee also considers recommendations for director candidates submitted by our shareholders. The nominating and corporate governance committee evaluates and recommends to the board of directors qualified candidates for election, re-election or appointment to the board, as applicable.
When evaluating director candidates, the nominating and corporate governance committee seeks to ensure that the board of directors has the requisite skills, experience and expertise and that its members consist of persons with appropriately diverse and independent backgrounds. The nominating and corporate governance committee considers all aspects of a candidate’s qualifications in the context of our needs, including: personal and professional integrity, ethics and values; experience and expertise as an officer in corporate management; experience in the industry of any of our portfolio businesses and international business and familiarity with our operations; experience as a board member of another publicly traded company; practical and mature business judgment; the extent to which a candidate would fill a present need on the board of directors; and the other ongoing commitments and obligations of the candidate. The nominating and corporate governance committee does not have any minimum criteria for director candidates. Consideration of new director candidates will typically involve a series of internal discussions, review of information concerning candidates and interviews with selected candidates.
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As a foreign private issuer, we are permitted to follow home country practice in lieu of the requirement to have a nominating and corporate governance committee comprised entirely of independent directors. One of the members of our nominating and corporate governance committee is non-independent under NYSE standards and accordingly we rely on the NYSE exemption for foreign private issuers.
The members of our nominating and corporate governance committee are Cyril Pierre-Jean Ducau, Bill Foo and Aviad Kaufman. Our nominating and corporate governance committee operates under a written charter that satisfies the applicable standards of the NYSE for foreign private issuers.
Compensation Committee
Our compensation committee assists our board in reviewing and approving the compensation structure of our directors and officers, including all forms of compensation to be provided to our directors and officers. The compensation committee is responsible for, among other things:
| · | reviewing and determining the compensation package for our |
| · | reviewing and making recommendations to our board with respect to the compensation of our non-employee directors; |
| · | reviewing and approving corporate goals and objectives relevant to the compensation of our |
| · | reviewing periodically and approving and administering stock options plans, long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans for all employees, including reviewing and approving the granting of options and other incentive awards. |
As a foreign private issuer, we are permitted to follow home country practice in lieu of the requirement to have a compensation committee comprised entirely of independent directors. Nonetheless, we have determined that all of the members of our compensation committee, Laurence N. Charney, N. Scott Fine and Aviad Kaufman are independent directors as defined under the applicable rules of the NYSE. Our compensation committee operates under a written charter that satisfies the applicable standards of the NYSE.
Code of Ethics and Ethical Guidelines
Our board of directors has adopted a code of ethics that describes our commitment to, and requirements in connection with, ethical issues relevant to business practices and personal conduct.
D. Employees
As of December 31, 2018, 2017 2016 and 20152016 we, and our consolidated subsidiaries, employed 108,112, 108 and 115 and 118 individuals, respectively, as follows:
Number of Employees as of December 31, | ||||||||||||
| Company | 2017 | 2016 | 2015 | |||||||||
| OPC | 88 | 79 | 66 | |||||||||
| Primus | 14 | 31 | 41 | |||||||||
| Kenon | 6 | 5 | 11 | |||||||||
| Total | 108 | 115 | 118 | |||||||||
Number of Employees as of December 31, | ||||||||||||
| Company | 2018 | 2017 | 2016 | |||||||||
| OPC | 92 | 88 | 79 | |||||||||
| Primus | 13 | 14 | 31 | |||||||||
| Kenon | 7 | 6 | 5 | |||||||||
| Total | 112 | 108 | 115 | |||||||||
OPC
As of December 31, 2017,2018, OPC employed 8892 employees. For further information on OPC’s employees, see “Item 4.B Business Overview—OPC—Employees.”
Qoros
As of December 31, 2017,2018, Qoros employed approximately 1,6403,400 employees, consisting of headquarter and factory employees predominantly within China.
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ZIM
As of December 31, 2017,2018, ZIM employed approximately 3,6003,700 employees (including employees of its subsidiaries).
A significant number of ZIM’s Israeli employees are unionized and ZIM is party to numerous collective agreements with respect to its employees. For further information on the risks related to ZIM'sZIM’s unionized employees, see “Item 3.D Risk Factors—Risks Related to the Industries in Which Our Businesses Operate—Our businesses may be adversely affected by work stoppages, union negotiations, labor disputes and other matters associated with our labor force.”
Other
As of December 31, 2017,2018, Primus employed 1413 employees, all of whom are located in the U.S.
E. Share Ownership
Interests of our Directors and our Employees
Kenon has established the Share Incentive Plan 2014 and the Share Option Plan 2014 for its directors and management. The Share Incentive Plan 2014 and the Share Option Plan 2014 provide grants of Kenon’s shares, and stock options in respect of Kenon’s shares, respectively, to management and directors of Kenon, or to officers of Kenon’s subsidiaries or associated companies, as well as to officers of IC, pursuant to awards, which may be granted by Kenon from time to time. The total number of shares underlying awards which may be granted under the Share Incentive Plan 2014 or delivered pursuant to the exercise of options granted under the Share Option Plan 2014 shall not, in the aggregate, exceed 3% of the total issued shares (excluding treasury shares) of Kenon. Kenon granted awards of shares to directors and certain members of its management under the Share Incentive Plan 2014 in 2017,2018, with a value of $1.1$0.4 million.
Equity Awards to Certain Executive Officers—Subsidiaries and Associated Companies
Kenon’s subsidiaries and associated companies may, from time to time, adopt equity compensation arrangements for officers and directors of the relevant entity. Kenon expects any such arrangements to be on customary terms and within customary limits (in terms of dilution).
A. Major Shareholders
The following table sets forth information regarding the beneficial ownership of our ordinary shares as of April 4, 2018,5, 2019, by each person or entity beneficially owning 5% or more of our ordinary shares, based upon the 53,826,749 ordinary shares outstanding as of such date, which represents our entire issued and outstanding share capital as of such date. The information set out below is based on public filings with the SEC as of April 4, 2018.5, 2019.
To our knowledge, as of April 4, 2018,March 31, 2019, we had one shareholder2 shareholders of record in the United StatesStates: one holding approximately 99% of our outstanding ordinary shares and the other one holding less than 1% of our outstanding ordinary shares. Such numbers are not representative of the portion of our shares held in the United States nor are they representative of the number of beneficial holders residing in the United States, since suchthe holder of record of approximately 99% of our outstanding ordinary shares (which includes the ordinary shares held by the TASE for trading on the TASE) were held of record bywas one U.S. nominee company, CEDE & Co, which holds all of our shares traded on the NYSE and the TASE indirectly.
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All of our ordinary shares have the same voting rights.
Beneficial Owner (Name/Address) | Ordinary Shares Owned | Percentage of Ordinary Shares | ||||||
Ansonia Holdings Singapore B.V.1 | 31,156,869 | 58.0 | % | |||||
Clal Insurance Enterprises Holdings Ltd.2 | 3,860,158 | 7.2 | % | |||||
Menora Mivtachim Holdings Ltd.3 | 3,120,626 | 5.8 | % | |||||
Laurence N. Charney4 | 32,482 | * | 5 | |||||
N. Scott Fine4 | 27,265 | * | 5 | |||||
Bill Foo4 | 3,085 | * | 5 | |||||
Arunava Sen4 | 3,085 | * | 5 | |||||
Directors and Executive Officers6 | – | * | 5 | |||||
| Beneficial Owner (Name/Address) | Ordinary Shares Owned | Percentage of Ordinary Shares | ||||||
Ansonia Holdings Singapore B.V.1 | 31,156,869 | 58.0 | % | |||||
XT Investments Ltd.2 | 6,273,128 | 11.7 | % | |||||
Clal Insurance Enterprises Holdings Ltd.3 | 2,818,563 | 5.2 | % | |||||
Laurence N. Charney4 | 9,656 | — | 5 | |||||
N. Scott Fine4 | 5,652 | — | 5 | |||||
Directors and Executive Officers6 | — | — | 5 | |||||
| (1) | Based solely on the Schedule 13-D/A (Amendment No. 4) filed by Ansonia Holdings Singapore B.V. with the SEC on January 25, 2017. A discretionary trust, in which Mr. Idan Ofer is the prime beneficiary, indirectly holds 100% of Ansonia Holdings Singapore B.V. |
| (2) | Based solely upon the Schedule |
| (3) | Based solely upon the Schedule 13-G/A (Amendment No. 1) filed by Menora Mivtachim Holdings Ltd. with the SEC on February 11, 2019. According to the Schedule 13-G/A (i) the ordinary shares reported are beneficially owned by Menora Mivtachim Holdings Ltd. and by entities that are its direct or indirect, wholly-owned or majority-owned, subsidiaries; and (ii) the economic interest or beneficial ownership in a portion of the ordinary shares reported (including the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, such securities) is held for the benefit of insurance policy holders or the members of provident funds or pension funds, as the case may be. According to the Schedule 13-G/A, of the 3,120,626 ordinary shares reported, (i) 2,542,995 ordinary shares are held by Menora Mivtachim Pensions and Gemel Ltd; (ii) 527,124 ordinary shares are held by Menora Mivtachim Insurance Ltd.; and (iii) 50,507 ordinary shares are held by Menora Mivtachim Vehistadrut Hamehandesim Nihul Kupot Gemel Ltd. |
| (4) | Based solely on Exhibit 99.3 to the Form 6-K furnished by Kenon with the SEC on |
| (5) | Owns less than 1% of Kenon’s ordinary shares. |
| (6) | Excludes shares held by Laurence N. Charney, |
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that such person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
We are not aware of any arrangement that may, at a subsequent date, result in a change of our control.
Significant changes in ownership of major shareholders
Based solely upon the Schedule 13-D/A (Amendment No. 3) filed by XT Investments Ltd. and XT Holdings Ltd. with the SEC on April 11, 2018, XT Investments Ltd. decreased its ownership of Kenon ordinary shares, from 11.7% as of August 22, 2017 to 2.3%.
B. Related Party Transactions
Kenon
Pursuant to its charter, the audit committee must review and approve all related party transactions. The audit committee has a written policy with respect to the approval of related party transactions. In addition, we have undertaken that, for so long as we are listed on the NYSE, to the extent that we or our subsidiaries will enter into transactions with related parties, such transactions will be considered and approved by us or our wholly-owned subsidiaries in a manner that is consistent with customary practices followed by companies incorporated in Delaware and shall be reviewed in accordance with the requirements of Delaware law.
We are party to numerous related party transactions with certain of our affiliates. Set forth below is a summary of these transactions. For further information, see Note 3129 to our financial statements included in this annual report.
OPC
Sales of Electricity and Gas
OPC-Rotem sells electricity through PPAs to some entities that may be considered to be related parties. OPC-Rotem recorded revenues from related parties in the amount of $80 million, $103 million $130 million and $147$130 million in the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively.
OPC-Rotem and OPC-Hadera also sell an immaterial amount of gas to some entities that may be considered related parties.
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Qoros
Ansonia
Kenon iswas party to loan agreements with Kenon’s major shareholder Ansonia, which loan agreements were entered into in 2016 to provide loans to Kenon to fund Qoros. The total outstanding principal amount of theIn 2018, Kenon repaid $77 million in loans owing from Kenon to Ansonia was approximately $75 million (including interest) as of December 31, 2017.
C. Interests of Experts and Counsel
Not applicable.
A. Consolidated Statements and Other Financial Information
For information on the financial statements filed as a part of this annual report, see “Item 18. Financial Statements.” For information on our legal proceedings, see “Item 4.B Business Overview” and Note 2119 to our financial statements included in this annual report. For information on our dividend policy, see “Item 10.B Constitution.”
B. Significant Changes
For information on any significant changes that may have occurred since the date of our annual financial statements, see “Item 5. Operating and Financial Review and Prospects—Recent Developments.”
A. Offer and Listing Details.
Price per ordinary share($) | ||||||||
| High | Low | |||||||
| Annual: | ||||||||
| Year ended December 31, 2015 (since January 6, 2015) | 22.13 | 9.66 | ||||||
| Year ended December 31, 2016 | 12.02 | 7.40 | ||||||
| Year ended December 31, 2017 | 21.65 | 10.01 | ||||||
| Quarterly: | ||||||||
| Three months ended March 31, 2016 | 9.80 | 7.46 | ||||||
| Three months ended June 30, 2016 | 10.90 | 7.40 | ||||||
| Three months ended September 30, 2016 | 12.02 | 9.57 | ||||||
| Three months ended December 31, 2016 | 11.70 | 8.81 | ||||||
| Three months ended March 31, 2017 | 13.11 | 10.01 | ||||||
| Three months ended June 30, 2017 | 14.00 | 11.19 | ||||||
| Three months ended September 30, 2017 | 17.19 | 13.05 | ||||||
| Three months ended December 31, 2017 | 21.65 | 15.85 | ||||||
Three months ended March 31, 20181 | 32.28 | 16.25 | ||||||
| Monthly | ||||||||
| October 2017 | 17.50 | 15.85 | ||||||
| November 2017 | 20.65 | 16.50 | ||||||
| December 2017 | 21.65 | 19.79 | ||||||
| January 2018 | 30.35 | 21.79 | ||||||
| February 2018 | 31.58 | 28.36 | ||||||
March 20181 | 32.28 | 16.25 | ||||||
Price per ordinary share(NIS) | ||||||||
| High | Low | |||||||
| Annual: | ||||||||
| Year ended December 31, 2015 (since January 6, 2015) | 84.98 | 37.75 | ||||||
| Year ended December 31, 2016 | 46.34 | 28.10 | ||||||
| Year ended December 31, 2017 | 74.15 | 37.55 | ||||||
| Quarterly: | ||||||||
| Three months ended March 31, 2016 | 40.00 | 29.13 | ||||||
| Three months ended June 30, 2016 | 41.75 | 28.10 | ||||||
| Three months ended September 30, 2016 | 46.34 | 36.12 | ||||||
| Three months ended December 31, 2016 | 45.33 | 33.30 | ||||||
| Three months ended March 31, 2017 | 49.06 | 37.55 | ||||||
| Three months ended June 30, 2017 | 48.85 | 40.40 | ||||||
| Three months ended September 30, 2017 | 61.10 | 46.33 | ||||||
| Three months ended December 31, 2017 | 74.15 | 55.06 | ||||||
Three months ended March 31, 20181 | 109.80 | 56.72 | ||||||
| Monthly | ||||||||
| October 2017 | 60.70 | 55.06 | ||||||
| November 2017 | 72.95 | 59.92 | ||||||
| December 2017 | 74.15 | 69.55 | ||||||
| January 2018 | 102.00 | 75.02 | ||||||
| February 2018 | 109.80 | 98.77 | ||||||
March 20181 | 107.90 | 56.72 | ||||||
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are listed on each of the NYSE and the TASE under the symbol “KEN.”
D. Selling Shareholders
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the Issue
Not applicable.
A. Share Capital
Not applicable.
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B. Constitution
The following description of our constitution is a summary and is qualified by reference to the constitution, a copy of which has been filed with the SEC. Subject to the provisions of the Singapore Companies Act and any other written law and its constitution, the Company has full capacity to carry on or undertake any business or activity, do any act or enter into any transaction.
New Shares
Under Singapore law, new shares may be issued only with the prior approval of our shareholders in a general meeting. General approval may be sought from our shareholders in a general meeting for the issue of shares. Approval, if granted, will lapse at the earliest of:
| · | the conclusion of the next annual general meeting; |
| · | the expiration of the period within which the next annual general meeting is required by law to be held (i.e., within |
| · | the subsequent revocation or modification of approval by our shareholders acting at a duly convened general meeting. |
Our shareholders have provided such general authority to issue new shares until the conclusion of our 20182019 annual general meeting. Subject to this and the provisions of the Singapore Companies Act and our constitution, all new shares are under the control of the directors who may allot and issue new shares to such persons on such terms and conditions and with the rights and restrictions as they may think fit to impose.
Preference Shares
Our constitution provides that we may issue shares of a different class with preferential, deferred or other special rights, privileges or conditions as our board of directors may determine. Under the Singapore Companies Act, our preference shareholders will have the right to attend any general meeting insofar as the circumstances set forth below apply and on a poll at such general meeting, to have at least one vote for every preference share held:
| · | upon any resolution concerning the winding-up of our company; and |
| · | upon any resolution which varies the rights attached to such preference shares. |
We may, subject to the prior approval in a general meeting of our shareholders, issue preference shares which are, or at our option, subject to redemption provided that such preference shares may not be redeemed out of capital unless:
| · | all the directors have made a solvency statement in relation to such redemption; and |
| · | we have lodged a copy of the statement with the Singapore Registrar of Companies. |
Further, the shares must be fully paid-up before they are redeemed.
Transfer of Ordinary Shares
Subject to applicable securities laws in relevant jurisdictions and our constitution, our ordinary shares are freely transferable. Shares may be transferred by a duly signed instrument of transfer in any usual or common form or in a form acceptable to our directors. The directors may decline to register any transfer unless, among other things, evidence of payment of any stamp duty payable with respect to the transfer is provided together with other evidence of ownership and title as the directors may require. We will replace lost or destroyed certificates for shares upon notice to us and upon, among other things, the applicant furnishing evidence and indemnity as the directors may require and the payment of all applicable fees.
Election and Re-election of Directors
Under our constitution, our shareholders by ordinary resolution, or our board of directors, may appoint any person to be a director as an additional director or to fill a casual vacancy, provided that any person so appointed by our board of directors shall hold office only until the next annual general meeting, and shall then be eligible for re-election.
Our constitution provides that, subject to the Singapore Companies Act, no person other than a director retiring at a general meeting is eligible for appointment as a director at any general meeting, without the recommendation of the Board for election, unless (a) in the case of a member or members who in aggregate hold(s) more than fifty percent of the total number of our issued and paid-up shares (excluding treasury shares), not less than ten days, or (b) in the case of a member or members who in aggregate hold(s) more than five percent of the total number of our issued and paid-up shares (excluding treasury shares), not less than 120 days, before the date of the notice provided to members in connection with the general meeting, a written notice signed by such member or members (other than the person to be proposed for appointment) who (i) are qualified to attend and vote at the meeting for which such notice is given, and (ii) have held shares representing the prescribed threshold in (a) or (b) above, for a continuous period of at least one year prior to the date on which such notice is given, is lodged at our registered office. Such a notice must also include the consent of the person nominated.
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Shareholders’ Meetings
We are required to hold an annual general meeting each year. Annual general meetings must be held not more than 15within six months after the holding of the last preceding annual general meeting, and in each case, not later than six months from our financial year end, being December 31. The directors may convene an extraordinary general meeting whenever they think fit and they must do so upon the written request of shareholders representing not less than one-tenth of the paid-up shares as at the date of deposit carries the right to vote at general meetings (disregarding paid-up shares held as treasury shares). In addition, two or more shareholders holding not less than one-tenth of our total number of issued shares (excluding our treasury shares) may call a meeting of our shareholders. The Singapore Companies Act requires not less than:
| · | 14 days’ written notice to be given by Kenon of a general meeting to pass an ordinary resolution; and |
| · | 21 days’ written notice to be given by Kenon of a general meeting to pass a special resolution, |
to every member and the auditors of Kenon. Our constitution further provides that in computing the notice period, both the day on which the notice is served, or deemed to be served, and the day for which the notice is given shall be excluded.
Unless otherwise required by law or by our constitution, voting at general meetings is by ordinary resolution, requiring the affirmative vote of a simple majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the resolution. An ordinary resolution suffices, for example, for appointments of directors. A special resolution, requiring an affirmative vote of not less than three-fourths of the shares present in person or represented by proxy at the meeting and entitled to vote on the resolution, is necessary for certain matters under Singapore law, such as an alteration of our constitution.
Voting Rights
Voting at any meeting of shareholders is by a show of hands unless a poll is duly demanded before or on the declaration of the result of the show of hands. If voting is by a show of hands, every shareholder who is entitled to vote and who is present in person or by proxy at the meeting has one vote. On a poll, every shareholder who is present in person or by proxy or by attorney, or in the case of a corporation, by a representative, has one vote for every share held by him or which he represents.
Dividends
We have no current plans to pay annual or semi-annual cash dividends. However, as part of our strategy, we may, in the event that we divest a portion of, or our entire equity interest in, any of our businesses, distribute such cash proceeds or declare a distribution-in-kind of shares in our investee companies. No dividend may be paid except out of profits and we currently do not have distributable profits from which dividends may be declared. Any dividends would be limited by the amount of available distributable reserves, which, under Singapore law, will be assessed on the basis of Kenon’s standalone unconsolidated accounts (which will be based upon the SFRS). Under Singapore law, it is also possible to effect a capital reduction exercise to return cash and/or assets to our shareholders. The completion of a capital reduction exercise may require the approval of the Singapore Courts, and we may not be successful in our attempts to obtain such approval.
Additionally, because we are a holding company, our ability to pay cash dividends, or declare a distribution-in-kind of the ordinary shares of any of our businesses, may be limited by restrictions on our ability to obtain sufficient funds through dividends from our businesses, including restrictions under the terms of the agreements governing the indebtedness of our businesses. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, contractual restrictions, our overall financial condition, available distributable reserves and any other factors deemed relevant by our board of directors. Generally, a final dividend is declared out of profits disclosed by the accounts presented to the annual general meeting, and requires approval of our shareholders. However, our board of directors can declare interim dividends without approval of our shareholders.
Bonus and Rights Issues
In a general meeting, our shareholders may, upon the recommendation of the directors, capitalize any reserves or profits and distribute them as fully paid bonus shares to the shareholders in proportion to their shareholdings.
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Takeovers
The Singapore Code on Take-overs and Mergers, the Singapore Companies Act and the Securities and Futures Act, Chapter 289 of Singapore regulate, among other things, the acquisition of ordinary shares of Singapore-incorporated public companies. Any person acquiring an interest, whether by a series of transactions over a period of time or not, either on his own or together with parties acting in concert with such person, in 30% or more of our voting shares, or, if such person holds, either on his own or together with parties acting in concert with such person, between 30% and 50% (both amounts inclusive) of our voting shares, and if such person (or parties acting in concert with such person) acquires additional voting shares representing more than 1% of our voting shares in any six-month period, must, except with the consent of the Securities Industry Council in Singapore, extend a mandatory takeover offer for the remaining voting shares in accordance with the provisions of the Singapore Code on Take-overs and Mergers.
“Parties acting in concert” comprise individuals or companies who, pursuant to an agreement or understanding (whether formal or informal), cooperate, through the acquisition by any of them of shares in a company, to obtain or consolidate effective control of that company. Certain persons are presumed (unless the presumption is rebutted) to be acting in concert with each other. They include:
| · | a company and its related companies, the associated companies of any of the company and its related companies, companies whose associated companies include any of these companies and any person who has provided financial assistance (other than a bank in the ordinary course of business) to any of the foregoing for the purchase of voting rights; |
| · | a company and its directors (including their close relatives, related trusts and companies controlled by any of the directors, their close relatives and related trusts); |
| · | a company and its pension funds and employee share schemes; |
| · | a person and any investment company, unit trust or other fund whose investment such person manages on a discretionary basis but only in respect of the investment account which such person manages; |
| · | a financial or other professional adviser, including a stockbroker, and its clients in respect of shares held by the adviser and persons controlling, controlled by or under the same control as the adviser and all the funds managed by the adviser on a discretionary basis, where the shareholdings of the adviser and any of those funds in the client total 10% or more of the client’s equity share capital; |
| · | directors of a company (including their close relatives, related trusts and companies controlled by any of such directors, their close relatives and related trusts) which is subject to an offer or where the directors have reason to believe a bona fide offer for the company may be imminent; |
| · | partners; and |
| · | an individual and such person’s close relatives, related trusts, any person who is accustomed to act in accordance with such person’s instructions and companies controlled by the individual, such person’s close relatives, related trusts or any person who is accustomed to act in accordance with such person’s instructions and any person who has provided financial assistance (other than a bank in the ordinary course of business) to any of the foregoing for the purchase of voting rights. |
Subject to certain exceptions, a mandatory takeover offer must be in cash or be accompanied by a cash alternative at not less than the highest price paid by the offeror or parties acting in concert with the offeror during the offer period and within the six months preceding the acquisition of shares that triggered the mandatory offer obligation.
Under the Singapore Code on Take-overs and Mergers, where effective control of a company is acquired or consolidated by a person, or persons acting in concert, a general offer to all other shareholders is normally required. An offeror must treat all shareholders of the same class in an offeree company equally. A fundamental requirement is that shareholders in the company subject to the takeover offer must be given sufficient information, advice and time to consider and decide on the offer. These legal requirements may impede or delay a takeover of our company by a third-party.
In October 2014, the Securities Industry Council of Singapore waived application of the Singapore Code on Take-overs and Mergers to the Company, subject to certain conditions. Pursuant to the waiver, for as long as Kenon is not listed on a securities exchange in Singapore, and except in the case of a tender offer (within the meaning of U.S. securities laws) where the offeror relies on a Tier 1 exemption to avoid full compliance with U.S. tender offer regulations, the Singapore Code on Take-overs and Mergers shall not apply to Kenon.
Insofar as the Singapore Code on Take-overs and Mergers applies to Kenon, the Singapore Code on Take-overs and Mergers generally provides that the board of directors of Kenon should bring the offer to the shareholders of Kenon in accordance with the Singapore Code on Take-overs and Mergers and refrain from an action which will deny the shareholders from the possibility to decide on the offer.
126
Liquidation or Other Return of Capital
On a winding-up or other return of capital, subject to any special rights attaching to any other class of shares, holders of ordinary shares will be entitled to participate in any surplus assets in proportion to their shareholdings.
Limitations on Rights to Hold or Vote Ordinary Shares
Except as discussed above under “—Takeovers,” there are no limitations imposed by the laws of Singapore or by our constitution on the right of non-resident shareholders to hold or vote ordinary shares.
Limitations of Liability and Indemnification Matters
Our constitution currently provides that, subject to the provisions of the Singapore Companies Act and every other act applicable to Kenon, every director, secretary or other officer of our company or our subsidiaries and affiliates shall be entitled to be indemnified by our company against all costs, charges, losses, expenses and liabilities incurred by him or her in the execution and discharge of his or her duties (and where he serves at our request as a director, officer, employee or agent of any of our subsidiaries or affiliates) or in relation thereto and in particular and without prejudice to the generality of the foregoing, no director, secretary or other officer of our company shall be liable for the acts, receipts, neglects or defaults of any other director or officer or for joining in any receipt or other act for conformity or for any loss or expense happening to our company through the insufficiency or deficiency of title to any property acquired by order of the directors for or on behalf of our company or for the insufficiency or deficiency of any security in or upon which any of the moneys of our company shall be invested or for any loss or damage arising from the bankruptcy, insolvency or tortious act of any person with whom any moneys, securities or effects shall be deposited or left or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his or her office or in relation thereto unless the same shall happen through his or her own negligence, default, breach of duty or breach of trust.
The limitation of liability and indemnification provisions in our constitution may discourage shareholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our shareholders. A shareholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act of 1933, or the Securities Act, may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable.
Comparison of Shareholder Rights
We are incorporated under the laws of Singapore. The following discussion summarizes material differences between the rights of holders of our ordinary shares and the rights of holders of the common stock of a typical corporation incorporated under the laws of the state of Delaware which result from differences in governing documents and the laws of Singapore and Delaware.
This discussion does not purport to be a complete statement of the rights of holders of our ordinary shares under applicable law in Singapore and our constitution or the rights of holders of the common stock of a typical corporation under applicable Delaware law and a typical certificate of incorporation and bylaws.
| Transactions with controlling shareholders |
Assets, liabilities and benefits with respect to which a transaction is executed with the controlling shareholders are measured at fair value on the transaction date. The Group records the difference between the fair value and the consideration in equity.
F - 3437
Note 3 – Significant Accounting Policies (Cont’d)
New standards and interpretations not yet adopted |
International Financial Reporting Standard IFRS 16 “Leases” – The standard replaces IAS 17 – Leases and its related interpretations. The standard's instructions annul the existing requirement from lessees to classify leases as operating or finance leases. Instead of this, for lessees, the new standard presents a unified model for the accounting treatment of all leases according to which the lessee has to recognize an asset and liability in respect of the lease in its financial statements. Similarly, the standard determines new and expanded disclosure requirements from those required at present. The standard |
International Accounting Standard IAS 28 “Investments in Associates and Joint Ventures” – The amendment clarifies that: |
| - | a venture capital organisation, or other qualifying entity, may elect to measure its investments in an associate or joint venture at fair value through profit or loss on an investment-by-investment basis. |
| - | a non-investment entity investor may elect to retain the fair value accounting applied by an investment entity associate or investment entity joint venture to its subsidiaries. This election can be made separately for each investment entity associate or joint venture. |
Note 4 – Determination of Fair Value
| A. | Business Combinations |
The Group measures the value of the acquired assets, liabilities, and contingent liabilities considering the fair value basis from the date on which the Group took control. The criteria considered to measure the fair value of the main items were the following:
| · | Fixed assets were valued considering the market value provided by an appraiser; |
| · | Intangibles consider the valuation of Concessions; |
| · | Deferred taxes were valued based on the temporary differences between the accounting and tax basis of the business combination; |
| · | Non-controlling interests were measured as a proportional basis of the net assets identified on the acquisition date |
| · | Intangibles consider the valuation of its Power Purchase Agreements (PPAs); and, |
| · | Contingent liabilities were determined over the average probability established by third party legal processes. |
| B. | Cash Generating Unit for impairment testing |
See Note 15.C.14.C.
| C. | Derivatives and Qoros put option |
See Note 3230 regarding “Financial Instruments”.
| D. | Non-derivative financial liabilities |
Non-derivative financial liabilities are measured at their respective fair values, at initial recognition and for disclosure purposes, at each reporting date. Fair value for disclosure purposes, is determined based on the quoted trading price in the market for traded debentures, whereas for non-traded loans, debentures and other financial liabilities is determined by discounting the future cash flows in respect of the principal and interest component using the market interest rate as at the date of the report.
F - 3738
Note 5 – Cash and Cash Equivalents
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Cash in banks | 1,313,710 | 320,199 | 72,074 | 1,313,710 | ||||||||||||
| Time deposits | 103,678 | 6,436 | 59,049 | 103,678 | ||||||||||||
| Cash and cash equivalents | 1,417,388 | 326,635 | ||||||||||||||
| 131,123 | 1,417,388 | |||||||||||||||
The Group’s exposure to credit risk, interest rate risk and currency risk and a sensitivity analysis with respect to the financial assets and liabilities is detailed in Note 3230 “Financial Instruments”.
Note 6 – Short-Term investmentsInvestments and depositsDeposits
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Restricted cash and short-term deposits (1) | 7,085 | 89,475 | 49,881 | 7,085 | ||||||||||||
| Other | 59 | 70 | ||||||||||||||
| Others | 57 | 59 | ||||||||||||||
| 7,144 | 89,545 | 49,938 | 7,144 | |||||||||||||
| (1) |
Note 7 – Trade Receivables Net
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Trade Receivables | 44,137 | 285,100 | ||||||
| Less – allowance for doubtful debts | - | (568 | ) | |||||
| 44,137 | 284,532 | |||||||
| As at December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ Thousands | ||||||||
| Trade receivables | 35,548 | 44,137 | ||||||
The Group’s exposure to credit risk is detailed in Note 30 “Financial Instruments”.
Note 8 – Other Current Assets, Including Derivative Instruments
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Advances to suppliers | 673 | 141 | 827 | 673 | ||||||||||||
| Prepaid expenses | 1,818 | 6,039 | 1,740 | 1,818 | ||||||||||||
| Qoros put option (1) | 24,435 | - | ||||||||||||||
| Derivative instruments | 1,471 | 1,831 | 726 | 1,471 | ||||||||||||
| Government agencies | 7,408 | 14,677 | 5,362 | 7,408 | ||||||||||||
| Contingent consideration (a) | 18,004 | - | ||||||||||||||
| Other receivables (b) | 6,378 | 27,085 | ||||||||||||||
| Contingent consideration (2) | 4,500 | 18,004 | ||||||||||||||
| Other receivables | 3,924 | 6,378 | ||||||||||||||
| 35,752 | 49,773 | 41,514 | 35,752 | |||||||||||||
| Refer to Note 9.C.b.2. |
| (2) | This represents |
F - 3839
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Fuel and spare parts (a) | - | 91,659 | ||||||
Note 109 – Investment in Associated Companies
| A. | Condensed information regarding significant associated companies |
| 1. | Condensed financial information with respect to the statement of financial position |
| ZIM | Qoros* | |||||||||||||||
| As at December 31 | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| $ thousands | ||||||||||||||||
| Principal place of business | International | China | ||||||||||||||
| Proportion of ownership interest | 32 | % | 32 | % | 50 | % | 50 | % | ||||||||
| Current assets | 579,595 | 465,892 | 235,237 | 259,804 | ||||||||||||
| Non-current assets | 1,222,743 | 1,237,740 | 1,259,762 | 1,273,862 | ||||||||||||
| Current liabilities | (686,693 | ) | (530,842 | ) | (870,192 | ) | (773,946 | ) | ||||||||
| Non-current liabilities | (1,209,137 | ) | (1,273,447 | ) | (804,062 | ) | (695,484 | ) | ||||||||
| Non-controlling interests | (6,509 | ) | (3,125 | ) | - | — | ||||||||||
| Total net assets attributable to the Group | (100,001 | ) | (103,782 | ) | (179,255 | ) | 64,236 | |||||||||
| Share of Group in net assets | (32,000 | ) | (33,210 | ) | (89,627 | ) | 32,118 | |||||||||
| Adjustments: | ||||||||||||||||
| Write back/(impairment) of assets and investments | 28,758 | (72,263 | ) | — | — | |||||||||||
| Excess cost | 123,242 | 187,216 | — | — | ||||||||||||
| Loans | — | — | 61,645 | 55,798 | ||||||||||||
| Financial guarantee | — | — | 29,676 | 29,677 | ||||||||||||
| Book value of investment | 120,000 | 81,743 | 1,694 | 117,593 | ||||||||||||
| ZIM | Qoros* | |||||||||||||||
| As at December 31, | ||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| $ Thousands | ||||||||||||||||
| Principal place of business | International | China | ||||||||||||||
| Proportion of ownership interest | 32% | 32% | 24% | 50% | ||||||||||||
| Current assets | 746,636 | 579,595 | 724,697 | 235,237 | ||||||||||||
| Non-current assets | 1,079,501 | 1,222,743 | 1,188,996 | 1,259,762 | ||||||||||||
| Current liabilities | (932,969 | ) | (686,693 | ) | (939,950 | ) | (804,062 | ) | ||||||||
| Non-current liabilities | (1,117,180 | ) | (1,209,137 | ) | (534,720 | ) | (870,192 | ) | ||||||||
| Non-controlling interests | (6,282 | ) | (6,509 | ) | - | - | ||||||||||
| Total net (liabilities)/assets attributable to the Group | (230,294 | ) | (100,001 | ) | 439,023 | (179,255 | ) | |||||||||
| Share of Group in net (liabilities)/assets | (73,694 | ) | (32,000 | ) | 105,366 | (89,627 | ) | |||||||||
| Adjustments: | ||||||||||||||||
| Write back of assets and investments | - | 28,758 | - | - | ||||||||||||
| Currency translation | - | - | 33,818 | - | ||||||||||||
| Excess cost | 165,290 | 123,242 | - | - | ||||||||||||
| Loans | - | - | - | 61,645 | ||||||||||||
Financial guarantee | - | - | - | 29,676 | ||||||||||||
| Book value of investment | 91,596 | 120,000 | 139,184 | 1,694 | ||||||||||||
| Assets held for sale | - | - | 69,592 | - | ||||||||||||
| Investment in associated companies | 91,596 | 120,000 | 69,592 | 1,694 | ||||||||||||
| * | Qoros is |
F - 3940
Note 109 – Investment in Associated Companies (Cont’d)
| 2. | Condensed financial information with respect to results of operations |
| ZIM | Tower* | Qoros** | ||||||||||||||||||||||||||
| For the year ended December 31 | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||||||
| Revenues | 2,978,291 | 2,539,296 | 2,991,135 | 461,778 | 280,079 | 377,456 | 232,114 | |||||||||||||||||||||
| (Loss) / income *** | 6,235 | (168,290 | ) | 2,253 | (737 | ) | (242,395 | ) | (285,069 | ) | (392,427 | ) | ||||||||||||||||
| Other comprehensive (loss) / income *** | (3,871 | ) | (12,351 | ) | (1,948 | ) | — | 31 | 7 | (19 | ) | |||||||||||||||||
| Total comprehensive (loss) / income | 2,364 | (180,641 | ) | 305 | (737 | ) | (242,364 | ) | (285,062 | ) | (392,446 | ) | ||||||||||||||||
| Kenon’s share of comprehensive | ||||||||||||||||||||||||||||
| (loss) / income | 756 | (57,805 | ) | 98 | (189 | ) | (121,182 | ) | (142,531 | ) | (196,223 | ) | ||||||||||||||||
| Adjustments | 8,538 | 9,856 | 9,418 | (609 | ) | (16 | ) | (3 | ) | — | ||||||||||||||||||
| Kenon’s share of comprehensive | ||||||||||||||||||||||||||||
| (Loss) / Income presented in the books | 9,294 | (47,949 | ) | 9,516 | (798 | ) | (121,198 | ) | (142,534 | ) | (196,223 | ) | ||||||||||||||||
| ZIM | Qoros* | |||||||||||||||||||||||
| For the year ended December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||||||||
| $ Thousands | ||||||||||||||||||||||||
| Revenue | 3,247,864 | 2,978,291 | 2,539,296 | 811,997 | 280,079 | 377,456 | ||||||||||||||||||
| (Loss) / income ** | (125,653 | ) | 6,235 | (168,290 | ) | (330,023 | ) | (242,395 | ) | (285,069 | ) | |||||||||||||
| Other comprehensive (loss) / income ** | (6,057 | ) | (3,871 | ) | (12,351 | ) | (23 | ) | 31 | 7 | ||||||||||||||
| Total comprehensive (loss) / income | (131,710 | ) | 2,364 | (180,641 | ) | (330,046 | ) | (242,364 | ) | (285,062 | ) | |||||||||||||
| Kenon’s share of comprehensive | ||||||||||||||||||||||||
| (loss) / income | (42,147 | ) | 756 | (57,805 | ) | (79,211 | ) | (121,182 | ) | (142,531 | ) | |||||||||||||
| Adjustments | 13,290 | 8,538 | 9,856 | 873 | (16 | ) | (3 | ) | ||||||||||||||||
| Kenon’s share of comprehensive | ||||||||||||||||||||||||
| (loss) / income presented in the books | (28,857 | ) | 9,294 | (47,949 | ) | (78,338 | ) | (121,198 | ) | (142,534 | ) | |||||||||||||
| * |
| Excludes portion attributable to non-controlling interest. |
F - 4041
Note 109 – Investment in Associated Companies (Cont’d)
| B. | Associated companies that are individually immaterial |
| Associated Companies | ||||||||||||
| As at December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| $ thousands | ||||||||||||
| Book value of investments as at December 31 | - | 8,897 | 9,008 | |||||||||
| Associated Companies | ||||||||||||
| As at December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| $ Thousands | ||||||||||||
| Book value of investments as at December 31 | - | - | 8,897 | |||||||||
| C. | Additional information |
| a. | ZIM |
| 1. | The container shipping industry is dynamic and volatile and has been marked in recent years by instability, which is characterized by |
In view of the aforementioned business environment, the volatile bunker prices and in order to improve ZIM’s results of operations and liquidity position, Management continues to optimize ZIM’s network rationalizations including establishment of new partnerships, invest in upgrading customer services and constantly strive to create and maintain efficiencies and cost reductions. However, an adverse trend could negatively affect the entire industry and also affect ZIM’s business, financial position, assets value, results of operations, cash flows and compliance with certain financial covenants.
As of December 31, 2018 ZIM’s total equity amounted to a negative balance of $224 million (compared to negative balance of $93 million as of December 31, 2017) and its working capital amounted to a negative balance of $186 million (compared to negative balance of $107 million as of December 31, 2017).
During the year ended December 31, 2018, ZIM recorded operating loss of $29 million (compared to operating profit of $135 million during the year ended December 31, 2017 and operating loss of $52 million during the year ended December 31, 2016) and net loss of $120 million (compared to net profit of $11 million during the year ended December 31, 2017 and net loss of $164 million during the year ended December 31, 2016).
As at December 31, 2018, ZIM complies with its financial covenants as amended (see below), ZIM’s liquidity amounts to $187 million (Minimum Liquidity required is $125 million).
In order to improve its financial position and liquidity, during the second half of 2016, ZIM took the following steps:
(a) ZIM recorded operating profit of $135 million (compared to operating loss of $52 million during the year ended December 31, 2016 and operating profit of $98 million during the year ended December 31, 2015) and net profit of $11 million (compared to net loss of $164 million during the year ended December 31, 2016 and net profit of $7 million during the year ended December 31, 2015).
Below are the main components of the agreements reached:
| 1) | Deferral of payments in a total amount of $116 million (the “Deferred Amounts”), during a period of up to 12 months starting on September 30, 2016, each creditor with relation to its specific contracts. The repayment of the Deferred Amounts will begin as from January 1, 2018 on a straight line basis and will end on December 31, 2020 (the “Repayment Period”). In case any respective agreement expires before the end of the Repayment Period, the unpaid balance of Deferred Amounts will be paid in full upon expiration. |
| 2) | The Deferred Amounts bear interest, at an annual rate of Libor + 2.8% paid quarterly in cash. |
| 3) | ZIM granted security related to its rights and interests deriving from certain of its receivables, for securing the repayment of the Deferred Amounts (using a similar receivable-backed facility as described in No). The balance of the secured Deferred Amounts as of December 31, $58 million. |
| 4) | In case of excess cash, as defined in the rescheduling agreements, a mechanism of mandatory prepayments of the abovementioned rescheduled amounts and their related accrued interest, will apply. |
Further to such rescheduling, certain agreements of containers leases previously classified as operational leases were reclassified as financial leases, resulting in recognition of additional assets and liabilities in a total amount of US$ 73$73 million.
F - 4142
Note 109 – Investment in Associated Companies (Cont’d)
| ZIM obtained amendments to its financial covenants in |
| 1) | Fixed Charge Cover ratio |
| 2) | Total Leverage ratio - |
| 3) | Minimum Liquidity - This covenant was amended as from March 31, 2016 to include all cash and cash equivalents available to ZIM without any restrictions. In addition, during 2016 and through (and including) September 30, 2016 ZIM was required to stand a minimum liquidity of |
ZIM obtained additional waivers from its creditors for compliance with certain covenants in July 2018 (except for the minimum liquidity requirement, which continues to apply) and is required to comply with these covenants beginning in March 2020, and repay the deferred amounts on a straight line basis, during a period of up to 36 months, ending on December 31, 2020. As at December 31, 2017, 2018, ZIM is in compliance with its financial covenants. According to these consolidated Financial Statements, ZIM’s liquidity amounts to $182$187 million (Minimum Liquidity required is $125$125 million).
ZIM’s financial position, liquidity and the risk of deviation from financial covenants depend on the recovery of the shipping industry and especially the freight rates. Current economic conditions make forecasting difficult, and there is possibility that actual performance may be materially different from Management plans and expectations.
In the opinion of ZIM’s management and its Board of Directors, the updated forecast and the abovementioned actions with regards to rescheduling of payments and covenants amendment,amendments and waivers described above, enables ZIM to meet its liabilities and operational needs and to comply with the new set of financial covenants for a period of at least 12 months following the balance sheet date.
| 2. | Further to the recent trends in the shipping industry, ZIM tested its assets for impairment based on IAS 36, where ZIM operates an integrated liner network, as one cash-generating unit (“CGU”). ZIM estimated its recoverable amount on the basis of fair value less costs to sell, using the discounted cash flow (“DCF”) method, measured at Level 3 fair value measurement under IFRS 13. The impairment test resulted with a recoverable amount exceeding the carrying amount of the CGU with a range between |
For the year ended December 31, 2016, Kenon recognized an impairment loss of $72 million in relation to its carrying value of ZIM. Based on a valuation performed at the above assessment,end of 2017, Kenon will record a recorded an impairment write-back impairment of $29 million, in write back/(impairment) of assets and investments, bringing the carrying value inof ZIM as at December 31, 2017 to $120 million.
| During 2016, ZIM sold a portion of its holdings in an associated company and ceased to have significant influence over such investee. ZIM recognized a disposal gain in an amount of $16 million, Kenon's share of the disposal gain is $5 million and is recognized in share of net income and losses from associated companies. |
| During 2017 and 2018, ZIM did not sell any of its holdings. |
F - 43
Note 9 – Investment in Associated Companies (Cont’d)
| b. | Qoros Automotive Co. Ltd. (“Qoros”) |
| 1. | As at December 31, |
In January 2019, Kenon further announced that it had entered into an agreement to sell half of its remaining interest in Qoros (i.e. 12%) to the New Qoros Investor, giving the latter a 63% equity interest in Qoros on completion. Chery’s equity interest in Qoros will remain at 25%, and Quantum’s equity interest in Qoros will be reduced to 12% (see Note 31.1.A).
| 2. | Qoros |
In January 2018, the New Qoros Investor purchased 51% of Qoros from Kenon and Chery for RMB 3.315 billion (approximately $501 million); this was part of an investment structure to invest a total of approximately RMB 6.63 billion (approximately $1,002 million) by the New Qoros Investor. In connection with this investment, Kenon received total cash proceeds of RMB 1.69 billion ($260 million) from the dilution.
In July 2018, the relevant authorities in China approved the completion of a capital increase in Qoros of RMB 6.5 billion (approximately $932 million) including the conversion of existing shareholder loans owing from Qoros in the principal amount of RMB 944 million (approximately $143 million) to each of Kenon and Chery. Qoros’ shareholders (including the New Qoros Investor) have invested a total of RMB 6.5 billion (approximately $982 million) in Qoros’ equity in proportion to their post-investment equity ownership to finalise the capital increase. The New Qoros Investor has advanced their proportionate share totaling RMB 3.315 billion (approximately $501 million) directly to Qoros. As a result, all funds for the investment, totaling RMB 6.63 billion (approximately $1,002 million) have now been advanced by the New Qoros Investor. In August 2018, Kenon used RMB 0.62 billion (approximately $90 million) of the proceeds they received from the sale of their Qoros interests to partially fund their portion of the investment in Qoros together with the conversion of RMB 0.94 billion (approximately $137 million) of existing shareholder loans. The transaction did not involve any new money invested from Kenon and Kenon has no remaining obligations to Qoros.
As part of the Investment Agreement, Kenon has a put option to sell its remaining interest in Qoros to the New Qoros Investor for total consideration of RMB 3.12 billion (approximately $454 million), exercisable in two stages. The New Qoros Investor has an option exercisable over the next two years to increase its stake to 67% by investing further directly into Qoros.
As a result of the transaction, Kenon recognized a gain on third party investment in Qoros of approximately $504 million for the year ended December 31, 2018. The gain includes recognition of Kenon’s put option in relation to Qoros which was initially valued at approximately $130 million. It was subsequently reduced by approximately $40 million to approximately $90 million as a result of fair value assessment at December 31, 2018 (the put option is presented in the accompanying balance sheet under other current assets, including derivative instruments and non-current deposits, loans and other receivables, including derivative instruments).
| 3. | As at December 31, |
| 4. |
Qoros incurred a net loss of |
Qoros has given careful consideration to the future of its liquidity. With its available sources of finance and the addition of the New Strategic Partner, Qoros believes it will have sufficient financial resources to continue as a going concern for the next twelve months.
F - 44
Note 9 – Investment in Associated Companies (Cont’d)
Ansonia Loans |
| a. | Overview |
On April 22 and September 2, 2016, Ansonia Holdings Singapore B.V. ("Ansonia"), which owns approximately 58% of the outstanding shares of Kenon, entered an agreement to provide loans (“Ansonia loans”) in an aggregate amount of up to RMB 450 million ($69 million) with an interest rate of 6% per annum, through Quantum, to support Qoros. Wuhu Chery completed its provision of loans to Qoros in the same amount and on similar conditions. Set forth below is an overview
Following the transaction with the New Qoros Investor and the conversion of Quantum’s shareholder loans in Qoros to equity as described above, the Ansonia loans as of December 31, 2017:
| Date Granted | RMB million | Plus certain interest | Convertible into Equity Discount Rate 1 | Loan Transfer Date from Quantum to Qoros 2 |
| Tranche 1 / Apr 2016 | 150 | 6% | 10% | May 20, 2016 |
| Tranche 2 / Apr 2016 | 150 | June 28, 2016 | ||
| Tranche 3 / Sep 2016 | 150 | 25% | September 6, 2016 | |
| Total | 450 ($69 million) | |||
Financial Guarantees Provision and Releases |
| Loans | Timing | Amount of Loans to Qoros | Amount of Guarantee Obligations Prior to Investment | Release of Kenon Guarantees to Chery | Remaining Guarantee Obligations Post-Investment | Pledge of Qoros Shares in relation to Investment |
| in RMB million | ||||||
| First Tranche | March 2017 | 388.5 | 850 1 | 425 3 | 425 | 5.17% |
| Second Tranche | April 2017 | 100 | 425 | 105 3 | 320 | 5.17% |
| Third Tranche | At Kenon's discretion | 288.5 | 320 | 320 3 | — | |
| Total | 777 | — | 850 3 | — | 10.3%2 | |
| a. | In July 2012, Chery provided a guarantee to the banks, in the amount of RMB1.5 billion ($242 million), in relation to an agreement with the banks to provide Qoros a loan, in the amount of RMB3 billion ($482 million). In November 2015, Kenon |
| b. | On May 12, 2015, Qoros |
| c. | On June 15, 2015, this Facility was |
| d. |
| On July 31, 2014, in order to secure additional funding for Qoros of approximately RMB 1.2 billion ($200 million as of August 7, 2014) IC pledged a portion of its shares (including dividends derived therefrom) in Qoros, in proportion to its share in Qoros’s capital, in favor of the Chinese bank providing Qoros with such financing. Simultaneously, the subsidiary of Chery that holds Chery’s rights in Qoros also pledged a proportionate part of its rights in Qoros. Such financing agreement includes, inter alia, liabilities, provisions regarding covenants, events of immediate payment and/or early payment for violations and/or events specified in the agreement. The lien agreement includes, inter alia, provisions concerning the ratio of securities and the pledging of further securities in certain circumstances, including pledges of up to all of Quantum’s shares in Qoros (or cash), provisions regarding events that would entitle the Chinese Bank to exercise the lien, certain representations and covenants, and provisions regarding the registration and approval of the lien. |
As part of the reduction of guarantee obligations in Note 10.C.b.7,9.C.b.6, Kenon has pledged approximately 9% of the outstanding shares of Qoros to Chery to secure the amount of the back-to-back guarantee reduction. Chery may also borrow from Kenon up to 5% of Qoros' outstanding shares to meet its pledge obligations under the abovementioned RMB 1.2 billion loan facility. As of December 31, 2016, in relation to this loan facility of RMB 1.2 billion, Kenon and Chery have each pledged 22.6% of its equity interest in Qoros.
| On June 30, 2016, Kenon increased its previously recognized provision of $30 million to $160 million in respect to Kenon’s “back-to-back” guarantee obligations to Chery (RMB1,100 million), in respect of guarantees that Chery has given for Qoros’ bank debt and has pledged a portion of its interests in Qoros to secure Qoros’ bank debt. In addition to the current liquidity needs of Qoros, its financial position and Kenon’s strategic intent, the provision was made due to uncertainty in the Chinese automobile market. As a result, Kenon recognized a $130 million charge to expense for such financial guarantees in its consolidated statement of profit or loss in 2016. |
These back-to-back guarantees consist of (i) a back-to-back guarantee of one-half of the principal amount of Chery’s guarantee of RMB1.5 billion with respect to Qoros’ RMB3 billion facility, and (ii) a back-to-back guarantee of one-half of the principal amount of Chery’s guarantee of Qoros’ RMB700 million facility, and interest and fees, if applicable.
F - 45
Note 9 – Investment in Associated Companies (Cont’d)
| f. | On December 25, 2016. Kenon has agreed to provide a RMB250 million (approximately $36 million) shareholder loan to Qoros, and in relation to this loan, the maximum amount of Kenon’s back-to-back guarantee obligations to Chery was reduced by RMB250 million. As part of the loan to Qoros, Kenon’s back-to-back guarantee obligations to Chery with respect to Chery’s guarantee of Qoros’ RMB3 billion loan facility with the Export-Import Bank of China (“EXIM Bank”) were reduced by one third, and the maximum amount of Kenon’s obligations under this back-to-back guarantee (subject to certain obligations to negotiate fees and interest) were reduced from RMB750 million to RMB500 million (approximately $72 million). In addition, Ansonia committed to fund RMB25 million (approximately $4 million) of Kenon’s remaining back-to-back guarantee obligations to Chery in certain circumstances (“Ansonia Commitment”). |
Chery agreed to make a corresponding RMB250 million loan to Qoros. The proceeds of these loans were used to support Qoros’ ordinary course working capital requirements and Qoros’ investments in new initiatives, such as new-energy vehicles, while it continues its fund raising efforts.
As part of this transaction, Quantum pledged approximately 9% of the outstanding shares of Qoros to Chery to secure the amount of the back-to-back guarantee reduction. Chery may also borrow from Quantum up to 5% of Qoros’ outstanding equity to meet its pledge obligations under the Qoros RMB 1.2 billion loan facility with EXIM Bank.
Kenon has been informed that, in order to facilitate Kenon’s above mentioned reduction in Kenon’s back-to-back guarantee obligations to Chery, an affiliate of Kenon’s major shareholder has given certain undertakings to Chery with respect to the released guarantee obligations.
| g. | On March 10, 2017, Kenon announced that it had agreed to fund up to RMB777 million (approximately $114 million) to Qoros in relation to the full release of its remaining RMB825 million (approximately $125 million) back-to-back guarantee obligations to Chery in two tranches, which releases Kenon from commitments to pay any related interest and fees to Chery under the guarantees. |
On March 10, 2017, Kenon transferred RMB388.5 million (approximately $57 million) ("First Tranche Loans") to Qoros in relation to a reduction of RMB425 million (approximately $64 million) of Kenon's back-to-back guarantee obligations to Chery, including related interest and fees; the provision of the Second Tranche Loans was at Kenon's discretion.
As part of the First Tranche Loans, in relation to 50% reduction of the guarantee, Kenon funded 50% of such loans for Kenon and 50% on behalf of Chery. The proceeds of the First Tranche Loans were used to support Qoros' ordinary course working capital requirements, debt service requirements and investments in new initiatives, such as new-energy vehicles. The transactions enabled Kenon to support Qoros and its fundraising efforts, while reducing its back-to-back guarantee obligations to Chery.
On April 25, 2017, Kenon funded RMB100 million (approximately $16 million) as part of the remaining provision of RMB388.5 million to Qoros (the “Second Tranche Loans”) on similar terms in connection with the remaining RMB425 million reduction in its back-to-back guarantees.
In the event that Chery's obligations under its guarantees are reduced, Kenon is entitled to the proportionate return from Chery of the loans provided on Chery's behalf (i.e., up to RMB388.5 million (approximately $57 million) with respect to the First Tranche Loans and the Second Tranche Loans) and the release of the pledges described above.
Following completion of the transaction with the New Qoros Investor in 2018, the New Qoros Investor was required to assume its pro rata share of guarantees and equity pledges of Kenon and Chery based on the changes to its equity ownership. As a result, Chery returned approximately RMB119 million (approximately $18 million) to Kenon in relation to loans previously provided by Kenon on Chery’s behalf (see above).
As at December 31, 2017, Kenon’s remaining liability under its guarantee obligations totals RMB320 million in respect of RMB288.5 million (approximately $44 million) principal amount of debt. As at December 31, 2018, all provisions related to financial guarantees have been released. This is a result of Kenon’s assessment that, following the investment into Qoros by the New Qoros Investor, the likelihood of future cash payments in relation to the guarantees is now not probable.
F - 46
Note 9 – Investment in Associated Companies (Cont’d)
Set forth below is an overview of the financial guarantees provided by Kenon as described above:
| Date | Description | Amount (US$ million) | ||||
| June 2016 | Provision in respect of Kenon’s “back-to-back” guarantee obligations to Chery (See Note 9.C.b.6.e) | 160 | ||||
| December 2016 | Shareholder loan to Qoros (See Note 9.C.b.6.f) | (36 | ) | |||
| March 2017 | Transfer of First Tranche Loans (See Note 9.C.b.6.f) | (64 | ) | |||
| April 2017 | Transfer of Second Tranche Loans (See Note 9.C.b.6.g) | (16 | ) | |||
| January 2018 | Release of remaining financial guarantees (See Note 9.C.b.6.g) | (44 | ) | |||
| December 2018 | Year end balance | - | ||||
In addition, as at December 31, 2018, Quantum has pledged approximately 1% of the equity of Qoros to Chery in relation to the back-to-back guarantees, which pledges are enforceable to the extent Kenon would have been required to make payments under such guarantees but for the guarantee releases. Quantum has also pledged approximately 11% of the equity of Qoros in relation to Qoros’ RMB1.2 billion loan facility.
| 7. | Business Plans |
| D. | Details regarding dividends received from associated companies |
| For the Year Ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| $ thousands | ||||||||||||
| From associated companies | 382 | 743 | 4,487 | |||||||||
| For the Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| $ Thousands | ||||||||||||
| From associated companies | - | 382 | 743 | |||||||||
| E. | Restrictions |
Qoros
Qoros has restrictions with respect to distribution of dividends and sale of assets deriving from legal and regulatory restrictions, restrictions under the joint venture agreement and the Articles of Association and restrictions stemming from credit received.
F - 47
Note 9 – Investment in Associated Companies (Cont’d)
ZIM
The holders of ordinary shares of ZIM are entitled to receive dividends when declared and are entitled to one vote per share at meetings of ZIM. All shares rank equally with regard to the ZIM's residual assets, except as disclosed below.
In the framework of the process of privatizing ZIM, all the State of Israel’s holdings in ZIM (about 48.6%) were acquired by IC pursuant to an agreement from February 5, 2004. As part of the process, ZIM allotted to the State of Israel a special State share so that it could protect the vital interests of the State.
On July 14, 2014 the State and ZIM have reached a settlement agreement (the “Settlement Agreement”) that has been validated as a judgment by the Supreme Court. The Settlement Agreement provides, inter alia, the following arrangement shall apply:apply: the State’s consent is required to any transfer of the shares in ZIM which confers on the holder a holding of 35% and more of the ZIM’s share capital. In addition, any transfer of shares which confers on the holders a holding exceeding 24% but not exceeding 35%, shall require prior notice to the State. To the extent the State determines that the transfer involves a potential damage to the State’s security or any of its vital interests or if the State did not receive the relevant information in order to formulate a decision regarding the transfer, the State shall be entitled to inform, within 30 days, that it objects to the transfer, and it will be required to reason its objection. In such an event, the transferor shall be entitled to approach a competent court on this matter.
The Special State Share, and the permit which accompanies it, also imposes transferability restrictions on our equity interest in ZIM. Furthermore, although there are no contractual restrictions on any sales of our shares by our controlling shareholders, if major shareholders’ ownership interest in Kenon (controlling shareholders of Kenon) is less than 36%, or major shareholders cease to be the controlling shareholder, or sole controlling shareholder of Kenon, then Kenon’s rights with respect to its shares in ZIM (e.g., Kenon’s right to vote and receive dividends in respect of its ZIM shares),will be limited to the rights applicable to an ownership of 24% of ZIM, until or unless the State of Israel provides its consent, or does not object to, this decrease in major shareholders’ ownership or “control” (as defined in the State of Israel consent received by IC in relation to the spin-off). The State of Israel may also revoke Kenon’s permit if there is a material change in the facts upon which the State of Israel’s consent was based, upon a breach of the provisions of the Special State Share by Kenon, Mr. Ofer, or ZIM, or if the cancellation of the provisions of the Special State Share with respect to a person holding shares in ZIM contrary to the Special State Share’s provisions apply (without limitation).
The Special State Share is non-transferable. Except for the rights attached to the said share, it does not confer upon its holder voting rights or any share capital related rights.
| F. | Assets held for sale |
On January 8, 2019, Kenon announced that it had entered into an agreement to sell half of its remaining interest in Qoros (i.e. 12%) to the New Qoros Investor in Qoros for a purchase price of RMB1,560 million (approximately $227 million), which is based on the same post-investment valuation as the initial investment by the New Qoros Investor in Qoros. The sale is subject to obtaining customary relevant third-party consents and other closing conditions, including approvals by relevant government authorities. Following completion of the sale, Kenon will hold a 12% interest in Qoros, the New Qoros Investor in Qoros will hold 63% and Chery will own 25%. Kenon’s equity interest in Qoros being sold as per the agreement mentioned above is shown in the balance sheet at its carrying value (equity accounted) under Assets held for sale. Refer to Note 31.1.A for more details.
F - 48
Note 1110 – Subsidiaries
| A. | Investments |
| 1. | O.P.C. Energy Ltd. (formerly part of the I.C. Power Ltd group) |
| a. |
Subsequent to the year end, an outline was determined for the expansion of the activities of the group to which OPC belongs (“the Idan Ofer Group”) in the area of generation of electricity from an economy-wide business concentration perspective. See Note 31.2.A.
Also subsequent to the date of the report, on January 3, 2019, OPC signed an agreement with the private shareholders in Tzomet, for which a trustee holds 5% of Tzomet’s share capital (hereinafter – “the Sellers”), whereby the Sellers will sell their shares in Tzomet to the Company (hereinafter – “the Sale Agreement” and “Shares Being Sold”, respectively) in increments, on a number of dates and subject to working capital adjustments.fulfillment of milestones.
| 2. |
| I.C. Green Energy Ltd (I.C. Green) | ||||
| a. | As of December 31, During 2018, I.C. Green granted PGE additional $7 million with interest of 2% annually. |
F - 5149
Note 1110 – Subsidiaries (Cont’d)
| B. | The following table summarizes the information relating to each of the Group’s subsidiaries in 2018, 2017 |
| As at and for the year ended December 31 | ||||||||||||||||||||||||||||||||||||
| 2017 | 2016* | 2015* | ||||||||||||||||||||||||||||||||||
OPC Energy Ltd. | Samay I.S.A | Nicaragua Energy Holding | Kallpa Generacion S.A. | Cerro del Aguila S.A. | Samay I.S.A | Nicaragua Energy Holding | Kallpa Generacion S.A. | Cerro del Aguila S.A. | ||||||||||||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||||||||||||||
| NCI percentage | 24.18 | % | 25.10 | % | 35.42 | % | 25.10 | % | 25.10 | % | 25.10 | % | 35.42 | % | 25.10 | % | 25.10 | % | ||||||||||||||||||
| Current assets | 204,461 | 75,485 | 41,630 | 108,246 | 53,843 | 47,766 | 43,390 | 92,120 | 23,841 | |||||||||||||||||||||||||||
| Non-current assets | 736,123 | 380,947 | 144,313 | 611,928 | 949,440 | 344,052 | 172,917 | 638,325 | 847,015 | |||||||||||||||||||||||||||
| Current liabilities | (99,441 | ) | (73,846 | ) | (26,053 | ) | (55,323 | ) | (85,935 | ) | (36,075 | ) | (22,044 | ) | (188,291 | ) | (25,909 | ) | ||||||||||||||||||
| Non-current liabilities | (667,996 | ) | (311,030 | ) | (100,834 | ) | (511,277 | ) | (618,219 | ) | (289,560 | ) | (121,142 | ) | (356,900 | ) | (556,277 | ) | ||||||||||||||||||
| Net assets | 173,147 | 71,556 | 59,056 | 153,574 | 299,129 | 66,183 | 73,121 | 185,254 | 288,670 | |||||||||||||||||||||||||||
| Carrying amount of NCI | 41,863 | 17,961 | 20,918 | 38,547 | 75,081 | 16,612 | 25,899 | 46,499 | 72,456 | |||||||||||||||||||||||||||
| Revenues | 365,395 | 40,000 | 90,017 | 438,475 | 49,646 | — | 111,428 | 447,679 | — | |||||||||||||||||||||||||||
| Profit/(loss) | 5,896 | 548 | 7,511 | 35,820 | 9 | (4,049 | ) | 14,469 | 44,088 | (8,579 | ) | |||||||||||||||||||||||||
| Other comprehensive income/(loss) | 8,514 | 4,825 | — | — | 10,449 | (6,057 | ) | — | (53 | ) | (1,079 | ) | ||||||||||||||||||||||||
| Profit attributable to NCI | 1,425 | 138 | 2,660 | 8,991 | 2 | (1,016 | ) | 5,125 | 11,066 | (2,153 | ) | |||||||||||||||||||||||||
| OCI attributable to NCI | 2,058 | 1,211 | — | — | 2,623 | (1,520 | ) | — | (13 | ) | (271 | ) | ||||||||||||||||||||||||
| Cash flows from operating activities | 110,290 | (1,276 | ) | 17,737 | 114,838 | 25,629 | — | 42,480 | 120,438 | — | ||||||||||||||||||||||||||
| Cash flows from investing activities | (154,194 | ) | (60,468 | ) | (931 | ) | (16,082 | ) | (69,372 | ) | (236,207 | ) | (5,088 | ) | (13,589 | ) | (180,771 | ) | ||||||||||||||||||
| Cash flows from financing activities excluding dividends paid to non-controlling interests | 165,107 | — | (4,004 | ) | (16,943 | ) | — | 138,000 | (26,139 | ) | (91,084 | ) | 95,000 | |||||||||||||||||||||||
| Dividends paid to non-controlling interests | (4,159 | ) | 47,088 | (26,440 | ) | (88,911 | ) | 62,823 | — | (4,401 | ) | (7,530 | ) | — | ||||||||||||||||||||||
| Effect of changes in the exchange rate on cash and cash equivalents | 7,126 | 373 | (348 | ) | 198 | 369 | (3,266 | ) | (489 | ) | (5,334 | ) | (2,929 | ) | ||||||||||||||||||||||
| Net increase/(decrease) in cash equivalents | 124,170 | (14,283 | ) | (13,986 | ) | (6,900 | ) | 19,449 | (101,473 | ) | 6,363 | 2,901 | (88,700 | ) | ||||||||||||||||||||||
| As at and for the year ended December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | 2016* | ||||||||||||||||||||||
| OPC Energy Ltd. | OPC Energy Ltd. | Samay I.S.A | Nicaragua Energy Holding | Kallpa Generacion S.A. | Cerro del Aguila S.A. | |||||||||||||||||||
| $ Thousands | ||||||||||||||||||||||||
| NCI percentage ** | 32.23 | % | 34.82 | % | 25.10 | % | 35.42 | % | 25.10 | % | 25.10 | % | ||||||||||||
| Current assets | 184,211 | 204,461 | 75,485 | 41,630 | 108,246 | 53,843 | ||||||||||||||||||
| Non-current assets | 720,469 | 736,123 | 380,947 | 144,313 | 611,928 | 949,440 | ||||||||||||||||||
| Current liabilities | (77,792 | ) | (99,441 | ) | (73,846 | ) | (26,053 | ) | (55,323 | ) | (85,935 | ) | ||||||||||||
| Non-current liabilities | (624,570 | ) | (667,996 | ) | (311,030 | ) | (100,834 | ) | (511,277 | ) | (618,219 | ) | ||||||||||||
| Net assets | 202,318 | 173,147 | 71,556 | 59,056 | 153,574 | 299,129 | ||||||||||||||||||
| Carrying amount of NCI | 65,215 | 60,290 | 17,961 | 20,918 | 38,547 | 75,081 | ||||||||||||||||||
| Revenues | 363,262 | 365,395 | 40,000 | 90,017 | 438,475 | 49,646 | ||||||||||||||||||
| Profit | 26,266 | 15,934 | 548 | 7,511 | 35,820 | 9 | ||||||||||||||||||
| Other comprehensive (loss)/income | (14,280 | ) | 8,514 | 4,825 | — | — | 10,449 | |||||||||||||||||
| Profit attributable to NCI | 11,396 | 8,323 | 138 | 2,660 | 8,991 | 2 | ||||||||||||||||||
| OCI attributable to NCI | (4,554 | ) | 3,686 | 1,211 | — | — | 2,623 | |||||||||||||||||
| Cash flows from operating activities | 85,581 | 110,290 | (1,276 | ) | 17,737 | 114,838 | 25,629 | |||||||||||||||||
| Cash flows from investing activities | (102,080 | ) | (154,194 | ) | (60,468 | ) | (931 | ) | (16,082 | ) | (69,372 | ) | ||||||||||||
| Cash flows from financing activities excluding dividends paid to non-controlling interests | (34,474 | ) | 165,107 | — | (4,004 | ) | (16,943 | ) | — | |||||||||||||||
| Dividends paid to non-controlling interests | — | (4,159 | ) | 47,088 | (26,440 | ) | (88,911 | ) | 62,823 | |||||||||||||||
| Effect of changes in the exchange rate on cash and cash equivalents | (7,570 | ) | 7,126 | 373 | (348 | ) | 198 | 369 | ||||||||||||||||
| Net (decrease)/increase in cash and cash equivalents | (58,543 | ) | 124,170 | (14,283 | ) | (13,986 | ) | (6,900 | ) | 19,449 | ||||||||||||||
* These entities are discontinued operations in 2017.
** The NCI percentage represents the effective NCI of the Group.
F - 5250
Note 1211 – Deposits, Loans and Other Receivables, including Derivative Instruments
Composition:
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Deposits in banks and others – restricted cash | 76,459 | 16,690 | ||||||
| Long-term trade receivable | - | 10,120 | ||||||
| Financial derivatives not used for hedging | - | 1,342 | ||||||
| Income tax receivables and tax claims (1) | - | 99,892 | ||||||
Other receivables (2) | 30,258 | 48,731 | ||||||
106,717 | 176,775 | |||||||
| As at December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ Thousands | ||||||||
| Deposits in banks and others – restricted cash | 48,640 | 54,300 | ||||||
| Long-term trade receivable | 1,067 | - | ||||||
| Qoros put option (1) | 65,668 | - | ||||||
| Deferred expenses, net (2) | 18,786 | 21,412 | ||||||
| Contract asset | 3,720 | 747 | ||||||
| Other receivables (3) | 2,142 | 30,258 | ||||||
| 140,023 | 106,717 | |||||||
| (1) | Refer to Note 9.C.b.2. |
| (2) | Mainly relates to deferred expenses, net from OPC. |
| (3) | Mainly from discontinued operations. |
Note 1312 – Deferred Payment Obligation Receivable
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Deferred payment receivable | 175,000 | - | ||||||
| As at December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ Thousands | ||||||||
| Deferred payment receivable | 189,166 | 175,000 | ||||||
As part of the sale of IC Power’s Latin America businesses, proceeds from I Squared Capital (“ISQ”) include a four yearfour-year deferred payment obligation accruing 8% interest per annum.annum, payable in kind. The Group has performed an assessment and concluded that no expected credit loss provision is required.
F - 5351
Note 1413 – Property, Plant and Equipment, Net
| A. | Composition |
| As at December 31, 2017 | As at December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of year | Additions | Disposals | Differences in translation reserves | Sale of subsidiaries* | Balance at end of year | Balance at beginning of year | Additions | Disposals | Differences in translation reserves | Balance at end of year | ||||||||||||||||||||||||||||||||||
| $ thousands | $ Thousands | |||||||||||||||||||||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||||||||||||||
| Land, roads, buildings and leasehold improvements | 1,041,723 | 4,139 | (1,615 | ) | 4,167 | (1,005,625 | ) | 42,789 | 42,789 | 4,188 | (188 | ) | (3,266 | ) | 43,523 | |||||||||||||||||||||||||||||
| Installations, machinery and equipment | 2,445,579 | 68,410 | (70,142 | ) | 49,825 | (1,994,241 | ) | 499,431 | 499,431 | 22,388 | (17,990 | ) | (36,942 | ) | 466,887 | |||||||||||||||||||||||||||||
| Dams | 164,469 | 105 | (5 | ) | - | (164,569 | ) | - | ||||||||||||||||||||||||||||||||||||
| Office furniture and equipment and motor vehicles | 455,352 | 43,744 | (4,954 | ) | 11,589 | (500,163 | ) | 5,568 | ||||||||||||||||||||||||||||||||||||
| Office furniture, equipment and motor vehicles | 5,568 | 9,294 | (2,242 | ) | 1,548 | 14,168 | ||||||||||||||||||||||||||||||||||||||
| 4,107,123 | 116,398 | (76,716 | ) | 65,581 | (3,664,598 | ) | 547,788 | 547,788 | 35,870 | (20,420 | ) | (38,660 | ) | 524,578 | ||||||||||||||||||||||||||||||
| Plants under construction | 131,178 | 109,709 | (15 | ) | 9,356 | (85,609 | ) | 164,619 | 164,619 | 59,531 | - | (17,002 | ) | 207,148 | ||||||||||||||||||||||||||||||
| Spare parts for installations | 68,854 | 4,364 | (186 | ) | 1,487 | (61,129 | ) | 13,390 | 13,390 | 5,007 | (829 | ) | (1,171 | ) | 16,397 | |||||||||||||||||||||||||||||
| 4,307,155 | 230,471 | (76,917 | ) | 76,424 | (3,811,336 | ) | 725,797 | 725,797 | 100,408 | (21,249 | ) | (56,833 | ) | 748,123 | ||||||||||||||||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||||||||||||||||||||||
| Land, roads, buildings and leasehold improvements | 83,737 | 20,523 | (807 | ) | 530 | (96,690 | ) | 7,293 | 7,293 | 1,671 | (188 | ) | (514 | ) | 8,262 | |||||||||||||||||||||||||||||
| Installations, machinery and equipment | 637,794 | 112,416 | (13,466 | ) | 8,547 | (644,458 | ) | 100,833 | 100,833 | 27,800 | (17,970 | ) | (7,483 | ) | 103,180 | |||||||||||||||||||||||||||||
| Dams | 48,385 | 8,097 | (250 | ) | - | (56,232 | ) | - | ||||||||||||||||||||||||||||||||||||
| Office furniture and equipment and motor vehicles | 39,939 | 23,824 | (1,307 | ) | 484 | (61,433 | ) | 1,507 | ||||||||||||||||||||||||||||||||||||
| Office furniture, equipment and motor vehicles | 1,507 | 562 | (348 | ) | (128 | ) | 1,593 | |||||||||||||||||||||||||||||||||||||
| 809,855 | 164,860 | (15,830 | ) | 9,561 | (858,813 | ) | 109,633 | 109,633 | 30,033 | (18,506 | ) | (8,125 | ) | 113,035 | ||||||||||||||||||||||||||||||
| Balance as at December 31, 2017 | 3,497,300 | 65,611 | (61,087 | ) | 66,863 | (2,952,523 | ) | 616,164 | ||||||||||||||||||||||||||||||||||||
| Balance as at December 31, 2018 | 616,164 | 70,375 | (2,743 | ) | (48,708 | ) | 635,088 | |||||||||||||||||||||||||||||||||||||
F - 52
Note 13 – Property, Plant and Equipment, Net (Cont’d)
| As at December 31, 2017 | ||||||||||||||||||||||||
| Balance at beginning of year | Additions | Disposals | Differences in translation reserves | Sale of subsidiaries* | Balance at end of year | |||||||||||||||||||
| $ Thousands | ||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| Land, roads, buildings and leasehold improvements | 1,041,723 | 4,139 | (1,615 | ) | 4,167 | (1,005,625 | ) | 42,789 | ||||||||||||||||
| Installations, machinery and equipment | 2,445,579 | 68,410 | (70,142 | ) | 49,825 | (1,994,241 | ) | 499,431 | ||||||||||||||||
| Dams | 164,469 | 105 | (5 | ) | - | (164,569 | ) | - | ||||||||||||||||
| Office furniture, equipment and motor vehicles | 455,352 | 43,744 | (4,954 | ) | 11,589 | (500,163 | ) | 5,568 | ||||||||||||||||
| 4,107,123 | 116,398 | (76,716 | ) | 65,581 | (3,664,598 | ) | 547,788 | |||||||||||||||||
| Plants under construction | 131,178 | 109,709 | (15 | ) | 9,356 | (85,609 | ) | 164,619 | ||||||||||||||||
| Spare parts for installations | 68,854 | 4,364 | (186 | ) | 1,487 | (61,129 | ) | 13,390 | ||||||||||||||||
| 4,307,155 | 230,471 | (76,917 | ) | 76,424 | (3,811,336 | ) | 725,797 | |||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||
| Land, roads, buildings and leasehold improvements | 83,737 | 20,523 | (807 | ) | 530 | (96,690 | ) | 7,293 | ||||||||||||||||
| Installations, machinery and equipment | 637,794 | 112,416 | (13,466 | ) | 8,547 | (644,458 | ) | 100,833 | ||||||||||||||||
| Dams | 48,385 | 8,097 | (250 | ) | - | (56,232 | ) | - | ||||||||||||||||
| Office furniture, equipment and motor vehicles | 39,939 | 23,824 | (1,307 | ) | 484 | (61,433 | ) | 1,507 | ||||||||||||||||
| 809,855 | 164,860 | (15,830 | ) | 9,561 | (858,813 | ) | 109,633 | |||||||||||||||||
| Balance as at December 31, 2017 | 3,497,300 | 65,611 | (61,087 | ) | 66,863 | (2,952,523 | ) | 616,164 | ||||||||||||||||
| * | This amount includes impairment as a result of the sale of Colombian assets. The |
| As at December 31, 2016 | ||||||||||||||||||||||||||||
| Balance at beginning of year | Additions | Disposals | Differences in translation reserves | Acquisition as part of business combination | Transfers and Reclassifications | Balance at end of year | ||||||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||
| Land, roads, buildings and leasehold improvements | 288,538 | 7,759 | (1,244 | ) | 629 | 2,441 | 743,600 | 1,041,723 | ||||||||||||||||||||
| Installations, machinery and equipment | 1,840,754 | 46,652 | (35,616 | ) | 7,350 | — | 586,439 | 2,445,579 | ||||||||||||||||||||
| Dams | 138,310 | 159 | (965 | ) | — | — | 26,965 | 164,469 | ||||||||||||||||||||
| Office furniture and equipment and motor vehicles | 52,124 | 25,866 | (8,958 | ) | 12,129 | 375,063 | (872 | ) | 455,352 | |||||||||||||||||||
| 2,319,726 | 80,436 | (46,783 | ) | 20,108 | 377,504 | 1,356,132 | 4,107,123 | |||||||||||||||||||||
| Plants under construction | 1,260,375 | 217,278 | (167 | ) | 385 | 7,839 | (1,354,532 | ) | 131,178 | |||||||||||||||||||
| Spare parts for installations | 44,299 | 20,139 | (477 | ) | 281 | 7,152 | (2,540 | ) | 68,854 | |||||||||||||||||||
| 3,624,400 | 317,853 | (47,427 | ) | 20,774 | 392,495 | (940 | ) | 4,307,155 | ||||||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||||||
| Land, roads, buildings and leasehold improvements | 71,953 | 13,169 | (1,434 | ) | 48 | — | 1 | 83,737 | ||||||||||||||||||||
| Installations, machinery and equipment | 530,324 | 123,275 | (16,512 | ) | 970 | — | (263 | ) | 637,794 | |||||||||||||||||||
| Dams | 46,764 | 1,742 | (121 | ) | — | — | — | 48,385 | ||||||||||||||||||||
| Office furniture and equipment and motor vehicles | 21,538 | 20,591 | (2,665 | ) | 212 | — | 263 | 39,939 | ||||||||||||||||||||
| 670,579 | 158,777 | (20,732 | ) | 1,230 | — | 1 | 809,855 | |||||||||||||||||||||
| Balance as at December 31, 2016 | 2,953,821 | 159,076 | (26,695 | ) | 19,544 | 392,495 | (941 | ) | 3,497,300 | |||||||||||||||||||
| Prepayments on account of property, plant & equipment | 6,057 | — | ||||||||||||||||||||||||||
| 2,959,878 | 3,497,300 | |||||||||||||||||||||||||||
| B. | Net carrying values |
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
Land, roads, buildings and leasehold improvements | 35,496 | 957,986 | ||||||||||||||
| Land, roads, buildings and leasehold improvements | 35,261 | 35,496 | ||||||||||||||
| Installations, machinery and equipment | 398,598 | 1,807,785 | 363,707 | 398,598 | ||||||||||||
| Dams | - | 116,084 | ||||||||||||||
| Office furniture and equipment, motor vehicles and other equipment | 4,061 | 415,413 | ||||||||||||||
| Office furniture, equipment and motor vehicles | 12,575 | 4,061 | ||||||||||||||
| Plants under construction | 164,619 | 131,178 | 207,148 | 164,619 | ||||||||||||
| Spare parts for installations | 13,390 | 68,854 | 16,397 | 13,390 | ||||||||||||
| 616,164 | 3,497,300 | 635,088 | 616,164 | |||||||||||||
F - 53
Note 13 – Property, Plant and Equipment, Net (Cont’d)
| C. | When there is any indication of impairment, the Group’s entities perform impairment tests for their |
| · | Discount rate is a post-tax measure based on the characteristics of each CGU. |
| · | Cash flow projections include specific estimates for around five years and a terminal growth rate thereafter. The terminal growth rate is determined based on management’s estimate of long-term inflation. |
| · | Existing power purchase agreements (PPAs) signed and existing number of customers. |
| · | The production mix of each country was determined using specifically-developed internal forecast models that consider factors such as |
| · | The distribution business profits were determined using specifically-developed internal forecast models that consider factors such as forecasted demand, fuel prices, energy purchases, collection rates, percentage of losses, quality service improvement, among others. |
| · | Fuel prices have been calculated based on existing supply contracts and on estimated future prices including a price differential adjustment specific to every product according to local characteristics. |
| · | Assumptions for energy sale and purchase prices and output of generation facilities are made based on complex specifically-developed internal forecast models for each country. |
| · | Demand – Demand forecast has taken into consideration the most probably economic performance as well as growth forecasts of different sources. |
| · | Technical performance – The forecast takes into consideration that the power plants have an appropriate preventive maintenance that permits their proper functioning and the distribution businesss has the required capital expenditure to expand and perform properly in order to reach the targeted quality levels. |
| D. | The amount of borrowing costs capitalized |
| E. |
| As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
| Cost | Accumulated depreciation | Net cost | Cost | Accumulated Depreciation | Net cost | |||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||
| Land, roads, buildings and leasehold improvements | - | - | - | 42,288 | (6,602 | ) | 35,686 | |||||||||||||||||
| Installations, machinery and equipment | - | - | - | 275,852 | (117,368 | ) | 158,484 | |||||||||||||||||
| Motor vehicles | - | - | - | 410 | (46 | ) | 364 | |||||||||||||||||
| - | - | - | 318,550 | (124,016 | ) | 194,534 | ||||||||||||||||||
| Fixed assets purchased on credit in 2018, 2017 and 2016 |
The composition of follows |
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Depreciation charged to results | 30,794 | 27,286 | ||||||
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
Depreciation charged to cost of sales | 30,102 | 26,697 | ||||||
Depreciation charged to general, selling and administrative expenses | 597 | 468 | ||||||
Depreciation charged to results | 30,699 | 27,165 | ||||||
Amortization of intangibles charged to cost of sales | - | - | ||||||
Amortization of intangibles charged to general, selling and administrative expenses | 95 | 121 | ||||||
Depreciation and amortization from continuing operations | 30,794 | 27,286 | ||||||
| As at December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ Thousands | ||||||||
| Depreciation charged to cost of sales | 29,809 | 30,102 | ||||||
| Depreciation charged to general, selling and administrative expenses | 224 | 597 | ||||||
| Depreciation charged to results | 30,033 | 30,699 | ||||||
| Amortization of intangibles charged to general, selling and administrative expenses | 383 | 95 | ||||||
| Depreciation and amortization from continuing operations | 30,416 | 30,794 | ||||||
F - 5654
Note 1514 – Intangible Assets, Net
| A. | Composition: |
| Goodwill | Concessions licenses | Customer relationships | Software | Others | Total | |||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| Balance as at January 1, 2017 | 117,550 | 189,351 | 41,074 | 1,771 | 83,897 | 433,643 | ||||||||||||||||||
| Acquisitions as part of business combinations | 296 | - | - | 195 | - | 491 | ||||||||||||||||||
| Acquisitions – self development | - | - | - | 179 | 10,280 | 10,459 | ||||||||||||||||||
| Disposals | - | - | - | - | (82 | ) | (82 | ) | ||||||||||||||||
| Sale of subsidiaries* | (97,167 | ) | (189,351 | ) | (41,074 | ) | (1,066 | ) | (93,842 | ) | (422,500 | ) | ||||||||||||
| Translation differences | 1,235 | - | - | 74 | 256 | 1,565 | ||||||||||||||||||
| Balance as at December 31, 2017 | 21,914 | - | - | 1,153 | 509 | 23,576 | ||||||||||||||||||
| Amortization and impairment | ||||||||||||||||||||||||
| Balance as at January 1, 2017 | 21,455 | 5,434 | 20,942 | 1,015 | 8,019 | 56,865 | ||||||||||||||||||
| Amortization for the year | - | 5,759 | 3,970 | 209 | 2,984 | 12,922 | ||||||||||||||||||
| Disposals | - | - | - | 25 | - | 25 | ||||||||||||||||||
| Sale of subsidiaries | - | (11,193 | ) | (24,912 | ) | (804 | ) | (11,021 | ) | (47,930 | ) | |||||||||||||
| Translation differences | - | - | - | - | 53 | 53 | ||||||||||||||||||
| Balance as at December 31, 2017 | 21,455 | - | - | 445 | 35 | 21,935 | ||||||||||||||||||
| Carrying value | ||||||||||||||||||||||||
| As at January 1, 2017 | 96,095 | 183,917 | 20,132 | 756 | 75,878 | 376,778 | ||||||||||||||||||
| As at December 31, 2017 | 459 | - | - | 708 | 474 | 1,641 | ||||||||||||||||||
| Goodwill | Software | Others | Total | |||||||||||||
| $ Thousands | ||||||||||||||||
| Cost | ||||||||||||||||
| Balance as at January 1, 2018 | 21,914 | 1,153 | 509 | 23,576 | ||||||||||||
| Acquisitions – self development | — | 162 | — | 162 | ||||||||||||
| Translation differences | (34 | ) | (67 | ) | (55 | ) | (156 | ) | ||||||||
| Balance as at December 31, 2018 | 21,880 | 1,248 | 454 | 23,582 | ||||||||||||
| Amortization and impairment | ||||||||||||||||
| Balance as at January 1, 2018 | 21,455 | 445 | 35 | 21,935 | ||||||||||||
| Amortization for the year | 94 | 107 | 182 | 383 | ||||||||||||
| Translation differences | (4 | ) | (28 | ) | (10 | ) | (42 | ) | ||||||||
| Balance as at December 31, 2018 | 21,545 | 524 | 207 | 22,276 | ||||||||||||
| Carrying value | ||||||||||||||||
| As at January 1, 2018 | 459 | 708 | 474 | 1,641 | ||||||||||||
| As at December 31, 2018 | 335 | 724 | 247 | 1,306 | ||||||||||||
F - 55
Note 14 – Intangible Assets, Net (Con’t)
| Goodwill | Concessions licenses | Customer relationships | Software | Others | Total | |||||||||||||||||||
| $ Thousands | ||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| Balance as at January 1, 2017 | 117,550 | 189,351 | 41,074 | 1,771 | 83,897 | 433,643 | ||||||||||||||||||
| Acquisitions as part of business combinations | 296 | - | - | 195 | - | 491 | ||||||||||||||||||
| Acquisitions – self development | - | - | - | 179 | 10,280 | 10,459 | ||||||||||||||||||
| Disposals | - | - | - | - | (82 | ) | (82 | ) | ||||||||||||||||
| Sale of subsidiaries | (97,167 | ) | (189,351 | ) | (41,074 | ) | (1,066 | ) | (93,842 | ) | (422,500 | ) | ||||||||||||
| Translation differences | 1,235 | - | - | 74 | 256 | 1,565 | ||||||||||||||||||
| Balance as at December 31, 2017 | 21,914 | - | - | 1,153 | 509 | 23,576 | ||||||||||||||||||
| Amortization and impairment | ||||||||||||||||||||||||
| Balance as at January 1, 2017 | 21,455 | 5,434 | 20,942 | 1,015 | 8,019 | 56,865 | ||||||||||||||||||
| Amortization for the year | - | 5,759 | 3,970 | 209 | 2,984 | 12,922 | ||||||||||||||||||
| Disposals | - | - | - | 25 | - | 25 | ||||||||||||||||||
| Sale of subsidiaries* | - | (11,193 | ) | (24,912 | ) | (804 | ) | (11,021 | ) | (47,930 | ) | |||||||||||||
| Translation differences | - | - | - | - | 53 | 53 | ||||||||||||||||||
| Balance as at December 31, 2017 | 21,455 | - | - | 445 | 35 | 21,935 | ||||||||||||||||||
| Carrying value | ||||||||||||||||||||||||
| As at January 1, 2017 | 96,095 | 183,917 | 20,132 | 756 | 75,878 | 376,778 | ||||||||||||||||||
| As at December 31, 2017 | 459 | - | - | 708 | 474 | 1,641 | ||||||||||||||||||
| * | This amount includes impairment as a result of the sale of Colombian assets. The |
F - 5756
Note 1514 – Intangible Assets, Net (Cont’d)
| Goodwill | Concessions licenses | Customer relationships | Software | Others | Total | |||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| Balance as at January 1, 2016 | 79,581 | — | 41,074 | 1,776 | 68,806 | 191,237 | ||||||||||||||||||
| Acquisitions as part of business combinations | 37,102 | 189,351 | — | — | 5,796 | 232,249 | ||||||||||||||||||
| Acquisitions – self development | — | — | — | 138 | 9,331 | 9,469 | ||||||||||||||||||
| Disposals | — | — | — | (153 | ) | — | (153 | ) | ||||||||||||||||
| Reclassification | — | — | — | — | (161 | ) | (161 | ) | ||||||||||||||||
| Translation differences | 867 | — | — | 10 | 125 | 1,002 | ||||||||||||||||||
| Balance as at December 31, 2016 | 117,550 | 189,351 | 41,074 | 1,771 | 83,897 | 433,643 | ||||||||||||||||||
| Amortization and impairment | ||||||||||||||||||||||||
| Balance as at January 1, 2016 | 21,455 | — | 16,888 | 937 | 4,713 | 43,993 | ||||||||||||||||||
| Amortization for the year | — | 5,434 | 4,054 | 227 | 3,287 | 13,002 | ||||||||||||||||||
| Disposals | — | — | — | (153 | ) | — | (153 | ) | ||||||||||||||||
| Translation differences | — | — | — | 4 | 19 | 23 | ||||||||||||||||||
| Balance as at December 31, 2016 | 21,455 | 5,434 | 20,942 | 1,015 | 8,019 | 56,865 | ||||||||||||||||||
| Carrying value | ||||||||||||||||||||||||
| As at January 1, 2016 | 58,126 | — | 24,186 | 839 | 64,093 | 147,244 | ||||||||||||||||||
| As at December 31, 2016 | 96,095 | 183,917 | 20,132 | 756 | 75,878 | 376,778 | ||||||||||||||||||
| B. | The total carrying amounts of intangible assets with a finite useful life and with an indefinite useful life or not yet available for use |
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Intangible assets with a finite useful life | 1,182 | 280,683 | 971 | 1,182 | ||||||||||||
| Intangible assets with an indefinite useful life or not yet available for use | 459 | 96,095 | 335 | 459 | ||||||||||||
| 1,641 | 376,778 | 1,306 | 1,641 | |||||||||||||
| C. | Examination of impairment of cash generating units containing goodwill |
For the purpose of testing impairment, goodwill is allocated to the Group’s cash-generating units that represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. Goodwill is calculated based on the local currencies of the countries that the subsidiaries operate in and translated into US dollars at the exchange rate at the reporting date. Refer to Note 13C for assumptions used in testing impairment.
Goodwill arises from the following Group entities in I.C. PowerOPC (cash generating unit):
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Nejapa* | - | 40,693 | ||||||
| Kallpa* | - | 10,934 | ||||||
| Energuate* | - | 37,651 | ||||||
| Surpetroil* | - | 6,699 | ||||||
| OPC Rotem (former AIE) | 459 | 118 | ||||||
| 459 | 96,095 | |||||||
| As at December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ Thousands | ||||||||
| OPC Rotem (former AIE) | 425 | 459 | ||||||
| 425 | 459 | |||||||
| 2017 | 2016 | |||||||
| Discount rate | In percent | |||||||
| Peru* | - | 6.7 | ||||||
| Energuate* | - | 8.9 | ||||||
| El Salvador* | - | 9.8 | ||||||
| Colombia* | - | 8.2 | ||||||
| Terminal value growth rate | - | 2 | ||||||
Note 1615 – Loans and Debentures
Following are the contractual conditions of the Group’s interest bearinginterest-bearing loans and credit, which are measured based on amortized cost. Additional information regarding the Group’s exposure to interest risks, foreign currency and liquidity risk is provided in Note 32,30, in connection with financial instruments.
| As at December 31 | As at December 31 | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ thousands | |||||||||||||||
| Current liabilities | ||||||||||||||||
| Short-term loans from banks, financial institutions and others (1) | 317,684 | 213,417 | - | 317,684 | ||||||||||||
| 317,684 | 213,417 | - | 317,684 | |||||||||||||
| Current maturities of long-term liabilities: | ||||||||||||||||
| Loans from banks, financial institutions and others | 123,908 | 251,803 | 20,302 | 123,908 | ||||||||||||
| Non-convertible debentures | 6,364 | 10,617 | 2,933 | 6,364 | ||||||||||||
| Liability in respect of financing lease | - | 6,976 | ||||||||||||||
| 130,272 | 269,396 | 23,235 | 130,272 | |||||||||||||
| Total current liabilities | 447,956 | 482,813 | 23,235 | 447,956 | ||||||||||||
| Non-current liabilities | ||||||||||||||||
| Loans from banks and financial institutions | 627,150 | 1,903,323 | 487,759 | 503,785 | ||||||||||||
| Non-convertible debentures | 91,122 | 867,287 | 75,476 | 84,758 | ||||||||||||
| Liability in respect of financing lease | - | 88,169 | ||||||||||||||
| Other long-term balances | 543 | 240,213 | ||||||||||||||
| Total other long-term liabilities | 718,815 | 3,098,992 | ||||||||||||||
| Less current maturities | (130,272 | ) | (269,396 | ) | ||||||||||||
| Total non-current liabilities | 588,543 | 2,829,596 | 563,235 | 588,543 | ||||||||||||
| Total liabilities | 586,470 | 1,036,499 | ||||||||||||||
| (1) | Balances as at December 31, 2017 mainly |
F - 6057
Note 1615 – Loans and Debentures (Cont’d)
| A. |
| As at | As at | |||||||||||||||||||||
| December 31,2017 | December 31,2016 | |||||||||||||||||||||
| $ thousands | ||||||||||||||||||||||
| Nominal annual Interest rate | Currency | Maturity | Current | Non-Current | Current | Non-Current | ||||||||||||||||
Short-term loans from banks | ||||||||||||||||||||||
I.C. Power Distribution Holdings | ||||||||||||||||||||||
| Credit Suisse | LIBOR + 4% | USD | 2017 | — | — | 119,487 | — | |||||||||||||||
Samay | ||||||||||||||||||||||
| Interbank | 2.9% | USD | 2017 | — | — | 31,945 | — | |||||||||||||||
DEOCSA | ||||||||||||||||||||||
| Various entities | LIBOR + 4.75% | USD | 2017 | — | — | 18,000 | — | |||||||||||||||
DEORSA | ||||||||||||||||||||||
| Various entities | LIBOR + 4.75% | USD | 2017 | — | — | 12,000 | — | |||||||||||||||
CDA | ||||||||||||||||||||||
| Banco de Crédito del Perú | 0.83% | USD | 2017 | — | — | 14,000 | — | |||||||||||||||
PQP | ||||||||||||||||||||||
| Banco Industrial Guatemala | 4.75% | USD | 2017 | — | — | 6,000 | — | |||||||||||||||
Cobee | ||||||||||||||||||||||
| Various entities | 4.2% / 5.5% | BOB | 2016/2017 | — | — | 4,499 | — | |||||||||||||||
Nejapa | ||||||||||||||||||||||
| Scotiabank El Salvador | 5.50% | USD | 2017 | — | — | 4,200 | — | |||||||||||||||
Empresa Energética Corinto Ltd | ||||||||||||||||||||||
| Banco de América Central (BAC) | 5.25% | USD | 2017 | — | — | 1,586 | — | |||||||||||||||
Cepp | ||||||||||||||||||||||
| Scotiabank | 2.4% | USD | 2017 | — | — | 1,000 | — | |||||||||||||||
| BHD Bank | 2.53% | USD | 2017 | — | — | 200 | — | |||||||||||||||
Surenergy | ||||||||||||||||||||||
| Banco Davivienda | DTF + 4.5% | COP | 2017 | — | — | 500 | — | |||||||||||||||
Short-term loans from banks | ||||||||||||||||||||||
| Subtotal | — | — | 213,417 | — | ||||||||||||||||||
Loans from Banks and others | ||||||||||||||||||||||
| Financial institutions: | ||||||||||||||||||||||
Cerro del Aguila | ||||||||||||||||||||||
| Tranche A | LIBOR+4.25% - LIBOR +5.50% | USD | 2024 | — | — | 15,344 | 320,437 | |||||||||||||||
| Tranche B | LIBOR+4.25% - LIBOR +6.25% | USD | 2024 | — | — | — | 180,896 | |||||||||||||||
| Tranche 1D | LIBOR+2.75% - LIBOR +3.60% | USD | 2024 | — | — | 1,760 | 38,697 | |||||||||||||||
| Tranche 2D | LIBOR+2.75% - LIBOR +3.60% | USD | 2027 | — | — | — | 21,959 | |||||||||||||||
| As at | As at | |||||||||||||||||||||
| December 31,2017 | December 31,2016 | |||||||||||||||||||||
| $ thousands | ||||||||||||||||||||||
| Nominal annual Interest rate | Currency | Maturity | Current | Non-Current | Current | Non-Current | ||||||||||||||||
Samay I | ||||||||||||||||||||||
| Sumitomo /HSBC / Bank of Tokyo | LIBOR+2.125% - LIBOR +2.625% | USD | 2021 | — | — | 5,047 | 302,247 | |||||||||||||||
Central Cardones | ||||||||||||||||||||||
Tranche One | ||||||||||||||||||||||
| BCI / Banco Itaú | LIBOR+1.90% | USD | 2021 | — | — | 3,781 | 18,228 | |||||||||||||||
Tranche Two | ||||||||||||||||||||||
| BCI / Banco Itaú | LIBOR+2.75% | USD | 2021 | — | — | — | 13,383 | |||||||||||||||
Colmito | ||||||||||||||||||||||
| Banco Bice | 7.90% | CLP | 2028 | — | — | 625 | 16,121 | |||||||||||||||
Consorcio Eólico Amayo, S.A.(I) | ||||||||||||||||||||||
| Banco Centroamericano de Integración Económica | 8.45% - LIBOR +4% | USD | 2023 | — | — | 5,307 | 37,376 | |||||||||||||||
Consorcio Eólico Amayo (Fase II), S.A. | ||||||||||||||||||||||
| Various entities | LIBOR+5.75%, 8.53%,10.76% | USD | 2025 | — | — | 3,029 | 28,250 | |||||||||||||||
Empresa Energética Corinto, Ltd. | ||||||||||||||||||||||
| Banco de América Central (BAC) | 8.35% | USD | 2018 | — | — | 3,124 | 3,402 | |||||||||||||||
Tipitapa Power Company, Ltd. | ||||||||||||||||||||||
| Banco de América Central (BAC) | 8.35% | USD | 2018 | — | — | 2,801 | 3,328 | |||||||||||||||
Jamaica Private Power Company | ||||||||||||||||||||||
| Royal Bank of Canada | LIBOR + 5.50% | USD | 2017 | — | — | 824 | — | |||||||||||||||
| Burmeister & Wain Scandinavian Contractor A/S | 3.59% | USD | 2018 | — | — | 338 | 233 | |||||||||||||||
PQP | ||||||||||||||||||||||
| Banco Industrial | LIBOR + 4.50% | USD | 2021 | — | — | 2,374 | 9,632 | |||||||||||||||
Surpetroil S.A.S | ||||||||||||||||||||||
| Banco de Occidente S.A | IBR + 5.87% | COP | 2018 | — | — | 504 | 375 | |||||||||||||||
| Banco Pichincha | DTF + 3% | COP | 2017 | — | — | 100 | — | |||||||||||||||
Kanan | ||||||||||||||||||||||
| Scotiabank | LIBOR + 3.5% | USD | 2021 | — | — | 46,094 | — | |||||||||||||||
Overseas Investments Peru | ||||||||||||||||||||||
| Credit Suisse (D) | LIBOR + 5%-6.5% | USD | 2017 | 99,964 | — | 97,274 | — | |||||||||||||||
DEORSA | ||||||||||||||||||||||
| Syndicated Loan – various banks | LIBOR + 4.7% - LIBOR + 4.75% | USD | 2021/2025 | — | — | 10,167 | 67,857 | |||||||||||||||
| Syndicated Loan - various banks | TAPP minus 5.6% - TAPP minus 6.1% | GTQ | 2021/2025 | — | — | 4,687 | 30,653 | |||||||||||||||
| As at | As at | |||||||||||||||||||||
| December 31,2017 | December 31,2016 | |||||||||||||||||||||
| $ thousands | ||||||||||||||||||||||
| Nominal annual Interest rate | Currency | Maturity | Current | Non-Current | Current | Non-Current | ||||||||||||||||
DEOCSA | ||||||||||||||||||||||
| Syndicated Loan – various banks | LIBOR + 4.7% - LIBOR + 4.75% | USD | 2021/2025 | — | — | 16,876 | 107,488 | |||||||||||||||
| Syndicated Loan - various banks | TAPP minus 5.6% - TAPP minus 6.1% | GTQ | 2021/2025 | — | — | 6,215 | 43,127 | |||||||||||||||
RECSA | ||||||||||||||||||||||
| Banco G&T Continental | TAPP + 6.63% | GTQ | 2020 | — | — | 931 | 3,722 | |||||||||||||||
OPC Rotem Ltd | ||||||||||||||||||||||
| Lenders Consortium (E) | 4.85% - 5.36% | NIS | 2031 | 23,944 | 463,160 | 20,290 | 344,240 | |||||||||||||||
OPC Hadera | ||||||||||||||||||||||
| Facility B—Amitim and Menora Pension Funds (F) | 7.75% | NIS | 2029 | — | 40,092 | 4,311 | 47,425 | |||||||||||||||
IC Power Asua Development Ltd | ||||||||||||||||||||||
| Bank Hapoalim New York | 0.75% | USD | 2019 | — | — | — | 12,000 | |||||||||||||||
AGS | ||||||||||||||||||||||
| Veolia Energy Israel Ltd | NIS | 2019 | — | — | — | 444 | ||||||||||||||||
| Sub total | 123,908 | 503,242 | 251,803 | 1,651,520 | ||||||||||||||||||
Liabilities in respect of finance leases: | ||||||||||||||||||||||
Kallpa Generación | ||||||||||||||||||||||
| Banco de Crédito del Perú | 7.15% | USD | 2023 | — | — | 6,624 | 81,193 | |||||||||||||||
Surpetroil S.A.S. | ||||||||||||||||||||||
| Banco de Occidente S.A. | DTF + 3.5% | COP | 2017 | — | — | 223 | — | |||||||||||||||
DEORSA | ||||||||||||||||||||||
| Arrendadora Agromercantil | TAPP minus 2.47% | GTQ | 2017 | — | — | 129 | — | |||||||||||||||
| Sub total | — | — | 6,976 | 81,193 | ||||||||||||||||||
Debentures | ||||||||||||||||||||||
Cobee | ||||||||||||||||||||||
| Bonds Cobee III-1B | 6.50% | USD | 2017 | — | — | 1,750 | — | |||||||||||||||
| Bonds Cobee III-1C (bolivianos) | 9.00% | BOB | 2020 | — | — | 1,586 | 4,757 | |||||||||||||||
| Bonds Cobee III-2 | 6.75% | USD | 2017 | — | — | 5,000 | — | |||||||||||||||
| Bonds Cobee III-3 (bolivianos) | 7.00% | BOB | 2022 | — | — | — | 6,160 | |||||||||||||||
| Bonds Cobee IV-1A | 6.00% | USD | 2018 | — | — | — | 3,988 | |||||||||||||||
| Bonds Cobee IV-1B | 7.00% | USD | 2020 | — | — | — | 3,980 | |||||||||||||||
| Bonds Cobee IV-1C (bolivianos) | 7.80% | BOB | 2024 | — | — | — | 12,030 | |||||||||||||||
| Cobee Bonds-IV Issuance 3 | 6.70% | USD | 2019 | — | — | — | 4,973 | |||||||||||||||
| Cobee Bonds-IV Issuance 4 (bolivianos) | 7.80% | BOB | 2024 | — | — | — | 15,039 | |||||||||||||||
| Cobee Bonds-IV Issuance 5 (bolivianos) | 5.75% | BOB | 2026 | — | — | 1,950 | 17,697 | |||||||||||||||
| As at | As at | |||||||||||||||||||||
| December 31,2017 | December 31,2016 | |||||||||||||||||||||
| $ thousands | ||||||||||||||||||||||
| Nominal annual Interest rate | Currency | Maturity | Current | Non-Current | Current | Non-Current | ||||||||||||||||
Inkia Energy Ltd | ||||||||||||||||||||||
| Inkia Bonds | 8.38% | USD | 2021 | — | — | — | 447,904 | |||||||||||||||
Kallpa Generación | ||||||||||||||||||||||
| Kallpa Bonds | 4.88% | USD | 2026 | — | — | — | 325,970 | |||||||||||||||
Cepp | ||||||||||||||||||||||
| Cepp Bonds | 6.00% | USD | 2019 | — | — | — | 9,945 | |||||||||||||||
Cobee | ||||||||||||||||||||||
| Cobee Bonds (Premium) | USD-BOB | 2017-2024 | — | — | 331 | 4,227 | ||||||||||||||||
OPC Energy Ltd | ||||||||||||||||||||||
| Bonds – Series A (G) | 4.45% | NIS | 2030 | 6,364 | 84,758 | — | — | |||||||||||||||
| Sub total | 6,364 | 84,758 | 10,617 | 856,670 | ||||||||||||||||||
| Total | 130,272 | 588,000 | 482,813 | 2,589,383 | ||||||||||||||||||
| Classification based on currencies and interest rates |
| Weighted-average interest rate December 31 | As at December 31 | Weighted-average interest rate December 31 | As at December 31, | |||||||||||||||||||||
| 2017 | 2017 | 2016 | ||||||||||||||||||||||
| % | $ thousands | |||||||||||||||||||||||
| Current liabilities (without current maturities) | ||||||||||||||||||||||||
| Short-term loans from financial institutions | ||||||||||||||||||||||||
| In dollars | - | 208,418 | ||||||||||||||||||||||
| In other currencies | - | 4,999 | ||||||||||||||||||||||
| - | 213,417 | 2018 | 2018 | 2017 | ||||||||||||||||||||
| % | $ Thousands | |||||||||||||||||||||||
| Non-current liabilities (including current maturities) | ||||||||||||||||||||||||
| Debentures | ||||||||||||||||||||||||
| In dollars | - | 804,052 | ||||||||||||||||||||||
| In other currencies | 4.80 | % | 91,122 | 63,235 | ||||||||||||||||||||
| In shekels | 4.45 | % | 78,409 | 91,122 | ||||||||||||||||||||
| 91,122 | 867,287 | 78,409 | 91,122 | |||||||||||||||||||||
| Loans from financial institutions (including financing lease) | ||||||||||||||||||||||||
| In dollars | 7.90 | % | 99,964 | 1,467,369 | - | - | 99,964 | |||||||||||||||||
| In shekels | 4.80 | % | 527,186 | 416,710 | 4.72 | % | 508,061 | 527,729 | ||||||||||||||||
| In quetzales | - | 89,464 | ||||||||||||||||||||||
| In other currencies | - | 17,948 | ||||||||||||||||||||||
| 627,150 | 1,991,491 | 508,061 | 627,693 | |||||||||||||||||||||
| 718,272 | 2,858,778 | |||||||||||||||||||||||
| 586,470 | 718,815 | |||||||||||||||||||||||
| As at December 31, 2017 | As at December 31, 2016 | |||||||||||||||||||||||
| Minimum future lease rentals | Interest component | Present value of minimum lease rentals | Minimum future lease rentals | Interest component | Present value of minimum lease rentals | |||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||
| Less than one year | - | - | - | 13,016 | 6,040 | 6,976 | ||||||||||||||||||
| From one year to five years | - | - | - | 85,849 | 19,217 | 66,632 | ||||||||||||||||||
| More than five years | - | - | - | 15,207 | 646 | 14,561 | ||||||||||||||||||
| - | - | - | 114,072 | 25,903 | 88,169 | |||||||||||||||||||
Long term loans from banks and others
O |
On January 3, 2018, this loan was fully repaid for a total amount of $101 million (including interest accrued).
F - 58
Note 15 – Loans and Debentures (Cont’d)
OPC |
As part of the Facility Agreement, OPC is required to keep a Debt Service Reserve equivalent to the following two quarterly debt payments (hereinafter- “the reserve”) within the period of two years following power plant construction completion. As of December 31, 20172018 and 2016,2017, the amount of the reserve is NIS51 million (approximately $14 million) and NIS72 million (equivalent to $21 million) and NIS73 million (equivalent to(approximately $19 million) respectively.
As of December 31, 20172018 and 2016,2017, OPC used NIS7 million (approximately $1.9 million) and NIS5 million ($1.4 million) and NIS4 million ($1.2(approximately $1.3 million), respectively from the guarantee.
Under the Facility Agreement, OPC and IC Power Asia Development Ltd (“ICPAD”) together and the non-controlling interests in Rotem ("Veridis"), issued corporate guarantees in favor of Rotem in amounts of NIS92 million ($26.5(approximately $24.5 million) and NIS23 million ($6.6(approximately $6.1 million), respectively.
In December 2017, an amended credit facility agreement was signed, according to which ICPAD was released from the corporate guarantee, in return for the accumulation of an additional fund in Rotem in the amount of NIS 57.5 million ($16.6(approximately $15.3 million) ("the owners' guarantee fund") and in return fromsuch that as at December 31, 2018, the corporate guarantee of OPC and Veridis ofamounts to NIS 57.572.5 million ($16.6(approximately $19.3 million), according to their relative portion in holdings. The owners' guarantee fund is subject to an adjustment mechanism under which in certain coverage ratios it can exceedreach a maximum amount of NIS115 million ($33(approximately $31 million). ICPAD'sThe owners’ guarantee fund will accumulate in the following manner – NIS20 million ($5.8(approximately $5.3 million) upon signing the amended credit agreement and the balance will accumulate over 24 months in semi-annual deposits. After the completion of the accumulation of ICPAD'sthe owners’ guarantee fund, Veridis and OPC will be released from the corporate guarantee. As at December 31, 2017, ICPAD's2018, the owners’ guarantee fund amounted to NIS20NIS39 million ($5.8(approximately $10.4 million).
OPC |
As at the date of the report, Hadera withdrew a total of NIS162 millionNIS 616 milllion (approximately $41$164 million) and Tranche B was prepaid forout of the Financing Agreement of Hadera. During 2018, Hadera’s withdrawals amounted to a total of NIS38NIS 122 million (approximately $10$34 million).
the report ranges between about 3.1% and about 3.9% on the CPI-linked loans and between about 4.7% and about 5.4% on the loans not linked to the CPI.
F - 6659
Note 1615 – Loans and Debentures (Cont’d)
Debentures
| In May, 2017, OPC issued |
On August 20, 2017, OPC listed the bondsdebentures for trade in the stock exchange under an issuance and the listing of its shares for trade and accordingly, from that date, interest on the bonds (seriesdebentures (Series A) was reduced by 0.5% and is 4.45% per year.
According to the trust deed from May 2017, OPC has registered, in favor of the trustee on behalf of the bond holders of the debentures, a first-ranking floating charge, unlimited in amount, on all of its assets. The floating charge will not preclude OPC from pledging specific assets and the performance of other asset dispositions by OPC.
The trust deed contains customary clauses for calling for the immediate redemption of the bonds,debentures, including events of breach,default, insolvency, liquidation proceedings, receivership, stay of proceedings and creditors' arrangements, certain types of restructuring, material downturn in the position of OPC. The right to call for immediate redemption also arises upon: (1) the occurrence of certain events of loss of control by Kenon; (2) the call for immediate repayment of other debts (or guarantees) of the Company or of Hadera or Rotem in certain predefined minimum amounts; (3) a change in the area of operation of OPC such that OPC's main area of activity is not in the energy sector in Israel, including electricity generation in power plants and with renewable energy sources; (4) in the event that a rating is discontinued over a certain period of time, and the rating of the bonddebentures falls below the level of Baa3 (or BBB)BBB-); and (5) in the event of suspending trading for a certain time period if the bondsdebentures are listed for trade on the main list of the Stock Exchange. All of such conditions, pursuant to the terms set out in the trust deed.
Additionally, restrictions imposed on distributions, provision of loans to related parties and repayment of loans to related parties, are included as set forth in the trust deed, including compliance with certain covenants.
The terms of the bondsdebentures also provide for the possible raising of the interest rate in certain cases of lowering the rating, in certain cases of breach of financial covenants, and in certain cases of use of the reserve for servicing the debt where the reserve is not sufficiently funded within the time frame that is set forth in the trust deed. The ability of OPC to expand the debenture series of the bonds has beenwas limited under certain circumstances, including maintaining the rating of the bondsdebentures at its level shortly prior to the expansion of the series and the lack of breach. Additionally, should OPC raiseissue additional bondsdebentures that are not secured (or that are secured with a pari passu ranking floating charge), these will not have preference over the bondsdebentures (Series A) upon liquidation.
F - 6760
Note 1716 – Trade Payables
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Current | ||||||||||||||||
| Trade Payables | 36,994 | 264,720 | 25,082 | 36,994 | ||||||||||||
| Accrued expenses and other payables | 21,901 | 20,892 | 22,590 | 21,901 | ||||||||||||
| 58,895 | 285,612 | 47,672 | 58,895 | |||||||||||||
| Non-current | ||||||||||||||||
| Trade Payables* | - | 44,057 | ||||||||||||||
Note 1817 – Other Payables, including Derivative Instruments
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Current liabilities: | ||||||||||||||||
| Financial derivatives not used for hedging | 73 | 783 | - | 73 | ||||||||||||
| Financial derivatives used for hedging | 439 | 11,563 | - | 439 | ||||||||||||
| The State of Israel and government agencies | 1,208 | 4,206 | 244 | 1,208 | ||||||||||||
| Employees and payroll-related agencies | 179 | 4,846 | 40 | 179 | ||||||||||||
| Customer advances and deferred income | - | 944 | ||||||||||||||
| Accrued expenses | 14,915 | 23,563 | 7,505 | 14,915 | ||||||||||||
| Dividend payable to non-controlling interest | - | 2,893 | ||||||||||||||
| Interest payable | 21 | 23,038 | 277 | 21 | ||||||||||||
Transaction costs on sale of subsidiaries | 59,000 | - | - | 59,000 | ||||||||||||
| Other | 6,687 | 19,467 | ||||||||||||||
| Others | 4,006 | 6,687 | ||||||||||||||
82,522 | 91,303 | 12,072 | 82,522 | |||||||||||||
| Non-current liabilities: | ||||||||||||||||
| Financial derivatives not used for hedging | - | 1,342 | ||||||||||||||
| Financial derivatives used for hedging | - | 13,701 | ||||||||||||||
| Other financial derivatives | - | 29,594 | ||||||||||||||
| Others | 369 | 81 | ||||||||||||||
| - | 44,637 | 369 | 81 | |||||||||||||
Note 19 - Guarantee Deposits from Customers
| Financial Guarantee* | Others | Total | Financial Guarantee* | Others** | Total | |||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| $ thousands | $ thousands | |||||||||||||||||||||||
| Balance at January, 1 | 118,763 | 768 | 119,531 | - | 41,686 | 41,686 | ||||||||||||||||||
| Reclassified from long-term liabilities | - | - | - | 34,263 | - | 34,263 | ||||||||||||||||||
| Provision made during the year | - | - | - | 130,193 | - | 130,193 | ||||||||||||||||||
| Provision reversed to profit/(loss) during the year | - | - | - | (4,587 | ) | - | (4,587 | ) | ||||||||||||||||
| Provision paid/ released | (74,421 | ) | (768 | ) | (75,189 | ) | (36,023 | ) | (40,170 | ) | (76,193 | ) | ||||||||||||
| Effects of foreign currency | - | - | - | (5,083 | ) | (748 | ) | (5,831 | ) | |||||||||||||||
| Balance at December, 31 | 44,342 | - | 44,342 | 118,763 | 768 | 119,531 | ||||||||||||||||||
| Financial Guarantee* | Total | Financial Guarantee* | Others | Total | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
| $ thousands | $ thousands | |||||||||||||||||||
| Balance at January, 1 | 44,342 | 44,342 | 118,763 | 768 | 119,531 | |||||||||||||||
| Provision released | (44,342 | ) | (44,342 | ) | (74,421 | ) | (768 | ) | (75,189 | ) | ||||||||||
| Balance at December, 31 | - | - | 44,342 | - | 44,342 | |||||||||||||||
* Relates to Kenon’s provision of financial guarantees to Chery in respect of an obligation of Qoros (see Note 10.C.b.7)9.C.b.6).
F - 6961
Note 2119 – Contingent Liabilities, Commitments and Concessions
| A. | Claims |
| a. | OPC Rotem – Tamar |
In July 2013, the EA published four generation component tariffs/power cost indicators, ranging from NIS 386 per megawatt hour, or MWh, to NIS 333.2 per MWh, instead of the single tariff that had previously been used. In January 2015, the EA published new tariffs, which reduced the tariff rates by approximately 10%. In connection with the indexation of their natural gas price formula for OPC’s gas supply agreement with the Tamar Partner, OPC and the Tamar Partners disagreed as to which of the EA’s July 2013 tariffs applied to the Tamar’s supply agreement and have a similar disagreement with respect to the tariffs published in January 2015. Subsequent to the period of the report, onOn February 2, 2017, OPC received a letter from Tamar's attorney claiming a debt of $ 24.6$24.6 million (including accrued interest) and requesting that such amount be deposited in escrow pursuant to the GSPA. Based on the OPC's legal consultant’s opinion it is not more likely than not that OPC will pay this claim and therefore no provision was included in the financial statements.
On June 21, 2017, the Tamar Partners filed a request for arbitration against OPC Rotem in accordance with the gas supply agreement.agreement. On July 20, 2017, OPC Rotem submitted its response to such request, rejecting the arguments of Tamar Partners and requesting (i) that it be determined that the relevant tariff in connection with the price of gas for the period in dispute is NIS 333.2 per MWh; (ii) that the amount deposited in escrow, plus the gains accrued thereon, should be released immediately; and (iii) that Tamar Partners bear OPC Rotem’s arbitration expenses.
In February 2018, Tamar Partners filed a detailed statement of claim in which they repeated the abovementioned contentions. In addition, an alternative claim was raised. OPC Rotem rejects the contentions of Tamar Partners and, in June 2018, OPC Rotem filed a detailed statement of defence wherein it rejected the contentions. In October 2018 a statement of response was filed by Tamar Partners and in December 2018 OPC Rotem filed its final reply. Subsequent to the date of the report, in February 2019, a hearing was held. The arbitration decision has not yet been rendered and is expected to be issued no later than the second half of 2019.
As at December 31, 2017,2018, OPC Rotem has classified the amount deposited in escrow as non-current assets, sincebelieves that it is it is unable to assess whether this amountmore likely than not that its position will be returned withinaccepted and, accordingly, no provision has been recognized in the following 12 months.financial statements in respect of this claim.
| b. | ORL Claim |
In November 2017, a request was filed with the Tel Aviv-Jaffa District Court to approve a derivative claim on behalf of Oil Refineries Ltd. ("ORL"). The request is based on the petitioner's contention that the undertaking in the electricity purchase transaction between ORL and OPC-Rotem is an extraordinary interested party transaction that did not receive the approval of the general assembly of ORL shareholders on the relevant dates. The respondents to the request include ORL, Rotem, the Israel Corporation Ltd. and the members of ORL's Board of Directors at the time of entering into the electricity purchase transaction. The requested remedies include remedies such as a "do" order and financial remedies. OPC is studying
The subject of the request is the gas purchase transactions of ORL, Israel Chemicals Ltd., OPC Rotem and will respond to it as partOPC Hadera (hereinafter - the "Group Companies"), including their inter-company aspects, including: (1) a transaction of the legal process.Group Companies for the purchase of natural gas from Tamar Partners; and (2) transactions of the Group Companies for the purchase of natural gas from Energean.
F - 62
Note 19 – Contingent Liabilities, Commitments and Concessions (Cont’d)
As for the transaction with Energean, the plaintiff contends that beyond the Group's transaction with a third party (i.e., Energean), a transaction is required among the Group Companies themselves regarding the distribution of the economic benefits achieved in the joint negotiations in a manner that suits the purchasing and bargaining power of each of the group companies.
The plaintiff contends that the alleged absence of such an inter-company transaction (or the alleged absence of a proper procedure regarding the distribution of the benefit) discriminates against ORL (the inter-company dimension is not at market conditions) and ORL does not receive its share in the economic benefits due to its large purchasing power and its contribution to the negotiations with Energean (inter alia, in view of the fact that the transaction was made at similar prices for the Group Companies).
The main remedies for which the plaintiff is petitioning in relation to the Energean deal are a number of declarative and financial measures, and inter alia, an inter-company process that will reflect the differences in purchasing power between the companies.
With respect to the Tamar transaction, the petitioner claims that the Tamar transaction was not approved by ORL as required and additional claims regarding this transaction, including the question of its being beneficial to ORL and at market conditions; with respect to the Tamar transaction, declaratory remedies and compensatory remedies were requested from ORL and/or the refund of the amounts of the benefits that the OPC Hadera and the other parties to the transaction allegedly received, at the expense of ORL, with an additional coefficient petitioned.
In August 2018 the Group Companies submitted their response to the claim filed. The response rejected the contentions appearing in the claim and requested summary dismissal of the claim. A pre-trial hearing has been scheduled for June 2019.
OPC believes, based on advice from its legal advisors, are unable to assessthat the chancesclaim will not be accepted by the Court and, accordingly, no provision has been included in the financial statements in respect of the receipt of the request, the claim and the expectation of a negative cash flow.claim. Therefore, no provision was included in the financial statements.statements as at December 31, 2018.
| B. | Commitments |
| Guarantee party | Description | In thousands of NIS | In thousands of $ | Cash Collateral in thousands of $ | ||||||||||
| Advanced Integrated Energy Ltd | IDOM - EPC Agreement | — | 10,500 | — | ||||||||||
| Advanced Integrated Energy Ltd | GE - CSA Agreement | — | 21,000 | — | ||||||||||
| OPC Rotem Ltd. | Facility agreement | 45,000 | 12,980 | 6,505 | ||||||||||
| OPC Rotem |
Power Purchase Agreements (PPA)
On November 2, 2009, OPC signed a 20 year20-year power purchase agreement (“the PPA”) with Israel Electric Company Ltd. (“IEC”) to purchase capacity and energy from OPC over a period of twenty (20) years from the commencement date of commercial operation (“COD”) of the plant. The PPA is a “capacity and energy” agreement, meaning, a right of OPC Rotem to provide the plant’s entire production capacity to IEC and to produce electricity in the quantities and on the dates as required by IEC.
PPA with end users
The PPA with IEC provides OPC Rotem with the option to allocate and sell the generated electricity of the power station directly to end users. OPC Rotem has exercised this option and sells all of its energy and capacity directly to end users.
Most of the agreements are for a period of 10 years. The consideration, tariff, are set based on the TAOZ, the generation component of the time-of-use electricity tariff, less a discount from the generation component. Both the TAOZ and the generation component are determined by the Electricity Authority (EA, previously name PUA) and are updated from time to time.
If the consideration is less than a minimum tariff of the generation component, the Company has the right to terminate the agreements.
The agreements guarantyguarantee a certain level of availability of the power plant below which, customers are entitled to compensation.
Note 19 – Contingent Liabilities, Commitments and Concessions (Cont’d)
Natural supply gas agreement
On November 25, 2012, OPC Rotem signed an agreement with Noble Energy Mediterranean Ltd., Delek Drilling Limited Partnership, Isramco Negev 2 Limited Partnership, Avner Oil Exploration Limited Partnership and Dor Gas Exploration Limited Partnership ("Tamar Partners") regarding the natural gas supply to the power plant. The agreement shall terminate upon the earlier of: June 2029 or until OPC Rotem has consumed the entire contractual quantity. In addition, each party has the right to extend the period of the agreement for a period of up two additional years under certain conditions or until the date of consuming the total contract quantity, whichever is earlier (the "Tamar Agreement").
The price of the gas is linked to changes in the "Production Cost" Tariff, which is part of the TAOZ, and partially linked to the USD representative exchange rate, and includes "a floor price". According to the Agreement, OPC Rotem shall purchase natural gas with a total contractual quantity of 10.6 BCM (billions of cubic meters). OPC Rotem is under a “take or pay” obligation regarding a certain annual quantity of natural gas based on a mechanism set forth in the Tamar Agreement. The Tamar Agreement contains certain conditions that provide in the future flexibility to reduce the minimum annual quantity.
On December 28, 2015 the agreement received the Israeli Antitrust Authority, ("Authority") approval. The agreement between Tamar and OPC Rotem allows cutting back the supply of gas to OPC Rotem during the "interim period" in the event of gas shortage and gives preference in such scenario to certain customers of Tamar Partners over OPC Rotem.
On January 8, 2018, the EA published a resolution which entered into force and effect on January 15, 2018, regarding the update of tariffs for 2018 (“2018 Tariff Update”), in which the rate of the production component was raised by 6.7% from NIS 265 per MWh to NIS 281.6 per MWh. As a result of the 2018 Tariff Update, OPC Rotem may payand Hadera paid a price in 2018 that iswas higher than the minimum price stipulated in their gas agreements.
| OPC Hadera |
Power and Steam Purchase Agreement (“PSPA”)
On August 10, 2015, OPC Hadera and Hadera Paper entered into two agreements for the supply of electricity and steam to Hadera Paper’s facility:
| - | Short Term PSPA - Pursuant this agreement, OPC Hadera will supply steam and electricity until COD of the power plant, which shall be done through the existing energy center. |
| - | Long Term PSPA – Pursuant this agreement, OPC Hadera will supply steam and electricity during the period commencing upon COD of the power plant and for a period of 18 years thereafter. Subsequent to the date of the report, in January 2019, an amendment was signed to this agreement providing that the period will be 25 years from the COD of the power plant. |
F - 64
Note 19 – Contingent Liabilities, Commitments and Concessions (Cont’d)
In consideration for electricity purchased under each of the PSPAs, Hadera Paper will pay an electricity tariff which is based on a certain discount in comparison with the electricity tariffs charged by the Israeli Electric Company Ltd. The steam price paid by Hadera Paper is subject to adjustment based upon Hadera Paper’s annual steam consumption.
Hadera Paper is under a “take or pay” obligation (hereinafter – "the TOP") regarding a certain annual quantity of steam based on a mechanism set forth in the agreements. Under the PSPAs, OPC Hadera is obligated to certain availability with respect to the supply of electricity and steam, which obligation excludes unavailability due to events predominately not in the control of OPC Hadera. In addition, in certain circumstances, OPC Hadera may be subject to penalties in the event of delays in the COD of the power plant. OPC Hadera’s liability is subject to an annual cap, as set out in the agreements.
PPA with end users
As of December 31, 2018, OPC Hadera completed the signing of agreements for the sale of most of the generation capacity of the power plant to end users. The agreements are for a period of 10 years, and under most of the agreements the end user has an early termination right, in accordance, with the terms set forth in the agreement with right of refusal of OPC Hadera. The consideration was set based on the TAOZ rate, less a discount from the generation component.
If the consideration is less than the minimum tariff set for the generation component, OPC Hadera has the right to terminate the agreements.agreements. In addition, the agreements include compensation in the event of a delay of power plant’s COD and compensation for the unavailability of the power plant below an agreed minimum level.
Gas Sale and Purchase Agreement (“GSPA”)
On JanuaryNovember 25, 2012, Hadera Paper entered into a gas sale and purchaseRotem signed an agreement (hereinafter-with Tamar Partners which, as at the “GSPA”) withdate of the report, consist of Noble Energy Mediterranean Ltd., Delek Drilling Limited Partnership, Isramco Negev 2 Limited Partnership, Dor Gas Exploration Limited Partnership, and Everest Infrastructures Limited Partnership (hereinafter- theand Tamar Petroleum Limited Partnership (hereinafter – “Tamar Partners”), regarding thesupply of natural gas supply to Hadera Paper’s existing gas consuming facilities (i.e. the Energy Center) as well as the additional capacity of the power plant under construction.(hereinafter – “the Agreement between Tamar and Rotem”). The agreement was amended on October 16, 2012. On August 10, 2015, the GSPA was assigned to OPC Hadera pursuant to the terms of the share purchase agreement. The GSPAAgreement between Tamar and Rotem will terminate uponremain in effect until the earlier of 15 years following the commencement of supply from the Tamar reservoir (April 2013)June 2029 or until the date on which Rotem consumes the full contractual quantity. Rotem is to purchase natural gas in an overall maximum quantity of consuming the total contract quantity (118,000,000 MMBTU)10.6 BCM (billion cubic meters). In addition, both parties have an option to extend the GSPA by up to two years
Certain annual quantities in the event the total contract quantity was not yet consumed by the end of the GSPA term.
The Agreement between Tamar and Rotem allows reducing the supply of gas to Rotem during the “interim period” (as detailed below) in the event of gas shortage and gives preference in such a case to certain customers of Tamar Partners over Rotem. Nevertheless, in April 2017, the Natural Gas Sector Regulations (Maintaining a Natural Gas Sector during an Emergency), 2017, were published, which provide for handling of the gas supply in the event of failure by a gas supplier to supply all of the natural gas out of the relevant field. In general, pursuant to the Regulations, in the event of shortage of natural gas, the available gas will be allocated proportionately among consumers that generate electricity and consumers that do not generate electricity, based on their average consumption, and after deducting gas quantities that are reserved for distribution consumers. It is noted that in extraordinary circumstances of a shortage that has a significant adverse impact on the regular operation of the electricity sector, the Regulations authorize the Minister of Energy to make an exception to the allocation provided in the Regulations, after consulting with the Director of the Natural Gas Authority and the Director of the Electricity Authority.
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Note 19 – Contingent Liabilities, Commitments and Concessions (Cont’d)
Without detracting from that stated above, pursuant to the gas sale and purchase agreement (hereinafter – “the GSPA”), Rotem is defined as a “Tier B” customer and accordingly during the “Interim Period”, which according to a statement from Tamar Partners commenced, in April 2015 and will end in September 2020, under certain circumstances, Tamar Partners will not be obligated to supply Rotem’s daily capacity. On the other hand, during the “Interim Period” Rotem is not subject to any TOP obligation.
Pursuant to the agreement, the price is based on a base price in NIS that was determined on the signing date of the agreement, linked to changes in the generation component tariff, which is part of the TAOZ, and in part (30%) to the representative rate of exchange of the U.S. dollar. As a result, increases and decreases in the generation component, as determined by the Electricity Authority, affect Rotem’s cost of sales and its profit margins. In addition, onthe natural gas price formula set forth in the Agreement between Tamar and Rotem is subject to a minimum price denominated in US dollars. As a result of past reductions in the generation component tariff, Rotem began paying the minimum price in November 2014, and therefore decreases in the generation tariff in February and September 6, 2016, OPC Hadera and2015 adversely affected Rotem’s profit margins.
In July 2013, the Electricity Authority published four generation component tariff indices, ranging from NIS 333.2 per MWh to NIS 386 per MWh, instead of the single tariff that had previously been used. In January 2015, the Electricity Authority published new tariffs, which reduced the tariff rates by about 10%. A disagreement arose between the parties in connection with the manner of indexing the natural gas price formula with respect to Rotem’s gas supply agreement with the Tamar Partners, entered into an additional GSPA (“Additional GSPA”) fornamely, which of the Electricity Authority’s July 2013 tariffs applied to Rotem’s supply of additional quantities of natural gas (in additionagreement and, similarly, also with respect to the original GSPA) as oftariffs published in January 2015 (see Note 19.A.a for further information).
Under the commissioning of the intended power plant.
Israel Natural Gas Lines Ltd. Agreement for the Transmission of Natural Gas
On July 11, 2007, Hadera Paper signed a gas transmission agreement with Israel Natural Gas Lines Ltd. (hereinafter- “INGL”), which was assigned to OPC Hadera on August 10, 2015, in accordance to the SPA. The agreement as amended on June 7, 2013 and March 31, 2015 is extended until July 14, 2018 and governs the transmission of natural gas to the Energy Center. The agreement was further extended and modified by a third amendment on December 28, 2015 which facilitates transmission of natural gas to the power plant, by means of the construction and installation of a new pressure regulation and measurement (PRMS) station, and includes additional commercial terms. The duration of the agreement, as modified by the third amendment, shall be 16 years from an agreed upon “start date” with an option for extension. The “start date” in accordance with the third amendment, will occur within a window of time as stipulated in the agreement. Such window may be postponed due to reasons attributable to changes in specifications of the PRMS or to the land on which the PRMS is to be constructed.
As part of the agreement, OPC Hadera extended to INGL a bank guarantee in the amount of approximately NIS 296 thousand (approximately $85 thousand) linked to the CPI in connection with OPC Hadera's monthly payment commitment pursuant to the agreement, which replaces the original guarantee provided by the Company.OPC Hadera.
In addition,, the OPC Hadera provided a CPI-linked corporate guarantee in an amount equal to NIS 4 million (approximately $1 million) in connection with the undertaking to construct the new PRMS facility for OPC Hadera under the agreement.
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Note 2119 – Contingent Liabilities, Commitments and Concessions (Cont’d)
IDOM Servicios Integrados
On January 21, 2016, an agreement was signed between OPC Hadera and SerIDOM Servicios Integrados IDOM, S.A.U (hereinafter - “IDOM”), for the design, engineering, procurement and construction of a cogeneration power plant in consideration of approximately $156 million (including additions to the Agreement that were signed at a later date), which is payable on the basis of progress and the achievement of milestones. The agreement contains a mechanism for the compensation of OPC Hadera in the event that IDOM fails to meet its contractual obligations, up to the amounts that are set forth in the agreement. IDOM has provided bank guarantees and a corporate guarantee by its parent company to secure said obligations and OPC Hadera has extended to IDOM a guarantee to secure part of OPC Hadera's liabilities.
In October 2018, an addendum to the construction agreement was signed (in this Section – “the Addendum to the Agreement”) whereby the additional amount Hadara was to pay, in the amount of about €10 million (approximately $11.5 million), in two payments of NIS 21.5 million (approximately $5.7 million) each, was updated such that the second payment was conditioned on construction of the Hadera Power Plant up to February 16, 2019 (a condition that was not fulfilled). Pursuant to the Addendum to the Agreement, a delay in completion of the work reduces the above‑mentioned payment in accordance with a mechanism determined by the parties. In addition, as part of the change order the parties agreed, among other things, to waive past claims. In the Company’s estimation, the commercial operation date of the Hadera Power Plant is expected to be in the third quarter of 2019 – this taking into account the delays that occurred during the construction, including, the timetables for replacement of a faulty component discovered during performance of the construction work, and as stated pursuant to the construction agreement Hadera is entitled to a certain compensation from IDOM in respect of delay in completion of the construction.
General Electric International and GE Global Parts
On June 27, 2016, OPC Hadera entered into a long-term service agreement (hereinafter - “the Service Agreement”) with General Electric International Ltd. (hereinafter - “GEI”) and GE Global Parts & Products GmbH (hereinafter - “GEGPP”), pursuant to which these two companies will provide maintenance treatments for the two gas turbines of GEI, generators and auxiliary facilities of the OPC Hadera Power Plant for a period commencing on the date of commercial operation until the earlier of: (a) the date on which all of the covered units (as defined in the Service Agreement) have reach the end-date of their performance and (b) 25 years from the date of signing the Service Agreement. The cost of the service agreement amounts to $42 million when the consideration will be payable over the term of the Agreement, based on the formula prescribed therein.
The Service Agreement contains a guarantee of reliability and other obligations concerning the performance of the Power Plant and indemnification to OPC Hadera in the event of failure to meet the performance obligations. At the same time, OPC Hadera has undertaken to pay bonuses in the event of improvement in the performance of the plant as a result of the maintenance works, up to a cumulative ceiling for every inspection period. GEI provided its subsidiary with a corporate guarantee of the parent company. To secure these liabilities, IC Power Asia Development Ltd. (hereinafter ICPAD) provided GEI with a corporate guarantee to secure some of OPC Hadera's liabilities. Subsequent to the report date, in 2018, OPC Hadera assumed the corporate guarantee that was provided by ICPAD.
| OPC Energy Ltd. |
Option agreement with Hadera Paper
On April 5, 2017, OPC Energy signed an option agreement with Hadera Paper, effective from February 9, 2017, concerning the lease of an area of some 68,000 sq.m. in proximity to the Hadera Power Plant, pending the approval of the competent organs.Plant. The option period commenced on the date of signing and expires on December 31, 2022. The option period is divided into three periods for which the option fees will be payable: NIS 500 thousand (approximately $144$144 thousand) for 2017; NIS 1.5 million (approximately $433$433 thousand) for 2018; and NIS 3 million (approximately $865$800 thousand) for each of the years 2019 through 2022 (inclusive). As partSubsequent to the date of the agreement, OPC Energy undertakesreport, in January 2019, an amendment to work to obtain statutory authorization for the construction of a power plant on the leased area and to pursue the advancement and approval of the statutory plan within the option period. OPC Energy may terminate the option agreement with an advance notice of 14 days duringHadera Paper was signed whereby it was agreed to extend the first option period (i.e. until December 31, 2017)to 2019, and where the amendment provides that notwithstanding that stated in the original option agreement, the Company is to pay Hadera Paper NIS 2.2 million (approximately $587 thousand) for 2019, and if the Company exercises the option and signs a lease agreement it will pay Hadera Paper on the financial closing date with a financing party with respect to construction of the Hadera Power Plant, an additional amount of NIS 800 thousand (approximately $213 thousand). The amendment to the optionag provides that no other change applies to the option periods in respect of the years 2020–2022 and the payment in respect thereof.
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Note 19 – Contingent Liabilities, Commitments and Concessions (Cont’d)
Additionally, OPC Energy is required to notify, at least 90 days prior to the end of each option year, of its intention to extent the option for an additional year. Otherwise, the option will expire at the end of the same year. According to the agreement, the option will expire if the National Infrastructure Committee in the Planning Administration refuses to approve the statutory plan and OPC Energy willthe Company does not initiate legal proceedings in connection with such refusal. The agreement also prescribesIf the principles ofoption is exercised, the lease agreement that wouldto be signed subject to the exercise of the option and stipulates that the option will expire if, at the end of 120 days of the date of signing of the option agreement, the parties fail to agree on the wording of the lease agreement. According to the principles that are set forth in the option agreement in relation to the lease agreement, the lease period will be for a period of 25 years less one month, starting on the handing over of possession in the leasehold (i.e.commencing from the date of exercisingtransfer of possession of the leasehold (i.e., the exercise date of the option) or on the commencement date of commencement of commercial operation, as set forth in the agreement, with an option to extend the engagement.undertaking. It is further stipulated that the lease agreement will not include a liability limit and that OPC Energy will bear all fees, taxes and payments that are imposed in respect of the construction of a power plant on the leasehold.
On April 6, 2017, OPC Energy (formerly IC Power Israel) entered into a series of agreements to acquire 95% of the shares of ZometTzomet Energy Ltd. (Zomet)(Tzomet) from Ipswich Holdings Netherlands B.V. (47.5%) and Rapac Energy Ltd. (47.5%), and an agreement with Methy Invest S.A. (Methy) for the waiver of its rights in connection with the shares of Ipswich and Rapac. ZometTzomet holds the rights to develop a natural gas fired power station at Plugot Junction (Israel) with an estimated capacity of approximately 396 MW, and the land rights and statutory approvals.
The total transaction consideration under the aforesaid agreements is expected to aggregate approximately $24 million, subject to adjustments pertaining to the volume of the ZometTzomet Project and subject to the payment milestones that are stipulated in the agreement.
On August 7, 2017, OPC Energy received a letter from the Israel Antitrust Authority and the Chairman of the Committee for the Reduction of Concentration (“the Concentration Committee”), addressed to the Electricity Authority, stating that the Concentration Committee recommends not to grant a conditional license for the ZometTzomet project.
In March 2018, OPC completed the acquisition of 95% of the shares of ZometTzomet Energy, although ZometTzomet still requires the necessary regulatory approvals, the approval for a new conditional licenses for electricity generation of the Electricity Authority and the approval of the Anti-Trust Commissioner.
Subsequent to the date of the report, on January 3, 2019, OPC signed an agreement with the private shareholders in Tzomet, for which a trustee holds 5% of Tzomet’s share capital (hereinafter – “the Sellers”), whereby the Sellers will sell their shares in Tzomet to the Company (hereinafter – “the Sale Agreement” and “Shares Being Sold”, respectively) in increments, on a number of dates and subject to fulfillment of milestones (see 10.A.1.a for further information).
PW Power Systems LLC
In September 2018, Tzomet signed a planning, procurement and construction agreement (hereinafter – “the Agreement”) with PW Power Systems LLC (hereinafter – “the Tzomet Construction Contractor”), for construction of the Tzomet project. The Agreement is a “lump‑sum turnkey” agreement wherein the Tzomet Construction Contractor committed to construct the Tzomet project in accordance with the technical and engineering specifications determined and includes various undertakings of the contractor. In addition, the Tzomet Construction Contractor committed to provide certain maintenance services in connection with the power station’s main equipment for a period of 20 years commencing from the start date of the commercial operation.
Pursuant to the Agreement, the Tzomet Construction Contractor undertook to complete the construction work of the Tzomet project, including the acceptance tests, within a period of about two and a half years from the date of receipt of the work commencement order from OPC (hereinafter – “the Work Commencement Order”), subject to certain circumstances spelled out in the Agreement. The Agreement includes a preliminary “development work” period, which commenced on September 6, 2018 (hereinafter – “the Preliminary Development Work”). The Preliminary Development Work includes, among other things, preliminary planning and receipt of building permits. It is noted that OPC is not required to submit a work commencement order and is permitted to conclude the Agreement in each of its stages, subject to certain circumstances stipulated in the Agreement.
In OPC’s estimation, based on the work specifications, the aggregate consideration that will be paid in the framework of the Agreement is about $300 million, and it will be paid based on the milestones provided therein.
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Note 19 – Contingent Liabilities, Commitments and Concessions (Cont’d)
Furthermore, the Agreement includes provisions that are customary in agreements of this type, including commitments for agreed compensation, limited in amount, in a case of non‑compliance with the terms of the Agreement, including with respect to certain guaranteed executions and for non‑compliance with the timetables set, and the like. The Agreement also provides that the Zomet Construction Contractor is to provide guarantees, including a parent company guarantee, as is customary in agreements of this type.
| OPC Rotem and OPC Hadera |
Energean agreement
On December 6, 2017, OPC Rotem and OPC Hadera signed an agreement with Energean Israel Ltd. (hereinafter - "Energean"), which havehas holdings in the Karish and Tanin gas reservoirs (hereinafter - "the gas reservoir"), subject to the fulfillment of suspending conditions). The agreements with OPC Rotem and OPC Hadera are separate and independent. According to the terms set forth in the agreements, the total quantity of natural gas that OPC Rotem and OPC Hadera are expected to purchase is about 9 BCM (for OPC Rotem and OPC Hadera together) for the entire supply period (hereinafter - the "Total Contractual Quantity"). The agreement includes, among other things, TOP mechanism under which OPC Rotem and OPC Hadera will undertake to pay for a minimum quantity of natural gas, even if they have not used it.
The agreements include additional provisions and arrangements for the purchase of natural gas, and with regard to maintenance,, gas quality, limitation of liability, buyer and seller collateral, assignments and liens, dispute resolution and operational mechanisms.
The agreements are valid for 15 years from the date the agreement comes into effect or until completion of the supply of the total contractual quantity from Energean to each of the subsidiaries (OPC Rotem and OPC Hadera ). According to each of the agreements, if after the elapse of 14 years from the date the agreement comes into effect, the contracting company did not take an amount equal to 90% of the total contractual quantity, subject to advance notice, each party may extend the agreement for an additional period which will begin at the end of 15 years from the date the agreement comes into effect until the earlier of: (1) completion of consumption of the total contractual quantity; or (2) at the end of 18 years from the date the agreement comes into effect. The agreement includes circumstances under which each party will be entitled to bring the relevant agreement to an end before the end of the contractual period, in case of prolonged non-supply, damage to collateral and more.
As for the consideration,, the price of natural gas is based on an agreed formula, linked to the electricity generation component and includes a minimum price. The total financial volume of the agreements may reach $ 1.3 billion (assuming maximum consumption according to the agreements and according to the gas price formula as at the report date), and depends mainly on the electricity generation component and the gas consumption. On January 14, 2018, the agreement was approved by OPC Energy’s shareholders.
OPC Hadera signed an agreement with an unrelated third party for the sale of surplus gas quantities which will be supplied to it pursuant to the agreement with Energean. As the agreements cannot be settled on a net basis and the undertakings were made for the purpose of OPC Hadera’s own independent contractual use, the agreements for the purchase and sale of gas are not within the scope of IFRS 9. Accordingly, the agreements were accounted for as executory contracts.
| Inkia Energy Limited |
Under the share purchase agreement, our subsidiary Inkia has agreed to indemnify the buyer and its successors, permitted assigns, and affiliates against certain losses arising from a breach of Inkia’s representations and warranties and certain tax matters, subject to certain time and monetary limits depending on the particular indemnity obligation. These indemnification obligations are supported by (a) a three-year pledge of shares of OPC which represent 25% of OPC’s outstanding shares, (b) a deferral of $175 million of the purchase price in the form of a four-year $175 million Deferred Payment Agreement, accruing interest at 8% per year and payable in-kind, and (c) a three-year corporate guarantee from Kenon for all of the Inkia’s indemnification obligations.obligations, all of the foregoing periods running from the closing date of December 31, 2017. In December 2018, the indemnification commitment was assigned by Inkia to a fellow wholly owned subsidiary of Kenon.
F - 7569
Note 2220 – Share Capital and Reserves
| A. | Share Capital |
| Company | ||||||||||||||||
| No. of shares | ||||||||||||||||
| (’000) | Company No. of shares | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| Authorised and in issue at January, 1 | 53,720 | 53,694 | 53,808 | 53,720 | ||||||||||||
| Authorised and in issued as part of the spin-off from IC | — | — | ||||||||||||||
| 53,720 | 53,694 | |||||||||||||||
| Issued for share plan | 88 | 26 | 19 | 88 | ||||||||||||
| Authorised and in issue at December. 31 | 53,808 | 53,720 | 53,827 | 53,808 | ||||||||||||
All shares rank equally with regards to Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company. All issued shareshares are fully paid with no par value.
The capital structure of the Company comprises of issued capital and accumulated profits. The management manages its capital structure to ensure that the Company will be able to continue to operate as a going concern. The Company is not subjected to externally imposed capital requirement.
In 2017, 87,911 (2016: 25,692)2018, 19,171 (2017: 87,911) ordinary shares were granted under the Share Incentive Plan to key management at an average price of $12.51 (2016: $9.34)$21.07 (2017: $12.51) per share.
Capital reduction
In December 2017, Kenon's shareholders approved a capital reduction to permit a distribution to shareholders of a portion of the proceeds received from the sale of Kenon's Latin American and Caribbean power generation and distribution businesses (the "Sale"). The capital reduction of up to $750 million was approved by the High Court of the Republic of Singapore on February 20, 2018. Kenon's Board of Directors considered a number of factors in determining the amount of the distribution, including the amount of proceeds from the Sale remaining after the repayment of debt, the payment of tax and other expenses, and Kenon's anticipated cash needs after the distribution.
On March 22, 2018, Kenon distributed an aggregate amount of $665 million, or $12.35 per share, to Kenon’s shareholders. TheAs a result, the share capital and total equity of Kenon will be reduced by $665 million in 2018. Following Kenon’s payment of the distribution, repayment of debt, payment of tax and other expenses, Kenon will retain cash in excess of $50 million at the holding company level (see Note 33.1.A).million.
| B. | Translation reserve |
The translation reserve includes all the foreign currency differences stemming from translation of financial statements of foreign activities as well as from translation of items defined as investments in foreign activities commencing from January 1, 2007 (the date IC first adopted IFRS).
| C. | Capital reserves |
Capital reserves reflect the unrealized portion of the effective part of the accrued net change in the fair value of hedging derivative instruments that have not yet been recorded in the statement of profit or loss.
| D. | Dividend |
On November 27, 2018, Kenon announced that its board of directors approved a cash dividend of $1.86 per share (an aggregate amount of $100 million), to Kenon’s shareholders of record as of the close of trading on December 7, 2018, for payment on December 17, 2018.
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Note 20 – Share Capital and Reserves (Cont’d)
| E. | Kenon's share plan |
Kenon has established a share incentive plan for its directors and management. The plan provides grants of Kenon shares, as well as stock options in respect of Kenon’s shares, to directors and officers of the Company and IC pursuant to awards, which may be granted by Kenon from time to time, representing up to 3% of the total issued shares (excluding treasury shares) of Kenon. During 20152018 and 2014,2017, Kenon granted awards of shares to certain members of its management. Such shares are vested upon the satisfaction of certain conditions, including the recipient’s continued employment in a specified capacity and Kenon’s listing on each of the NYSE and the TASE. The fair value of the shares granted in 20172018 is $404 thousand (2017: $1 million, (2016: $240 thousand, 2015:2016: $ 940240 thousand) and was determined based on the fair value of Kenon’s shares on the grant date. Kenon recognized $508$732 thousand as general and administrative expenses in 2017 (2016:2018 (2017: $508 thousand, 2016: $547 thousand, 2015: $566 thousand).
Note 2321 – OPC Energy Ltd’s Initial Public Offering
On August 10, 2017, OPC Energy Ltd (“OPC”) completed the issuance of 31,866,700 ordinary shares on the Tel Aviv Stock Exchange to the public at a price of NIS 12.5 per share (approximately US$ 3.47 per share). The proceeds of the issuance amount to approximately NIS 399 million (approximately $ 111 million), net of issuance costs of NIS 39 million (approximately $11 million). After the completion of the issuance, the public holds 24.2% of OPC’s shares, while the Group’s equity interest was diluted to 75.8% of the total issued shares of OPC. As a result of the dilution, the Group, registered $57 million, net of capital reserves realization, in equity attributable to equity holders and $42 million in non-controlling interest.
Note 2422 – Revenue and Cost of Sales and Services
| For the Year Ended December 31 | ||||||||||||
| 2017 | 2016* | 2015* | ||||||||||
| $ thousands | ||||||||||||
| Capacity and energy purchases and transmission costs | 50,973 | 57,310 | 93,196 | |||||||||
| Fuel, gas and lubricants | 137,832 | 133,012 | 142,967 | |||||||||
| Payroll and related expenses | 6,269 | 5,942 | 4,325 | |||||||||
| Regulatory expenses | 62,908 | 48,509 | - | |||||||||
| Third party services | 2,670 | 2,890 | - | |||||||||
| Other | 6,484 | 4,003 | 4,328 | |||||||||
| 267,136 | 251,666 | 244,816 | ||||||||||
| A. | Revenue |
| For the Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| $ Thousands | ||||||||||||
| Revenue from sale of electricity | 347,167 | 349,957 | 309,249 | |||||||||
| Revenue from sale of steam | 16,095 | 15,438 | 14,939 | |||||||||
| Others | 750 | 309 | 65 | |||||||||
| 364,012 | 365,704 | 324,253 | ||||||||||
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Note 22 – Revenue and Cost of Sales and Services (Cont’d)
| B. | Cost of Sales and Services |
| For the Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| $ Thousands | ||||||||||||
| Fuels | 118,698 | 129,788 | 125,528 | |||||||||
| Electricty and infrastructure services | 125,623 | 122,340 | 112,038 | |||||||||
| Salaries and related expenses | 6,097 | 5,822 | 5,305 | |||||||||
| Generation and operating expenses and outsourcing | 6,509 | 6,432 | 6,119 | |||||||||
| Third party services | 1,548 | 1,734 | 1,764 | |||||||||
| Other | 1,040 | 1,020 | 912 | |||||||||
| 259,515 | 267,136 | 251,666 | ||||||||||
The following footnote in the financial statements have been restated to be comparable with current year presentation:
| For the year ended December 31, 2017 | As previously stated | Effect of restatements | Restated | |||||||||
| $ Thousands | ||||||||||||
| Fuels | - | 129,788 | 129,788 | |||||||||
| Fuel, gas and lubricants | 137,832 | (137,832 | ) | - | ||||||||
| Electricity and infrastructure services | - | 122,340 | 122,340 | |||||||||
| Capacity and energy purchases and transmission costs | 50,973 | (50,973 | ) | - | ||||||||
| Regulatory expenses | 62,908 | (62,908 | ) | - | ||||||||
| Salaries and related expenses | 6,269 | (447 | ) | 5,822 | ||||||||
| Generation and operating expenses and outsourcing | - | 6,432 | 6,432 | |||||||||
| Third party services | 2,670 | (936 | ) | 1,734 | ||||||||
| Other | 6,484 | (5,464 | ) | 1,020 | ||||||||
| 267,136 | - | 267,136 | ||||||||||
| For the year ended December 31, 2016 | As previously stated | Effect of restatements | Restated | |||||||||
| $ Thousands | ||||||||||||
| Fuels | - | 125,528 | 125,528 | |||||||||
| Fuel, gas and lubricants | 133,012 | (133,012 | ) | - | ||||||||
| Electricty and infrastructure services | - | 112,038 | 112,038 | |||||||||
| Capacity and energy purchases and transmission costs | 57,310 | (57,310 | ) | - | ||||||||
| Regulatory expenses | 48,509 | (48,509 | ) | - | ||||||||
| Salaries and related expenses | 5,942 | (637 | ) | 5,305 | ||||||||
| Generation and operating expenses and outsourcing | - | 6,119 | 6,119 | |||||||||
| Third party services | 2,890 | (1,126 | ) | 1,764 | ||||||||
| Other | 4,003 | (3,091 | ) | 912 | ||||||||
| 251,666 | - | 251,666 | ||||||||||
F - 72
Note 2523 – Selling, General and Administrative Expenses
| For the Year Ended December 31 | For the Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016* | 2015* | 2018 | 2017 | 2016 | |||||||||||||||||||
| $ thousands | $ Thousands | |||||||||||||||||||||||
| Payroll and related expenses | 21,380 | 14,830 | 17,085 | 11,399 | 21,380 | 14,830 | ||||||||||||||||||
| Depreciation and amortization | 691 | 641 | 817 | 607 | 692 | 641 | ||||||||||||||||||
| Professional fees | 20,334 | 23,863 | 9,576 | 12,115 | 20,334 | 23,863 | ||||||||||||||||||
| Other expenses | 13,887 | 7,761 | 22,248 | 9,910 | 13,886 | 7,761 | ||||||||||||||||||
| 56,292 | 47,095 | 49,726 | 34,031 | 56,292 | 47,095 | |||||||||||||||||||
Note 2624 – Financing Income (Expenses), Net
| For the Year Ended December 31 | For the Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
| $ thousands | $ Thousands | |||||||||||||||||||||||
| Financing income | ||||||||||||||||||||||||
| Interest income from bank deposits | 640 | 2,269 | 4,772 | 4,360 | 640 | 2,269 | ||||||||||||||||||
| Interest income from deferred payment | 14,166 | - | - | |||||||||||||||||||||
| Interest income from associated company | 8,494 | |||||||||||||||||||||||
| Net change from change in exchange rates | 2,259 | 5,448 | 521 | 1,129 | 2,259 | 5,448 | ||||||||||||||||||
| Net changes in fair value of Tower options series 9 | - | - | 2,119 | |||||||||||||||||||||
| Net change in fair value of derivative financial instruments | - | 6 | 2,720 | - | - | 6 | ||||||||||||||||||
| Other income | 5 | 1 | 589 | 443 | 5 | 1 | ||||||||||||||||||
| Financing income | 2,904 | 7,724 | 10,721 | 28,592 | 2,904 | 7,724 | ||||||||||||||||||
| Financing expenses | ||||||||||||||||||||||||
| Interest expenses to banks and others | (59,514 | ) | (45,317 | ) | (34,378 | ) | (30,382 | ) | (59,514 | ) | (45,317 | ) | ||||||||||||
| Net change from change in exchange rates | - | - | (648 | ) | ||||||||||||||||||||
| Net change in fair value of derivative financial instruments | (1,168 | ) | - | - | - | (1,168 | ) | - | ||||||||||||||||
| Other expenses | (9,484 | ) | (1,959 | ) | (1,368 | ) | - | (9,484 | ) | (1,959 | ) | |||||||||||||
| Financing expenses | (70,166 | ) | (47,276 | ) | (36,394 | ) | (30,382 | ) | (70,166 | ) | (47,276 | ) | ||||||||||||
| Net financing expenses recognized in the statement of profit and loss | (67,262 | ) | (39,552 | ) | (25,673 | ) | (1,790 | ) | (67,262 | ) | (39,552 | ) | ||||||||||||
F - 7873
Note 2725 – Income Taxes
| A. | Components of the Income Taxes |
| For the Year Ended December 31 | For the Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
| $ thousands | $ Thousands | |||||||||||||||||||||||
| Current taxes on income | ||||||||||||||||||||||||
| In respect of current year* | 64,291 | 1,687 | 25 | 1,878 | 64,291 | 1,687 | ||||||||||||||||||
| In respect of prior years | 44 | 92 | (294 | ) | (48 | ) | 44 | 92 | ||||||||||||||||
| Deferred tax income | ||||||||||||||||||||||||
| Creation and reversal of temporary differences | 8,474 | 473 | 9,312 | 9,669 | 8,474 | 473 | ||||||||||||||||||
| Total taxes on income | 72,809 | 2,252 | 9,043 | 11,499 | 72,809 | 2,252 | ||||||||||||||||||
No previously unrecognized tax benefits were used in 2015, 2016, 2017 or 20172018 to reduce our current tax expense.
| * | Current taxes on income |
| B. | Reconciliation between the theoretical tax expense (benefit) on the pre-tax income (loss) and the actual income tax expenses |
| For the Year Ended December 31 | For the Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
| $ thousands | $ Thousands | |||||||||||||||||||||||
| (Loss)/profit from continuing operations before income taxes | (135,636 | ) | (426,900 | ) | 32,154 | |||||||||||||||||||
| Profit/(loss) from continuing operations before income taxes | 461,968 | (135,636 | ) | (426,900 | ) | |||||||||||||||||||
| Statutory tax rate | 17.00 | % | 17.00 | % | 17.00 | % | 17.00 | % | 17.00 | % | 17.00 | % | ||||||||||||
| Tax computed at the statutory tax rate | (23,058 | ) | (72,573 | ) | 5,466 | 78,535 | (23,058 | ) | (72,573 | ) | ||||||||||||||
| Increase (decrease) in tax in respect of: | ||||||||||||||||||||||||
| Elimination of tax calculated in respect of the Group’s share in losses of associated companies | 20,924 | 31,651 | 18,880 | 18,215 | 20,924 | 31,651 | ||||||||||||||||||
| Income subject to tax at a different tax rate | 63,446 | (2,548 | ) | 7,218 | 2,632 | 63,446 | (2,548 | ) | ||||||||||||||||
| Non-deductible expenses | 12,850 | 41,960 | 3,944 | 6,752 | 12,850 | 41,960 | ||||||||||||||||||
| Exempt income | (7,006 | ) | - | (35,651 | ) | (97,664 | ) | (7,006 | ) | - | ||||||||||||||
| Taxes in respect of prior years | 44 | 92 | (294 | ) | (48 | ) | 44 | 92 | ||||||||||||||||
| Impact of change in tax rate | - | - | - | |||||||||||||||||||||
| Changes in temporary differences in respect of which deferred taxes are not recognized | 4,285 | 1,419 | 580 | (4 | ) | 4,285 | 1,419 | |||||||||||||||||
| Tax losses and other tax benefits for the period regarding which deferred taxes were not recorded | 350 | 2,449 | 8,335 | 2,883 | 350 | 2,449 | ||||||||||||||||||
| Differences between the measurement base of income reported for tax purposes and the income reported in the financial statements | 13 | - | (419 | ) | - | 13 | - | |||||||||||||||||
| Other differences | 961 | (198 | ) | 984 | 198 | 961 | (198 | ) | ||||||||||||||||
| Taxes on income included in the statement of profit and loss | 72,809 | 2,252 | 9,043 | 11,499 | 72,809 | 2,252 | ||||||||||||||||||
F - 7974
Note 2725 – Income Taxes (Cont’d)
| C. | Deferred tax assets and liabilities |
| 1. | Deferred tax assets and liabilities recognized |
The deferred taxes are calculated based on the tax rate expected to apply at the time of the reversal as detailed below. Deferred taxes in respect of subsidiaries were calculated based on the tax rates relevant for each country.
The deferred tax assets and liabilities are derived from the following items:
| Property plant and equipment | Employee benefits | Carryforward of losses and deductions for tax purposes | Other* | Total | ||||||||||||||||
| $ thousands | ||||||||||||||||||||
| Balance of deferred tax asset (liability) as at January 1, 2016 | (123,968 | ) | 601 | 61,943 | (73,966 | ) | (135,390 | ) | ||||||||||||
| Changes recorded on the statement of profit and loss | (48,212 | ) | 286 | 28,014 | 1,741 | (18,171 | ) | |||||||||||||
| Changes recorded to equity reserve | — | 61 | — | (5,249 | ) | (5,188 | ) | |||||||||||||
| Translation differences | (1,495 | ) | 15 | 398 | 791 | (291 | ) | |||||||||||||
| Impact of change in tax rate | 7,638 | — | (5,620 | ) | (8,875 | ) | (6,857 | ) | ||||||||||||
| Changes in respect of business combinations | (41,456 | ) | 748 | — | 6,355 | (34,353 | ) | |||||||||||||
| Balance of deferred tax asset (liability) as at December 31, 2016 | (207,493 | ) | 1,711 | 84,735 | (79,203 | ) | (200,250 | ) | ||||||||||||
| Changes recorded on the statement of profit and loss | (13,940 | ) | (1,097 | ) | (13,919 | ) | 15,845 | (13,111 | ) | |||||||||||
| Changes recorded to equity reserve | - | 882 | - | (7,024 | ) | (6,142 | ) | |||||||||||||
| Translation differences | (10,046 | ) | 24 | 4,397 | 1,253 | (4,372 | ) | |||||||||||||
| Impact of change in tax rate | 575 | - | - | - | 575 | |||||||||||||||
Sale of subsidiaries | 140,736 | (1,520 | ) | (39,764 | ) | 71,095 | 170,547 | |||||||||||||
| Balance of deferred tax asset (liability) as at December 31, 2017 | (90,168 | ) | - | 35,449 | 1,966 | (52,753 | ) | |||||||||||||
| Property plant and equipment | Employee benefits | Carryforward of losses and deductions for tax purposes | Other* | Total | ||||||||||||||||
| $ thousands | ||||||||||||||||||||
| Balance of deferred tax asset (liability) as at January 1, 2017 | (207,493 | ) | 1,711 | 84,735 | (79,203 | ) | (200,250 | ) | ||||||||||||
| Changes recorded on the statement of profit and loss | (13,940 | ) | (1,097 | ) | (13,919 | ) | 15,845 | (13,111 | ) | |||||||||||
| Changes recorded to equity reserve | - | 882 | - | (7,024 | ) | (6,142 | ) | |||||||||||||
| Translation differences | (10,046 | ) | 24 | 4,397 | 1,253 | (4,372 | ) | |||||||||||||
| Impact of change in tax rate | 575 | - | - | - | 575 | |||||||||||||||
| Sale of subsidiaries | 140,736 | (1,520 | ) | (39,764 | ) | 71,095 | 170,547 | |||||||||||||
| Balance of deferred tax asset (liability) as at December 31, 2017 | (90,168 | ) | - | 35,449 | 1,966 | (52,753 | ) | |||||||||||||
| Changes recorded on the statement of profit and loss | 4,532 | 68 | (14,695 | ) | 134 | (9,961 | ) | |||||||||||||
| Changes recorded to equity reserve | - | - | - | (104 | ) | (104 | ) | |||||||||||||
| Translation differences | 6,344 | (2 | ) | (1,972 | ) | 13 | 4,383 | |||||||||||||
| Balance of deferred tax asset (liability) as at December 31, 2018 | (79,292 | ) | 66 | 18,782 | 2,009 | (58,435 | ) | |||||||||||||
| * | This amount includes deferred tax arising from derivative instruments, intangibles, undistributed profits, non-monetary items and trade receivables distribution. |
| 2. | The deferred taxes are presented in the statements of financial position as follows: |
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| As part of non-current assets | - | 25,104 | 632 | - | ||||||||||||
| As part of non-current liabilities | (52,753 | ) | (225,354 | ) | (59,067 | ) | (52,753 | ) | ||||||||
| (52,753 | ) | (200,250 | ) | (58,435 | ) | (52,753 | ) | |||||||||
Income tax rate in Israel is 24%23%, 25%24% and 26.5%25% for the years ended December 31, 20172018 and December 31, 2017 and 2016, and 2015, respectively.respectively.
On January 4, 2016, Amendment 216 to the Income Tax Ordinance (New Version) – 1961 (hereinafter – “the Ordinance”) was passed in the Knesset. As part of the amendment, OPC’s and Hadera’s income tax rate was reduced by 1.5% to a rate of 25% as from 2016. Furthermore, on December 22, 2016 the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016, by which, inter alia, the corporate tax rate would be reduced from 25% to 23% in two steps. The first step will be to a rate of 24% as from January 2017 and the second step will be to a rate of 23% as from January 2018.
As a result of reducing the tax rate to 25%, the deferred tax balances as at January 4, 2016 were calculated according to the new tax rate specified in the Law for the Amendment of the Income Tax Ordinance, at the tax rate expected to apply on the reversal date.
F - 8075
Note 2725 – Income Taxes (Cont’d)
In Singapore, under its one-tier corporate taxation system, profits are taxed at the corporate level at 17% and this is a final tax. Dividends paid by a Singapore resident company under the one-tier corporate tax system should not be taxable.
A Company is liable to pay tax in Singapore on income that is:
·Accrued in or derived from Singapore; or
·Received in Singapore from outside of Singapore.
Certain categories of foreign sourced income including,
·dividend income;
·service fee income derived from a business, trade or
may be exempted from tax in Singapore.
Tax exemption should be granted when all of the three conditions below are met:
| 1. | The highest corporate tax rate (headline tax rate) of the foreign jurisdiction from which the income is received is at least 15% at the time the foreign income is received in Singapore; |
| 2. | The foreign income had been subjected to tax in the foreign jurisdiction from which they were received (known as the "subject to tax" condition). The rate at which the foreign income was taxed can be different from the headline tax rate; and |
| 3. | The Tax Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore. |
The Comptroller will regard the "subject to tax" condition as having met if the income is exempt from tax in the foreign jurisdiction due to tax incentive granted for substantive business activities carried out in that jurisdiction.
Extension of safe habour under Singapore Budget 2016
Singapore does not impose taxes on disposal gains, which are considered to be capital in nature, but imposes tax on income and gains of a trading nature. As such, whenever a gain is realized on the disposal of an asset, the practice of the IRAS is to rely upon a set of commonly-applied rules in determining the question of capital (not taxable) or revenue (taxable). Under Singapore tax laws, any gains derived by a divesting company from its disposal of ordinary shares in an investee company between June 1, 2012 and May 31, 2022 (extended from May 31, 2017 to May 31, 2022) are generally not taxable if, immediately prior to the date of such disposal, the divesting company has held at least 20% of the ordinary shares in the investee company for a continuous period of at least 24 months.
F - 8176
Note 2826 – Earnings per Share
Data used in calculation of the basic / diluted earnings per share
| A. | Income/(Loss) allocated to the holders of the ordinary shareholders |
| For the Year Ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| $ thousands | ||||||||||||
| Income/(Loss) for the year attributable to Kenon’s shareholders | 236,590 | (411,937 | ) | 72,992 | ||||||||
| Income for the year from discontinued operations (after tax) | 476,565 | 35,150 | 72,781 | |||||||||
| Less: NCI | (24,928 | ) | (13,250 | ) | (12,872 | ) | ||||||
| Income for the year from discontinued operations (after tax) attributable to Kenon’s shareholders | 451,637 | 21,900 | 59,909 | |||||||||
| (Loss)/Income for the year from continuing operations attributable to Kenon’s shareholders | (215,047 | ) | (433,837 | ) | 13,083 | |||||||
| For the year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| $ Thousands | ||||||||||||
| Income/(loss) for the year attributable to Kenon’s shareholders | 434,213 | 236,590 | (411,937 | ) | ||||||||
| (Loss)/income for the year from discontinued operations (after tax) | (5,631 | ) | 476,565 | 35,150 | ||||||||
| Less: NCI | - | (24,928 | ) | (13,250 | ) | |||||||
| (Loss)/income for the year from discontinued operations (after tax) attributable to Kenon’s shareholders | (5,631 | ) | 451,637 | 21,900 | ||||||||
| Income/(loss) for the year from continuing operations attributable to Kenon’s shareholders | 439,844 | (215,047 | ) | (433,837 | ) | |||||||
| B. | Number of ordinary shares |
| For the Year Ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| ('000) | ||||||||||||
| Weighted Average number of shares used in calculation of basic/diluted earnings per share | 53,761 | 53,720 | 53,649 | |||||||||
| For the year ended December 31 | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Thousands | ||||||||||||
| Weighted Average number of shares used in calculation of basic/diluted earnings per share | 53,826 | 53,761 | 53,720 | |||||||||
Note 2927 – Discontinued Operations
| (a) | I.C. Power (Latin America businesses) |
In December 2017, Inkia, a wholly-owned subsidiary of IC Power completed the sale of its Latin American and Caribbean businesses to ISQ,, an infrastructure private equity firm.
The sale generated proceeds of approximately $1,332 million consisting of $1,110 million proceeds paid by ISQ plus retained unconsolidated cash at Inkia of $222 million. This reflects the base purchase price of $1,177 million after certain adjustments, including estimated working capital, debt and cash at closing. The purchase price iswas subject to adjustments, including a final adjustment based on actual working capital, debt and cash amounts as of the closing date.
As part of the transaction, ISQ have assumed Inkia’s $600 million of bonds, which were issued in November and December 2017.
At the date of closing, ISQ paid $935 million and entered into a four year $175 million deferred payment obligation accruing 8% interest payable in kind.kind.
In addition, Kenon’s subsidiaries is entitled to receive certain payments from ISQ in connection with certain insurance and other claims held by companies within the Inkia’s businesses. Included in the financials for FY2017, isIn 2018, $7.3 million (2017: $12 million that has beenmillion) was recognized in discontinued operations.operations relating to such claims.
F - 77
Note 27 – Discontinued Operations (Cont’d)
Set forth below are the results attributable to the discontinued operations
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | ||||||||||
| $ thousands | ||||||||||||
| Revenue | 1,777,232 | 1,517,391 | 962,677 | |||||||||
Cost of sales and services (excluding depreciation and amortization) | (1,235,214 | ) | (1,076,563 | ) | (620,180 | ) | ||||||
| Depreciation and amortization | (135,733 | ) | (132,998 | ) | (85,482 | ) | ||||||
| Gross profit | 406,285 | 307,830 | 257,015 | |||||||||
| Income before taxes on income | 152,280 | 92,233 | 126,116 | |||||||||
| Taxes on income | (73,141 | ) | (57,083 | ) | (53,335 | ) | ||||||
| Income after taxes on income | 79,139 | 35,150 | 72,781 | |||||||||
| Gain on sale of discontinued operations | 529,923 | - | - | |||||||||
| Tax on gain on sale of discontinued operations | (132,497 | ) | - | - | ||||||||
| Income from discontinued operations | 476,565 | 35,150 | 72,781 | |||||||||
| Net cash flows provided by operating activities | 319,637 | 176,515 | 229,757 | |||||||||
Net cash flows provided by/(used in) investing activities | 816,544 | (300,833 | ) | (637,994 | ) | |||||||
Net cash flows (used in)/provided by financing activities | (103,524 | ) | 25,308 | 163,714 | ||||||||
Cash and cash equivalents provided by/(used in) discontinued operations | 1,032,657 | (99,010 | ) | (244,523 | ) | |||||||
| Property, plant and equipment | 2,937,005 | |||||||||||
| Goodwill and intangible assets | 357,835 | |||||||||||
| Investments in associated companies | 9,155 | |||||||||||
| Deferred taxes, net | 25,450 | |||||||||||
| Income tax receivable | 112,457 | |||||||||||
| Trade and other receivables | 379,143 | |||||||||||
| Inventories | 91,718 | |||||||||||
| Cash and cash equivalents | 138,708 | |||||||||||
| Trade and other liabilities | (2,753,476 | ) | ||||||||||
| Net asset | 1,297,995 | |||||||||||
| Consideration received, satisfied in cash | 934,573 | |||||||||||
| Transaction costs | (3,280 | ) | ||||||||||
| Cash and cash equivalents disposed off | (138,708 | ) | ||||||||||
| Net cash inflow | 792,585 | |||||||||||
Year ended December 31, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | ||||||||||
| $ thousands | ||||||||||||
| Revenue | - | 1,777,232 | 1,517,391 | |||||||||
| Cost of sales and services (excluding depreciation and amortization) | - | (1,235,214 | ) | (1,076,563 | ) | |||||||
| Depreciation and amortization | - | (135,733 | ) | (132,998 | ) | |||||||
| Gross profit | - | 406,285 | 307,830 | |||||||||
| Income before taxes on income | 1,178 | 152,280 | 92,233 | |||||||||
| Taxes on income (1) | (3,944 | ) | (73,141 | ) | (57,083 | ) | ||||||
| (Loss)/income after taxes on income | (2,766 | ) | 79,139 | 35,150 | ||||||||
| (Loss)/gain on sale of discontinued operations (2) | (2,065 | ) | 529,923 | - | ||||||||
| Tax on loss on sale of discontinued operations | (800 | ) | (132,497 | ) | - | |||||||
| (Loss)/income from discontinued operations | (5,631 | ) | 476,565 | 35,150 | ||||||||
| Net cash flows provided by operating activities | - | 319,637 | 176,515 | |||||||||
| Net cash flows (used in)/provided by investing activities | (155,361 | ) | 816,544 | (300,833 | ) | |||||||
| Net cash flows (used in)/provided by financing activities | - | (103,524 | ) | 25,308 | ||||||||
| Cash and cash equivalents (used in)/provided by discontinued operations | (155,361 | ) | 1,032,657 | (99,010 | ) | |||||||
| Income tax payable | 4,744 | |||||||||||
| Net liabilities | 4,744 | |||||||||||
(1) Additional taxes in relation to the sale by IC Power of its Latin American and Caribbean businesses.
(2) Mainly relates to the write down of a contingent asset following settlement of the related insurance claim.
Note 3028 – Segment, Customer and Geographic Information
| A. | General |
The following summary describes the Group’s reportable segments in 2017:2018:
| 1. | OPC – OPC Energy Ltd operates in the Israeli electricity generation sector, including the initiation, development, construction and operation of power plants and the sale and supply of electricity. |
| 2. | Quantum – Quantum (2007) LLC is a wholly owned subsidiary of Kenon and holds Kenon’s share in Qoros. Qoros |
In addition to the segments detailed above, the Group has other activities, such as the discontinued power businesses in Latin America and Caribbean, container shipping services and renewable energy businesses categorized as Others.
Evaluation of the operating segments performance is based on Adjusted EBITDA. Adjusted EBITDA is defined as the net income (loss) excluding depreciation and amortization, financing income, income taxes and other items as presented in the tables below.
There were no intersegment sales in 2018, 2017 and 2016.
F - 78
Note 28 – Segment, Customer and Geographic Information (Cont’d)
| B. | Information regarding reportable segments |
Financial information of the reportable segments is set forth in the following table.
| OPC | Qoros* | Other | Adjustments | Total | OPC | Quantum | Other | Adjustments | Total | |||||||||||||||||||||||||||||||
| $ thousands | $ thousands | |||||||||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||||||
| Total sales | 365,395 | - | 309 | - | 365,704 | 363,262 | - | 750 | - | 364,012 | ||||||||||||||||||||||||||||||
| Income/(loss) before taxes | 22,708 | (121,198 | ) | (37,146 | ) | - | (135,636 | ) | 36,499 | 456,854 | (31,385 | ) | 461,968 | |||||||||||||||||||||||||||
| Income Taxes | (8,945 | ) | - | (63,864 | ) | - | (72,809 | ) | (10,233 | ) | - | (1,266 | ) | - | (11,499 | ) | ||||||||||||||||||||||||
| Income/(loss) from continuing operations | 13,763 | (121,198 | ) | (101,010 | ) | - | (208,445 | ) | 26,266 | 456,854 | (32,651 | ) | - | 450,469 | ||||||||||||||||||||||||||
| Depreciation and amortization | 30,102 | - | 692 | - | 30,794 | 29,809 | - | 607 | 30,416 | |||||||||||||||||||||||||||||||
| Financing income | (1,088 | ) | - | (13,230 | ) | 11,414 | (2,904 | ) | (2,031 | ) | (10,371 | ) | (48,430 | ) | 32,240 | (28,592 | ) | |||||||||||||||||||||||
| Financing expenses | 33,753 | - | 47,827 | (11,414 | ) | 70,166 | 27,219 | 2,003 | 33,400 | (32,240 | ) | 30,382 | ||||||||||||||||||||||||||||
| Other items: | ||||||||||||||||||||||||||||||||||||||||
| Share in losses/(income) of associated companies | - | 121,198 | (10,533 | ) | - | 110,665 | ||||||||||||||||||||||||||||||||||
| Write back of impairment of investments | - | - | (28,758 | ) | - | (28,758 | ) | |||||||||||||||||||||||||||||||||
| Write back of financial guarantee | - | (62,563 | ) | - | - | (62,563 | ) | |||||||||||||||||||||||||||||||||
| Gain on third party investment in Qoros | - | (504,049 | ) | - | - | (504,049 | ) | |||||||||||||||||||||||||||||||||
| Fair value loss on option | - | 39,788 | - | - | 39,788 | |||||||||||||||||||||||||||||||||||
| Share in losses of associated companies | - | 78,338 | 26,919 | - | 105,257 | |||||||||||||||||||||||||||||||||||
| 62,767 | 121,198 | (4,002 | ) | - | 179,963 | 54,997 | (456,854 | ) | 12,496 | - | (389,361 | ) | ||||||||||||||||||||||||||||
| Adjusted EBITDA | 85,475 | - | (41,148 | ) | - | 44,327 | 91,496 | - | (18,889 | ) | - | 72,607 | ||||||||||||||||||||||||||||
| Segment assets | 939,809 | - | 1,464,354 | - | 2,404,163 | 893,162 | 91,626 | 239,550 | - | 1,224,338 | ||||||||||||||||||||||||||||||
| Investments in associated companies | - | 1,694 | 120,000 | - | 121,694 | - | 139,184 | 91,596 | - | 230,780 | ||||||||||||||||||||||||||||||
| 2,525,857 | 1,455,118 | |||||||||||||||||||||||||||||||||||||||
| Segment liabilities | 742,692 | - | 731,818 | - | 1,474,510 | 700,452 | - | 38,948 | - | 739,400 | ||||||||||||||||||||||||||||||
| Capital expenditure | 109,226 | - | 121,245 | - | 230,471 | 100,389 | - | 19 | - | 100,408 | ||||||||||||||||||||||||||||||
| OPC | Quantum | Other | Adjustments | Total | ||||||||||||||||
| $ thousands | ||||||||||||||||||||
| 2017 | ||||||||||||||||||||
| Total sales | 365,395 | - | 309 | - | 365,704 | |||||||||||||||
| Income/(loss) before taxes | 22,708 | (127,526 | ) | (30,818 | ) | - | (135,636 | ) | ||||||||||||
| Income Taxes | (8,945 | ) | - | (63,864 | ) | - | (72,809 | ) | ||||||||||||
| Income/(loss) from continuing operations | 13,763 | (127,526 | ) | (94,682 | ) | - | (208,445 | ) | ||||||||||||
| Depreciation and amortization | 30,102 | - | 692 | - | 30,794 | |||||||||||||||
| Financing income | (1,088 | ) | - | (13,230 | ) | 11,414 | (2,904 | ) | ||||||||||||
| Financing expenses | 33,753 | 6,328 | 41,499 | (11,414 | ) | 70,166 | ||||||||||||||
| Other items: | ||||||||||||||||||||
| Share in losses/(income) of associated companies | - | 121,198 | (10,533 | ) | - | 110,665 | ||||||||||||||
| Write back of impairment of investments | - | - | (28,758 | ) | - | (28,758 | ) | |||||||||||||
| 62,767 | 127,526 | (10,330 | ) | - | 179,963 | |||||||||||||||
| Adjusted EBITDA | 85,475 | - | (41,148 | ) | - | 44,327 | ||||||||||||||
| Segment assets | 939,809 | 15,654 | 1,448,700 | - | 2,404,163 | |||||||||||||||
| Investments in associated companies | - | 1,694 | 120,000 | - | 121,694 | |||||||||||||||
| 2,525,857 | ||||||||||||||||||||
| Segment liabilities | 742,692 | 75,081 | 656,737 | - | 1,474,510 | |||||||||||||||
| Capital expenditure | 109,226 | - | 121,245 | - | 230,471 | |||||||||||||||
F - 8479
Note 3028 – Segment, Customer and Geographic Information (Cont’d)
| OPC | Qoros* | Other | Adjustments | Total | ||||||||||||||||
| $ thousands | ||||||||||||||||||||
| 2016 | ||||||||||||||||||||
| Total sales | 324,188 | - | 65 | - | 324,253 | |||||||||||||||
| Income/(loss) before taxes | 20,450 | (142,534 | ) | (304,816 | ) | - | (426,900 | ) | ||||||||||||
| Income Taxes | (67 | ) | - | (2,185 | ) | - | (2,252 | ) | ||||||||||||
| Income/(loss) from continuing operations | 20,383 | (142,534 | ) | (307,001 | ) | - | (429,152 | ) | ||||||||||||
| Depreciation and amortization | 26,697 | - | 589 | - | 27,286 | |||||||||||||||
| Financing income | (2,988 | ) | - | (17,081 | ) | 12,345 | (7,724 | ) | ||||||||||||
| Financing expenses | 22,838 | - | 36,783 | (12,345 | ) | 47,276 | ||||||||||||||
| Other items: | ||||||||||||||||||||
| Share in losses/(income) of associated companies | - | 142,534 | 43,681 | - | 186,215 | |||||||||||||||
| Provision of financial guarantee | - | - | 130,193 | - | 130,193 | |||||||||||||||
| Impairment of investments | - | - | 72,263 | - | 72,263 | |||||||||||||||
| 46,547 | 142,534 | 266,428 | - | 455,509 | ||||||||||||||||
| Adjusted EBITDA | 66,997 | - | (38,388 | ) | - | 28,609 | ||||||||||||||
| Segment assets | 667,631 | - | 4,261,929 | - | 4,929,560 | |||||||||||||||
| Investments in associated companies | - | 117,593 | 90,640 | - | 208,233 | |||||||||||||||
| 5,137,793 | ||||||||||||||||||||
| Segment liabilities | 533,684 | - | 3,709,905 | - | 4,243,589 | |||||||||||||||
| Capital expenditure | 72,540 | - | 245,313 | - | 317,853 | |||||||||||||||
| OPC | Qoros* | Other | Adjustments | Total | ||||||||||||||||
| $ thousands | ||||||||||||||||||||
| 2015 | ||||||||||||||||||||
| Total sales | 325,570 | - | 329 | - | 325,899 | |||||||||||||||
| Income/(loss) before taxes | 29,975 | (196,223 | ) | 198,402 | - | 32,154 | ||||||||||||||
| Income Taxes | (8,151 | ) | - | (892 | ) | - | (9,043 | ) | ||||||||||||
| Income/(loss) from continuing operations | 21,824 | (196,223 | ) | 197,510 | - | 23,111 | ||||||||||||||
| Depreciation and amortization | 25,435 | - | 1,605 | - | 27,040 | |||||||||||||||
| Financing income | (3,140 | ) | - | (7,581 | ) | - | (10,721 | ) | ||||||||||||
| Financing expenses | 26,315 | - | 10,079 | - | 36,394 | |||||||||||||||
| Other items: | ||||||||||||||||||||
| Share in losses/(income) of associated companies | - | 196,223 | (9,190 | ) | - | 187,033 | ||||||||||||||
| Gain from distribution of dividend in kind | - | - | (209,710 | ) | - | (209,710 | ) | |||||||||||||
| Asset impairment | - | - | 6,541 | - | 6,541 | |||||||||||||||
| 48,610 | 196,223 | (208,256 | ) | - | 36,577 | |||||||||||||||
| Adjusted EBITDA | 78,585 | - | (9,854 | ) | - | 68,731 | ||||||||||||||
| Segment assets | 810,551 | - | 3,303,204 | - | 4,113,755 | |||||||||||||||
| Investments in associated companies | - | 158,729 | 210,293 | - | 369,022 | |||||||||||||||
| 4,482,777 | ||||||||||||||||||||
| Segment liabilities | 676,832 | - | 2,542,390 | - | 3,219,222 | |||||||||||||||
| Capital expenditure | 18,273 | - | 556,116 | - | 574,389 | |||||||||||||||
| OPC | Quantum | Other | Adjustments | Total | ||||||||||||||||
| $ thousands | ||||||||||||||||||||
| 2016 | ||||||||||||||||||||
| Total sales | 324,188 | - | 65 | - | 324,253 | |||||||||||||||
| Income/(loss) before taxes | 20,450 | (142,534 | ) | (304,816 | ) | - | (426,900 | ) | ||||||||||||
| Income Taxes | (67 | ) | - | (2,185 | ) | - | (2,252 | ) | ||||||||||||
| Income/(loss) from continuing operations | 20,383 | (142,534 | ) | (307,001 | ) | - | (429,152 | ) | ||||||||||||
| Depreciation and amortization | 26,697 | - | 589 | - | 27,286 | |||||||||||||||
| Financing income | (2,988 | ) | - | (17,081 | ) | 12,345 | (7,724 | ) | ||||||||||||
| Financing expenses | 22,838 | - | 36,783 | (12,345 | ) | 47,276 | ||||||||||||||
| Other items: | ||||||||||||||||||||
| Share in losses/(income) of associated companies | - | 142,534 | 43,681 | - | 186,215 | |||||||||||||||
| Provision of financial guarantee | - | - | 130,193 | - | 130,193 | |||||||||||||||
| Impairment of investments | - | - | 72,263 | - | 72,263 | |||||||||||||||
| 46,547 | 142,534 | 266,428 | - | 455,509 | ||||||||||||||||
| Adjusted EBITDA | 66,997 | - | (38,388 | ) | - | 28,609 | ||||||||||||||
| Segment assets | 667,631 | 2,016 | 4,261,929 | - | 4,931,576 | |||||||||||||||
| Investments in associated companies | - | 117,593 | 90,640 | - | 208,233 | |||||||||||||||
| 5,139,809 | ||||||||||||||||||||
| Segment liabilities | 533,684 | - | 3,709,905 | - | 4,243,589 | |||||||||||||||
| Capital expenditure | 72,540 | - | 245,313 | - | 317,853 | |||||||||||||||
| C. | Customer and Geographic Information |
Major customers
Following is information on the total sales of the Group to material customers and the percentage of the Group’s total revenues (in $ thousand)Thousand):
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||
Customer | Total revenues | Percentage of revenues of the Group | Total revenues | Percentage of revenues of the Group | Total revenues | Percentage of revenues of the Group | Total revenues | Percentage of revenues of the Group | Total revenues | Percentage of revenues of the Group | Total revenues | Percentage of revenues of the Group | ||||||||||||||||||||||||||||||||||||
| Customer 1 | 75,735 | 20.71 | % | 59,880 | 18.47 | % | 70,545 | 21.65 | % | 74,019 | 20.33 | % | 75,757 | 20.72 | % | 59,886 | 18.47 | % | ||||||||||||||||||||||||||||||
| Customer 2 | * | * | * | * | 35,760 | 10.97 | % | 61,482 | 16.89 | % | 50,461 | 13.80 | % | 32,449 | 10.01 | % | ||||||||||||||||||||||||||||||||
| Customer 3 | 53,605 | 14.66 | % | 39,355 | 12.14 | % | 43,904 | 13.47 | % | 54,639 | 15.01 | % | 53,617 | 14.66 | % | 39,359 | 12.14 | % | ||||||||||||||||||||||||||||||
| Customer 4 | 50,447 | 13.79 | % | 32,446 | 10.01 | % | 35,650 | 10.94 | % | 42,487 | 11.67 | % | * | * | * | * | ||||||||||||||||||||||||||||||||
| Customer 5 | 38,212 | 10.45 | % | 36,391 | 11.22 | % | * | * | 39,276 | 10.79 | % | 38,223 | 10.45 | % | 36,394 | 11.22 | % | |||||||||||||||||||||||||||||||
| (*) Represents an amount less than 10% of revenues. |
F - 80
Note 28 – Segment, Customer and Geographic Information (Cont’d)
Information based on geographic areas
The Group’s geographic revenues are as follows:
| For the year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| $ Thousands | ||||||||||||
| Israel | 363,262 | 365,395 | 324,188 | |||||||||
| Others | 750 | 309 | 65 | |||||||||
| Total revenues | 364,012 | 365,704 | 324,253 | |||||||||
| For the year ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| $ thousands | ||||||||||||
| Israel | 365,395 | 324,188 | 325,570 | |||||||||
| Others | 309 | 65 | 329 | |||||||||
| Total revenues | 365,704 | 324,253 | 325,899 | |||||||||
The Group’s non-current assets* on the basis of geographic location:
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Peru | - | 1,910,421 | ||||||||||||||
| Guatemala | - | 682,985 | ||||||||||||||
| Israel | 617,358 | 495,639 | 636,256 | 617,358 | ||||||||||||
| Others | 447 | 785,033 | 138 | 447 | ||||||||||||
| Total non-current assets | 617,805 | 3,874,078 | 636,394 | 617,805 | ||||||||||||
* Composed of property, plant and equipment and intangible assets.
Note 3129 – Related-party Information
| A. | Identity of related parties: |
The Group’s related parties are as defined in IAS 24 – Related Party Disclosures and included:include Kenon’s beneficial owners and Kenon’s subsidiaries, affiliates and associates companies.
In the ordinary course of business, some of the Group’s subsidiaries and affiliates engage in business activities with each other.
Ordinary course of business transactions are aggregated in this Note. Other than disclosed elsewhere in the consolidated financial statements during the period, the Group engaged the following material related party transactions.
Key management personnel of the Company are those persons having the authority and responsibility for planning, directing and controlling the activities of the Company. The directors, co-CEOs, chief financial officer, general counselCEO and vice president of business development,CFO are considered as key management personnel of the Company.
| B. | Transactions with directors and officers (Kenon's directors and officers): |
| B. Key management personnel compensation | ||||||||
| For the year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ thousands | ||||||||
| Short-term benefits | 2,475 | 5,632 | ||||||
| Share-based payments | 732 | 508 | ||||||
3,207 | 6,140 | |||||||
| B. Key management personnel compensation | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Short-term benefits | 5,632 | 4,352 | ||||||
| Share-based payments | 508 | 547 | ||||||
| 6,140 | 4,899 | |||||||
F - 81
Note 29 – Related-party Information (Cont’d)
| C. | Transactions with related parties (excluding associates): |
| For the year ended December 31 | For the year ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
| $ thousands | $ thousands | |||||||||||||||||||||||
| Sales of electricity | 102,443 | 148,119 | 135,655 | 80,269 | 102,443 | 148,119 | ||||||||||||||||||
| Administrative expenses | 331 | 614 | 329 | 393 | 331 | 614 | ||||||||||||||||||
| Sales of gas | 31,296 | 29,873 | — | 6,868 | 31,296 | 29,873 | ||||||||||||||||||
| Financing expenses, net | 18,444 | 14,475 | 10,716 | (2,091 | ) | 18,444 | 14,475 | |||||||||||||||||
| Repayment of loan to Ansonia | (77,085 | ) | - | - | ||||||||||||||||||||
| Repayment of loan to IC | (239,971 | ) | - | - | ||||||||||||||||||||
| D. | Transactions with associates: |
| For the year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| $ Thousands | ||||||||||||
| Finance income, net | 8,494 | - | - | |||||||||
| Other income, net | 140 | 198 | 178 | |||||||||
| For the year ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| $ thousands | ||||||||||||
| Sales of electricity | — | — | 5,115 | |||||||||
| Operating expenses | — | — | 204 | |||||||||
| Other income, net | 198 | 178 | 95 | |||||||||
Balances with related parties:
| As at December | As at December | As at December 31, | As at December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||
| Ansonia | Other related parties * | Total | Ansonia | Other related parties * | Total | Other related parties * | Total | Ansonia | Other related parties * | Total | ||||||||||||||||||||||||||||||||||
| $ thousands | $ thousands | $ Thousands | $ Thousands | |||||||||||||||||||||||||||||||||||||||||
| Cash and short-term deposit | — | — | — | — | 2,462 | 2,462 | ||||||||||||||||||||||||||||||||||||||
| Trade receivables | — | 12,778 | 12,778 | — | 12,245 | 12,245 | 7,041 | 7,041 | — | 12,778 | 12,778 | |||||||||||||||||||||||||||||||||
Loans and Other Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
| In US dollar or linked thereto | 75,081 | 242,598 | 317,679 | 45,735 | 222,971 | 268,706 | (1,481 | ) | (1,481 | ) | 75,081 | 242,598 | 317,679 | |||||||||||||||||||||||||||||||
| Weighted-average interest rates (%) | 6.00 | % | 7.69 | % | 7.29 | % | 6.00 | % | 7.24 | % | 6.62 | % | 0.00 | % | 0.00 | % | 6.00 | % | 7.69 | % | 7.29 | % | ||||||||||||||||||||||
Repayment years | ||||||||||||||||||||||||||||||||||||||||||||
| Current maturities | 75,081 | 242,598 | — | — | 1,170 | 75,081 | 242,598 | |||||||||||||||||||||||||||||||||||||
| Second year | — | — | 45,735 | — | - | — | — | |||||||||||||||||||||||||||||||||||||
| Third year | — | — | — | — | - | — | — | |||||||||||||||||||||||||||||||||||||
| Fourth year | — | — | — | — | - | — | — | |||||||||||||||||||||||||||||||||||||
| Fifth year | — | — | — | — | 311 | — | — | |||||||||||||||||||||||||||||||||||||
| Sixth year and thereafter | — | — | — | 222,971 | - | — | — | |||||||||||||||||||||||||||||||||||||
| 75,081 | 242,598 | 45,735 | 222,971 | 1,481 | — | 242,598 | ||||||||||||||||||||||||||||||||||||||
| * | IC, Israel Chemicals Ltd (“ICL”), Oil Refineries Ltd (“ORL”). |
These balances relate to amounts with entities that are related to Kenon's beneficial owners.
| Regarding the convertible loan from Ansonia to Quantum, see Note |
| Gas Sale Agreement with ORL, see Note |
F - 8882
Note 3230 – Financial Instruments
| A. | General |
The Group has international activity in which it is exposed to credit, liquidity and market risks (including currency, interest, inflation and other price risks). In order to reduce the exposure to these risks, the Group holds derivative financial instruments, (including forward transactions, interest rate swap (“SWAP”) transactions, and options) for the purpose of economic (not accounting) hedging of foreign currency risks, inflation risks, commodity price risks, interest risks and risks relating to the price of inputs.
This note presents information about the Group’s exposure to each of the above risks, and the Group’s objectives, policies and processes for measuring and managing the risk.
The risk management of the Group companies is executed by them as part of the ongoing current management of the companies. The Group companies monitor the above risks on a regular basis. The hedge policies with respect to all the different types of exposures are discussed by the boards of directors of the companies.
The comprehensive responsibility for establishing the base for the risk management of the Group and for supervising its implementation lies with the Board of Directors and the senior management of the Group.
| B. | Credit risk Counterparty credit risk is the risk that the financial benefits of contracts with a specific counterparty will be lost if a counterparty defaults on their obligations under the contract. This includes any cash amounts owed to the Group by those counterparties, less any amounts owed to the counterparty by the Group where a legal right of set-offs exists and also includes the fair values of contracts with individual counterparties which are included in the financial statements. The maximum exposure to credit risk at each reporting date is the carrying value of each class of financial assets mentioned in this note. |
| (1) | Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: |
| As at December 31, | ||||||||
| 2018 | 2017 | |||||||
| $ Thousands | ||||||||
| Carrying amount | ||||||||
| Cash and cash equivalents | 131,123 | 1,417,388 | ||||||
| Short-term investments and deposits | 49,938 | 7,144 | ||||||
| Trade receivables, net | 35,548 | 44,137 | ||||||
| Other current assets | 33,210 | 35,752 | ||||||
| Deposits and other long-term receivables including derivative instruments | 305,616 | 259,555 | ||||||
| 555,435 | 1,763,976 | |||||||
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| $ thousands | ||||||||
| Carrying amount | ||||||||
| Cash and cash equivalents | 1,417,388 | 326,635 | ||||||
Short-term investments and deposits | 7,144 | 89,545 | ||||||
Trade receivables, net | 44,137 | 284,532 | ||||||
| Long-term trade receivables | - | 10,120 | ||||||
| Other current assets | 35,752 | 28,462 | ||||||
| Deposits and other long-term receivables including derivative instruments | 281,717 | 66,434 | ||||||
1,786,138 | 805,728 | |||||||
The maximum exposure to credit risk for trade receivables, as of the date of the report, by geographic region was as follows:
| As at December 31 | As at December 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| $ thousands | $ Thousands | |||||||||||||||
| Israel | 44,058 | 34,779 | 35,291 | 44,058 | ||||||||||||
| South America | - | 93,293 | ||||||||||||||
| Central America | - | 155,142 | ||||||||||||||
| Other regions | 79 | 11,438 | 257 | 79 | ||||||||||||
| 44,137 | 294,652 | 35,548 | 44,137 | |||||||||||||
F - 8983
Note 3230 – Financial Instruments (Cont’d)
| (2) | Aging of debts and impairment losses |
Set forth below is an aging of the trade receivables:
| As at December 31 | ||||||||
| 2018 | 2017 | |||||||
| $ Thousands | $ Thousands | |||||||
| Not past due | 35,438 | 50 | ||||||
| Past due up to 3 months | 87 | 40,879 | ||||||
| Past due 3 – 6 months | — | 3,208 | ||||||
| Past due more than one year | 23 | — | ||||||
| 35,548 | 44,137 | |||||||
| As at December 31, 2017 | As at December 31, 2016 | |||||||||||||||||||||||
| For which impairment was not recorded | For which impairment was recorded | For which impairment was not recorded | For which impairment was recorded | |||||||||||||||||||||
| Gross | Impairment | Gross | Impairment | |||||||||||||||||||||
| $ thousands | $ thousands | |||||||||||||||||||||||
| Not past due | 50 | — | — | 233,787 | 8 | (8 | ) | |||||||||||||||||
| Past due up to 3 months | 40,879 | — | — | 50,723 | — | — | ||||||||||||||||||
| Past due 3 – 6 months | 3,208 | — | — | 9,160 | 282 | (282 | ) | |||||||||||||||||
| Past due 6 – 9 months | — | — | — | 83 | — | — | ||||||||||||||||||
| Past due 9 – 12 months | — | — | — | 652 | — | — | ||||||||||||||||||
| Past due more than one year | — | — | — | 247 | 4,714 | (4,714 | ) | |||||||||||||||||
| 44,137 | — | — | 294,652 | 5,004 | (5,004 | ) | ||||||||||||||||||
No impairment has been recorded on any of the trade receivable amounts.
| C. | Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and adverse credit and market conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages its liquidity risk by means of holding cash balances, short-term deposits, other liquid financial assets and credit lines. Set forth below are the anticipated repayment dates of the financial liabilities, including an estimate of the interest payments. This disclosure does not include amounts regarding which there are offset agreements: |
| As at December 31, 2018 | ||||||||||||||||||||||||
| Book value | Projected cash flows | Up to 1 year | 1-2 years | 2-5 years | More than 5 years | |||||||||||||||||||
| $ Thousands | ||||||||||||||||||||||||
| Non-derivative financial liabilities | ||||||||||||||||||||||||
| Trade payables | 47,672 | 47,672 | 47,672 | - | - | - | ||||||||||||||||||
| Other payables | 5,885 | 5,885 | 5,885 | - | - | - | ||||||||||||||||||
| Non-convertible debentures * | 78,409 | 103,561 | 6,555 | 11,596 | 30,910 | 54,500 | ||||||||||||||||||
| Loans from banks and others * | 538,209 | 699,563 | 41,646 | 56,446 | 165,829 | 435,642 | ||||||||||||||||||
| 670,175 | 856,681 | 101,758 | 68,042 | 196,739 | 490,142 | |||||||||||||||||||
| As at December 31, 2017 | ||||||||||||||||||||||||
| Book value | Projected cash flows | Up to 1 year | 1-2 years | 2-5 years | More than 5 years | |||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||
| Non-derivative financial liabilities | ||||||||||||||||||||||||
| Loans from banks and others * | 317,684 | 317,786 | 317,786 | - | - | - | ||||||||||||||||||
| Trade payables | 58,895 | 58,895 | 58,895 | - | - | - | ||||||||||||||||||
| Other payables | 77,869 | 77,964 | 77,964 | - | - | - | ||||||||||||||||||
| Non-convertible debentures ** | 91,122 | 125,089 | 13,153 | 7,086 | 34,033 | 70,817 | ||||||||||||||||||
| Loans from banks and others ** | 627,150 | 846,652 | 157,805 | 50,768 | 173,222 | 464,857 | ||||||||||||||||||
| Liabilities in respect of financing lease | - | - | - | - | - | - | ||||||||||||||||||
| Financial guarantee *** | 44,342 | 44,342 | 44,342 | - | - | - | ||||||||||||||||||
| Financial liabilities – hedging instruments | ||||||||||||||||||||||||
| Forward exchange rate contracts | 439 | 439 | 439 | - | - | - | ||||||||||||||||||
| Financial liabilities not for hedging | ||||||||||||||||||||||||
| Derivatives on exchange rates | 73 | 73 | 73 | - | - | - | ||||||||||||||||||
| 1,217,574 | 1,471,240 | 670,457 | 57,854 | 207,255 | 535,674 | |||||||||||||||||||
| * |
F - 84
Note 30 – Financial Instruments (Cont’d)
| As at December 31, 2017 | ||||||||||||||||||||||||
| Book value | Projected cash flows | Up to 1 year | 1-2 years | 2-5 years | More than 5 years | |||||||||||||||||||
| $ Thousands | ||||||||||||||||||||||||
| Non-derivative financial liabilities | ||||||||||||||||||||||||
| Loans from banks and others * | 317,684 | 317,786 | 317,786 | - | - | - | ||||||||||||||||||
| Trade payables | 58,895 | 58,895 | 58,895 | - | - | - | ||||||||||||||||||
| Other payables | 77,869 | 77,964 | 77,964 | - | - | - | ||||||||||||||||||
| Non-convertible debentures ** | 91,122 | 125,089 | 13,153 | 7,086 | 34,033 | 70,817 | ||||||||||||||||||
| Loans from banks and others ** | 627,150 | 846,652 | 157,805 | 50,768 | 173,222 | 464,857 | ||||||||||||||||||
| Financial guarantee *** | 44,342 | 44,342 | 44,342 | - | - | - | ||||||||||||||||||
| Financial liabilities – hedging instruments | ||||||||||||||||||||||||
| Forward exchange rate contracts | 439 | 439 | 439 | - | - | - | ||||||||||||||||||
| Financial liabilities not for hedging | ||||||||||||||||||||||||
| Derivatives on exchange rates | 73 | 73 | 73 | - | - | - | ||||||||||||||||||
| 1,217,574 | 1,471,240 | 670,457 | 57,854 | 207,255 | 535,674 | |||||||||||||||||||
* Excludes current portion of long-term liabilities and long-term liabilities which were classified to short-term.
| ** | Includes current portion of long-term |
| *** | Financial Guarantees contractual period in Qoros is dependent on Qoros’s timeliness to meet the obligation of current loans payable. |
| As at December 31, 2016 | ||||||||||||||||||||||||
| Book value | Projected cash flows | Up to 1 year | 1-2 years | 2-5 years | More than 5 years | |||||||||||||||||||
| $ thousands | ||||||||||||||||||||||||
| Non-derivative financial liabilities | ||||||||||||||||||||||||
| Loans from banks and others * | 213,417 | 219,651 | 219,651 | - | - | - | ||||||||||||||||||
| Trade payables | 285,612 | 285,612 | 285,612 | - | - | - | ||||||||||||||||||
| Other payables | 160,540 | 160,540 | 59,650 | 10,121 | 21,718 | 69,051 | ||||||||||||||||||
| Non-convertible debentures ** | 867,287 | 1,190,032 | 58,113 | 57,217 | 616,765 | 457,937 | ||||||||||||||||||
| Loans from banks and others ** | 2,143,499 | 2,756,851 | 340,684 | 244,508 | 977,251 | 1,194,408 | ||||||||||||||||||
| Liabilities in respect of financing lease | 88,169 | 114,069 | 13,013 | 12,171 | 57,432 | 31,453 | ||||||||||||||||||
| Financial guarantee *** | 118,763 | 118,763 | 118,763 | - | - | - | ||||||||||||||||||
| Financial liabilities – hedging instruments | ||||||||||||||||||||||||
| Interest SWAP contracts | 22,865 | 22,865 | 9,930 | 5,788 | 4,192 | 2,955 | ||||||||||||||||||
| Forward exchange rate contracts | 2,399 | 2,399 | 1,627 | 772 | - | - | ||||||||||||||||||
| Financial liabilities not for hedging | ||||||||||||||||||||||||
| Interest SWAP contracts and options | 2,125 | 2,125 | 783 | 570 | 688 | 84 | ||||||||||||||||||
| Derivatives from debt restructure | 29,594 | 29,594 | - | 29,594 | - | - | ||||||||||||||||||
| 3,934,270 | 4,902,501 | 1,107,826 | 360,741 | 1,678,046 | 1,755,888 | |||||||||||||||||||
| D. | Market risks |
Market risk is the risk that changes in market prices, such as foreign exchange rates, the CPI, interest rates and prices of capital products and instruments will affect the fair value of the future cash flows of a financial instrument.
The Group buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Boards of Directors of the companies. For the most part, the Group companies enter into hedging transactions for purposes of avoiding economic exposures that arise from their operating activities. Most of the transactions entered into do not meet the conditions for recognition as an accounting hedge and, therefore, differences in their fair values are recorded on the statement of profit and loss.
(1) | CPI and foreign currency risk Currency risk The Group’s functional currency is the U.S. dollar. The exposures of the Group companies are measured with reference to the changes in the exchange rate of the dollar vis-à-vis the other currencies in which it transacts business. The Group is exposed to currency risk on sales, purchases, assets and liabilities that are denominated in a currency other than the respective functional currencies of the Group entities. The primary exposure is to the Shekel (NIS). The Group uses options and forward exchange contracts on exchange rates for purposes of hedging short-term currency risks, usually up to one year, in order to reduce the risk with respect to the final cash flows in dollars deriving from the existing assets and liabilities and sales and purchases of goods and services within the framework of firm or anticipated commitments, including in relation to future operating expenses. The Group is exposed to currency risk in relation to loans it has taken out and debentures it has issued in currencies other than the dollar. The principal amounts of these bank loans and debentures have been hedged by swap transactions the repayment date of which corresponds with the payment date of the loans and debentures. |
F - 9185
Note 3230 – Financial Instruments (Cont’d)
Inflation risk
The Group has CPI-linked loans. The Group is exposed to high payments of higher interest and principal as the result of an increase in the CPI. It is noted that part of the Group’s anticipated revenues will be linked to the CPI. The Group does not hedge this exposure beyond the expected hedge included in its revenues.
| (a) | Exposure to CPI and foreign currency risks The Group’s exposure to CPI and foreign currency risk, based on nominal amounts, is as follows: |
| As at December 31, 2017 | ||||||||||||||||||||||||
| Foreign currency | As at December 31, 2018 | |||||||||||||||||||||||
| Shekel | Foreign currency | |||||||||||||||||||||||
| Unlinked | CPI linked | Other | Shekel | |||||||||||||||||||||
| Unlinked | CPI linked | Other | ||||||||||||||||||||||
| Non-derivative instruments | ||||||||||||||||||||||||
| Cash and cash equivalents | 158,679 | — | 18,593 | 86,896 | — | 2,778 | ||||||||||||||||||
| Short-term investments, deposits and loans | 60,855 | — | — | 27,638 | — | 55 | ||||||||||||||||||
| Trade receivables | 42,004 | — | — | 35,291 | — | 44 | ||||||||||||||||||
| Other receivables | 2,686 | — | 3,603 | 286 | — | 26 | ||||||||||||||||||
| Long-term deposits and loans | 25,600 | — | — | 48,490 | — | — | ||||||||||||||||||
| Total financial assets | 289,824 | — | 22,196 | 198,601 | — | 2,903 | ||||||||||||||||||
| Loans from banks and others | — | — | 30,308 | |||||||||||||||||||||
| Trade payables | 31,286 | — | 86 | 23,774 | — | 9,968 | ||||||||||||||||||
| Other payables | 3,178 | — | 1,316 | 2,215 | — | 811 | ||||||||||||||||||
| Long-term loans from banks and others and debentures | 109,629 | 478,891 | — | |||||||||||||||||||||
| Loans from banks and others and debentures | 163,162 | 450,571 | — | |||||||||||||||||||||
| Total financial liabilities | 144,093 | 478,891 | 31,710 | 189,151 | 450,571 | 10,779 | ||||||||||||||||||
| Total non-derivative financial instruments, net | 145,731 | 478,891 | (9,514 | ) | ||||||||||||||||||||
| Derivative instruments | — | — | (439 | ) | — | — | 90,184 | |||||||||||||||||
| Net exposure | 145,731 | 478,891 | (9,953 | ) | — | — | 90,184 | |||||||||||||||||
| As at December 31, 2016 | ||||||||||||
| Foreign currency | ||||||||||||
| Shekel | ||||||||||||
| Unlinked | CPI linked | Other | ||||||||||
| Non-derivative instruments | ||||||||||||
| Cash and cash equivalents | 11,810 | — | 24,240 | |||||||||
| Short-term investments, deposits and loans | 29,137 | — | 26,198 | |||||||||
| Trade receivables | 34,779 | — | 172,664 | |||||||||
| Other receivables | 665 | — | 6,964 | |||||||||
| Long-term deposits and loans | 20,349 | — | 16,412 | |||||||||
| Total financial assets | 96,740 | — | 246,478 | |||||||||
| Loans from banks and others | — | — | 34,998 | |||||||||
| Trade payables | 26,913 | — | 128,512 | |||||||||
| Other payables | 1,093 | 1,205 | 17,266 | |||||||||
| Long-term loans from banks and others and debentures | 444 | 416,266 | 465,262 | |||||||||
| Total financial liabilities | 28,450 | 417,471 | 646,038 | |||||||||
| Total non-derivative financial instruments, net | 68,290 | (417,471 | ) | (399,560 | ) | |||||||
| Derivative instruments | — | — | (2,421 | ) | ||||||||
| Net exposure | 68,290 | (417,471 | ) | (401,981 | ) | |||||||
| As at December 31, 2017 | ||||||||||||
| Foreign currency | ||||||||||||
| Shekel | ||||||||||||
| Unlinked | CPI linked | Other | ||||||||||
| Non-derivative instruments | ||||||||||||
| Cash and cash equivalents | 158,679 | — | 18,593 | |||||||||
| Short-term investments, deposits and loans | 60,855 | — | — | |||||||||
| Trade receivables | 42,004 | — | — | |||||||||
| Other receivables | 2,686 | — | 3,603 | |||||||||
| Long-term deposits and loans | 25,600 | — | — | |||||||||
| Total financial assets | 289,824 | — | 22,196 | |||||||||
| Loans from banks and others | — | — | 30,308 | |||||||||
| Trade payables | 31,286 | — | 86 | |||||||||
| Other payables | 3,178 | — | 1,316 | |||||||||
| Long-term loans from banks and others and debentures | 109,629 | 478,891 | — | |||||||||
| Total financial liabilities | 144,093 | 478,891 | 31,710 | |||||||||
| Total non-derivative financial instruments, net | 145,731 | 478,891 | (9,514 | ) | ||||||||
| Derivative instruments | — | — | (439 | ) | ||||||||
| Net exposure | 145,731 | 478,891 | (9,953 | ) | ||||||||
F - 9286
Note 3230 – Financial Instruments (Cont’d)
| (b) | Sensitivity analysis A strengthening of the dollar exchange rate by 5%–10% against the following currencies and change of the CPI in rate of 5%–10% would have increased (decreased) the net income or net loss and the equity by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2015. |
| As at December 31, 2017 | ||||||||||||||||
| 10% increase | 5% increase | 5% decrease | 10% decrease | |||||||||||||
| $ thousands | ||||||||||||||||
Non-derivative instruments | ||||||||||||||||
| Shekel/dollar | 13,248 | 6,940 | (6,940 | ) | (13,248 | ) | ||||||||||
| CPI | (43,536 | ) | (22,804 | ) | 22,804 | 43,536 | ||||||||||
| Dollar/other | (2,559 | ) | (1,269 | ) | 1,269 | 2,559 | ||||||||||
| As at December 31, 2016 | As at December 31, 2018 | |||||||||||||||||||||||||||||||
| 10% increase | 5% increase | 5% decrease | 10% decrease | 10% increase | 5% increase | 5% decrease | 10% decrease | |||||||||||||||||||||||||
| $ thousands | $ Thousands | |||||||||||||||||||||||||||||||
Non-derivative instruments | ||||||||||||||||||||||||||||||||
| Shekel/dollar | 6,208 | 3,252 | (3,252 | ) | (6,208 | ) | (35,582 | ) | (18,658 | ) | 18,658 | 35,582 | ||||||||||||||||||||
| CPI | (37,952 | ) | (19,880 | ) | 19,880 | 37,952 | (25,875 | ) | (12,937 | ) | 10,222 | 10,600 | ||||||||||||||||||||
| Dollar/other | (44,447 | ) | (21,044 | ) | 19,037 | 36,332 | ||||||||||||||||||||||||||
| As at December 31, 2017 | ||||||||||||||||||||||||||||||||
| 10% increase | 5% increase | 5% decrease | 10% decrease | |||||||||||||||||||||||||||||
| $ Thousands | ||||||||||||||||||||||||||||||||
Non-derivative instruments | ||||||||||||||||||||||||||||||||
| Shekel/dollar | 13,248 | 6,940 | (6,940 | ) | (13,248 | ) | ||||||||||||||||||||||||||
| CPI | (43,536 | ) | (22,804 | ) | 22,804 | 43,536 | ||||||||||||||||||||||||||
| (2) | Interest rate risk The Group is exposed to changes in the interest rates with respect to loans bearing interest at variable rates, as well as in relation to swap transactions of liabilities in foreign currency for dollar liabilities bearing a variable interest rate. The Group has not set a policy limiting the exposure and it hedges this exposure based on forecasts of future interest rates. The Group enters into transactions mainly to reduce the exposure to cash flow risk in respect of interest rates. The transactions include interest rate swaps and “collars”. In addition, options are acquired and written for hedging the interest rate at different rates. Type of interest Set forth below is detail of the type of interest borne by the Group’s interest-bearing financial instruments: |
| As at December 31, | ||||||||
| 2018 | 2017 | |||||||
| Carrying amount | ||||||||
| $ Thousands | ||||||||
| Fixed rate instruments | ||||||||
| Financial assets | 55,027 | 1,438,243 | ||||||
| Financial liabilities | (586,334 | ) | - | |||||
| (531,307 | ) | 1,438,243 | ||||||
| Variable rate instruments | ||||||||
| Financial assets | 102,392 | - | ||||||
| Financial liabilities | - | (239,876 | ) | |||||
| 102,392 | (239,876 | ) | ||||||
| As at December 31 | ||||||||
| 2017 | 2016 | |||||||
| Carrying amount | ||||||||
| $ thousands | ||||||||
| Fixed rate instruments | ||||||||
| Financial assets | 1,438,243 | 157,121 | ||||||
| Financial liabilities | - | (1,530,715 | ) | |||||
| 1,438,243 | (1,373,594 | ) | ||||||
| Variable rate instruments | ||||||||
| Financial assets | - | 20,167 | ||||||
| Financial liabilities | (239,876 | ) | (2,600,799 | ) | ||||
| (239,876 | ) | (2,580,632 | ) | |||||
F - 9387
Note 3230 – Financial Instruments (Cont’d)
Type of interest (Cont’d)
The Group’s assets and liabilities bearing fixed interest are not measured at fair value through the statement of profit and loss and the Group does not designate derivatives interest rate swaps as hedging instruments under a fair value hedge accounting model. Therefore, a change in the interest rates as at the date of the report would not be expected to affect the income or loss with respect to changes in the value of fixed – interest assets and liabilities.
A change of 100 basis points in interest rate at reporting date would have increased/(decreased) profit and loss before tax by the amounts below. This analysis assumes that all variables, in particular foreign currency rates, remain constant.
| As at December 31, 2017 | ||||||||
| 100bp increase | 100 bp decrease | |||||||
| $ thousands | ||||||||
| Variable rate instruments | (2,399 | ) | 2,399 | |||||
| As at December 31, 2016 | ||||||||
| 100bp increase | 100 bp decrease | |||||||
| $ thousands | ||||||||
| Variable rate instruments | (25,806 | ) | 25,806 | |||||
| As at December 31, 2018 | ||||||||
| 100bp increase | 100 bp decrease | |||||||
| $ thousands | ||||||||
| Variable rate instruments | 1,024 | (1,023 | ) | |||||
| As at December 31, 2017 | ||||||||
| 100bp increase | 100 bp decrease | |||||||
| $ thousands | ||||||||
| Variable rate instruments | (2,399 | ) | 2,399 | |||||
| E. | Fair value |
| (1) | Fair value compared with carrying value |
The Group’s financial instruments include mainly non-derivative assets, such as: cash and cash equivalents, investments, deposits and short-term loans, receivables and debit balances, investments and long-term receivables; non-derivative liabilities:liabilities: such as: short-term credit, payables and credit balances, long-term loans, finance leases and other liabilities; as well as derivative financial instruments.
Due to their nature, the fair value of the financial instruments included in the Group’s working capital is generally identical or approximates the book value.
The following table shows in detail the carrying amount and the fair value of financial instrument groups presented in the financial statements not in accordance with their fair value.
| As at December 31, 2017 | ||||||||
| Carrying amount | Level 2 | |||||||
| $ thousands | ||||||||
| Non-convertible debentures | 91,122 | 105,488 | ||||||
| Long-term loans from banks and others (excluding interests) | 527,706 | 649,487 | ||||||
| As at December 31, 2016 | ||||||||
| Carrying amount | Level 2 | |||||||
$ thousands | ||||||||
| Non-convertible debentures | 867,287 | 947,786 | ||||||
| Long-term loans from banks and others (excluding interests) | 2,116,740 | 2,354,612 | ||||||
| As at December 31, 2018 | ||||||||
| Carrying amount | Level 2 | |||||||
| $ thousands | ||||||||
| Non-convertible debentures | 78,409 | 80,998 | ||||||
| Long-term loans from banks and others (excluding interest) | 508,203 | 555,570 | ||||||
| As at December 31, 2017 | ||||||||
| Carrying amount | Level 2 | |||||||
| $ thousands | ||||||||
| Non-convertible debentures | 91,122 | 105,488 | ||||||
| Long-term loans from banks and others (excluding interest) | 527,706 | 649,487 | ||||||
| The fair value is measured using the technique of discounting the future cash flows with respect to the principal component and the discounted interest using the market interest rate on the measurement date. |
F - 9488
Note 3230 – Financial Instruments (Cont’d)
| (2) | Hierarchy of fair value |
The following table presents an analysis of the financial instruments measured at fair value, using an evaluation method. The various levels were defined as follows:
– Level 1: Quoted prices (not adjusted) in an active market for identical instruments.
– Level 2: Observed data, direct or indirect, not included in Level 1 above.
– Level 3: Data not based on observed market data.
| As at | As at | As at | As at | |||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2018 | December 31, 2017 | |||||||||||||
| Level 2 | Level 2 | Level 3 | Level 2 | |||||||||||||
| $ thousands | $ thousands | $ Thousands | $ Thousands | |||||||||||||
| Assets | ||||||||||||||||
| Derivatives not used for accounting hedge (a) | 1,471 | 3,173 | ||||||||||||||
Qoros put option | 90,103 | - | ||||||||||||||
Derivatives not used for accounting hedge | - | 1,471 | ||||||||||||||
| 1,471 | 3,173 | 90,103 | 1,471 | |||||||||||||
| Liabilities | ||||||||||||||||
| Financial guarantee | - | - | ||||||||||||||
| Derivatives used for accounting hedge | 439 | 25,264 | - | 439 | ||||||||||||
| Derivatives not used for accounting hedge | 73 | 2,125 | - | 73 | ||||||||||||
| Other financial derivatives | - | 29,594 | ||||||||||||||
| 512 | 56,983 | - | 512 | |||||||||||||
| (3) | Data and measurement of the fair value of financial instruments at Level 2 |
Level 2
The fair value of forward contracts on foreign currency is determined using trading programs that are based on market prices.prices. The market price is determined based on a weighting of the exchange rate and the appropriate interest coefficient for the period of the transaction along with an index of the relevant currencies.
The fair value of contracts for exchange (SWAP) of interest rates and fuel prices is determined using trading programs which incorporate market prices, the remaining term of the contract and the credit risks of the parties to the contract.
The fair value of currency and interest exchange (SWAP) transactions is valued using discounted future cash flows at the market interest rate for the remaining term.
The fair value of transactions used to hedge inflation is valued using discounted future cash flows which incorporate the forward CPI curve, and market interest rates for the remaining term.
If the inputs used to measure the fair value of an asset or liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
The fair value of marketable securities held for trade is determined using the ‘Discounts for Lack of Marketability’ (“DLOM”) valuation method, which is a method used to calculate the value of restricted securities. The method purports that the only difference between a company’s common stock and its restricted securities is the lack of marketability of the restricted securities which is derived from the price difference between both prices.
Level 3
The fair value of Qoros put option, as of the valuation date, was based on the Binomial model using the following variables:
| · | The underlying asset value is Qoros’ equity value as of the valuation date. |
| · | The exercise price of the option is the price that must be paid for the stock on the date the put option is exercised, and is defined by the terms of the award. |
| · | The expected exercise date is the period between the grant date and the expiration date. |
| · | The Risk-free interest rate was based on yields on traded China government bonds, with time to maturity equals to the put option contractual period. |
| · | Expected volatility was based on the historical weekly volatility of comparable companies for a period of 4.3 years (remaining contractual term of the put option, as of the valuation date). |
| · | Expected dividend yield is 0% as no dividend distribution is expected in the foreseeable future. |
F - 9589
Note 3230 – Financial Instruments (Cont’d)
The credit risk adjustment was calculated using a recovery rate of 40% (common assumption of market participants) and credit spreads based on traded corporate bonds which have credit ratings of AA for a similar time to maturity as the put option.
The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair values as at December 31, 20162018 and 2015,2017, as well as the significant unobservable inputs used.
| Type | Valuation technique | Significant unobservable data | Inter-relationship between significant unobservable inputs and fair value measurement |
| Interest rate Swaps | The Group applies standard valuation techniques such as: discounted cash flows for fixed and variables coupons (estimated with forward curves) using as discounted rates the projected LIBOR zero coupon curve. The observable inputs are obtained through market information suppliers. | Not applicable | Not applicable |
| Put Options | The Group applies standard valuation techniques such as: Binomial model using risk free rates from market information suppliers. | The group researched on data from comparable companies on inputs such as expected volatility and credit risk. | The estimated fair value would increase(decrease) if: - the volatility is higher (lower) - the credit risk is lower (higher) |
| Foreign Exchange Forwards | The Group applies standard valuation techniques which include market observable parameters such as the implicit exchange rate calculated with forward points. These variables are obtained through market information suppliers. | Not applicable | Not applicable |
| Credit from banks, others and debentures | Discounted cash flows with market interest rate | Not applicable | Not applicable |
| Marketable Securities held for trade | DLOM valuation method | Not applicable | Not applicable |
F - 9690
Note 3331 – Subsequent Events
| 1. |
| Qoros |
| A. | On January 8, |
As a result of the transaction, Kenon will recognise recognize an estimated gain on dilutiondisposal of approximately $286$133 million in its financial statements in the first half of2019. The 12% investment in Qoros was classified as assets held for sale as at December 31, 2018.
See Note 9.F.Following the transaction, Kenon will alsolose significant influence over Qoros and will account for its remaining 12% interest in Qoros on a fair value its put option and record that value in its financial statements in the first quarter of 2018. The valuation of the put is in progress and no estimate can currently be given.
The sale was not made pursuant to the put option or investment right, will resultdescribed in adjustments to the respective parties’ pro rata obligations under the Qoros’ bank guarantees and pledges.
Note 33 – Subsequent Events (Cont’d)
F - 9891
| 2. | OPC |
 |   : 200040 +86 (21) 2212 2888 +86 (21) 6288 1889 kpmg.com/cn |
conditions set by law.
| In thousands of RMB | Note | 2017 | 2016 | |||||||||
| Assets | ||||||||||||
| Property, plant and equipment | 13 | 3,874,993 | 4,219,023 | |||||||||
| Intangible assets | 14 | 4,011,628 | 4,322,900 | |||||||||
| Prepayments | 19 | 21,679 | 1,061 | |||||||||
| Lease prepayments | 15 | 194,890 | 199,303 | |||||||||
| Trade and other receivables | 16 | 91,567 | 91,743 | |||||||||
| Pledged deposits | 17 | - | 8,403 | |||||||||
| Equity-accounted investee | 1,633 | 1,987 | ||||||||||
| Non-current assets | 8,196,390 | 8,844,420 | ||||||||||
| Inventories | 18 | 388,580 | 322,201 | |||||||||
| VAT recoverable | 828,391 | 807,484 | ||||||||||
| Trade and other receivables | 16 | 37,917 | 60,091 | |||||||||
| Prepayments | 19 | 173,046 | 13,049 | |||||||||
| Available-for-sale financial assets | - | 100,000 | ||||||||||
| Pledged deposits | 17 | 25,636 | 36,237 | |||||||||
| Cash and cash equivalents | 20 | 76,954 | 464,759 | |||||||||
| Current assets | 1,530,524 | 1,803,821 | ||||||||||
| Total assets | 9,726,914 | 10,648,241 | ||||||||||
| In thousands of RMB | Note | 2017 | 2016 | |||||||||
| Equity | ||||||||||||
| Paid-in capital | 21 | 10,425,480 | 10,425,480 | |||||||||
| Reserves | 53,594 | �� | 53,386 | |||||||||
| Accumulated losses | (11,645,360 | ) | (10,032,879 | ) | ||||||||
| Total (deficit) / equity | (1,166,286 | ) | 445,987 | |||||||||
| Liabilities | ||||||||||||
| Loans and borrowings | 22 | 4,227,338 | 4,248,660 | |||||||||
| Deferred income | 23 | 161,002 | 412,083 | |||||||||
| Trade and other payables | 24 | 1,208,256 | 112,488 | |||||||||
| Provisions | 25 | 65,136 | 55,516 | |||||||||
| Non-current liabilities | 5,661,732 | 4,828,747 | ||||||||||
| Loans and borrowings | 22 | 2,510,700 | 2,641,486 | |||||||||
| Trade and other payables | 24 | 2,704,095 | 2,684,669 | |||||||||
| Deferred income | 23 | 16,673 | 47,352 | |||||||||
| Current liabilities | 5,231,468 | 5,373,507 | ||||||||||
| Total liabilities | 10,893,200 | 10,202,254 | ||||||||||
| Total (deficit) / equity and liabilities | 9,726,914 | 10,648,241 | ||||||||||
| In thousands of RMB | Note | 2017 | 2016 | 2015 | ||||||||||||
| Revenue | 7 | 1,886,330 | 2,511,925 | 1,459,339 | ||||||||||||
| Cost of sales | (2,262,283 | ) | (3,008,831 | ) | (1,713,043 | ) | ||||||||||
| Gross loss | (375,953 | ) | (496,906 | ) | (253,704 | ) | ||||||||||
| Other income | 8 | 48,375 | 77,128 | 36,690 | ||||||||||||
| Research and development expenses | 9 | (321,943 | ) | (204,242 | ) | (278,008 | ) | |||||||||
| Selling, general and administrative expenses | (604,939 | ) | (762,966 | ) | (1,559,995 | ) | ||||||||||
| Other expenses | 10 | (19,199 | ) | (106,577 | ) | (74,174 | ) | |||||||||
| Operating loss | (1,273,659 | ) | (1,493,563 | ) | (2,129,191 | ) | ||||||||||
| Finance income | 11(a) | 10,647 | 16,573 | 13,429 | ||||||||||||
| Finance costs | 11(a) | (349,019 | ) | (419,592 | ) | (359,126 | ) | |||||||||
| Net finance costs | 11(a) | (338,372 | ) | (403,019 | ) | (345,697 | ) | |||||||||
| Share of (loss) / profit of equity - accounted investee, net of nil tax | (354 | ) | (45 | ) | 7 | |||||||||||
| Loss before tax | (1,612,385 | ) | (1,896,627 | ) | (2,474,881 | ) | ||||||||||
| Income tax expense | 12 | (96 | ) | (255 | ) | (575 | ) | |||||||||
| Loss for the year | (1,612,481 | ) | (1,896,882 | ) | (2,475,456 | ) | ||||||||||
| Other comprehensive income | ||||||||||||||||
| Items that are or may be reclassified to profit or loss | ||||||||||||||||
| Foreign operations - foreign currency translation differences | 208 | 48 | (18 | ) | ||||||||||||
| Other comprehensive income , net of nil tax | 208 | 48 | (18 | ) | ||||||||||||
| Total comprehensive Income for the year | (1,612,273 | ) | (1,896,834 | ) | (2,475,474 | ) | ||||||||||
| In thousands of RMB | Note | Paid-in capital | Capital reserve | Translation reserve | Accumulated losses | Total | ||||||||||||||||
| Balance at 1 January 2015 | 6,531,840 | 147 | (173 | ) | (5,660,541 | ) | 871,273 | |||||||||||||||
| Loss for the year | - | - | - | (2,475,456 | ) | (2,475,456 | ) | |||||||||||||||
| Other comprehensive income | - | - | (18 | ) | - | (18 | ) | |||||||||||||||
| Total comprehensive income | - | - | (18 | ) | (2,475,456 | ) | (2,475,474 | ) | ||||||||||||||
| Conversion of shareholders’ loans to capital | 1,800,000 | - | - | - | 1,800,000 | |||||||||||||||||
| Total contributions | 1,800,000 | - | - | - | 1,800,000 | |||||||||||||||||
| Balance at 31 December 2015 | 8,331,840 | 147 | (191 | ) | (8,135,997 | ) | 195,799 | |||||||||||||||
| Balance at 1 January 2016 | 8,331,840 | 147 | (191 | ) | (8,135,997 | ) | 195,799 | |||||||||||||||
| Loss for the year | - | - | - | (1,896,882 | ) | (1,896,882 | ) | |||||||||||||||
| Other comprehensive income | - | - | 48 | - | 48 | |||||||||||||||||
| Total comprehensive income | - | - | 48 | (1,896,882 | ) | (1,896,834 | ) | |||||||||||||||
| Conversion of shareholders’ loans to capital | 2,093,640 | 53,382 | - | - | 2,147,022 | |||||||||||||||||
| Total contributions | 2,093,640 | 53,382 | - | - | 2,147,022 | |||||||||||||||||
| Balance at 31 December 2016 | 10,425,480 | 53,529 | (143 | ) | (10,032,879 | ) | 445,987 | |||||||||||||||
| In thousands of RMB | Note | Paid-in capital | Capital reserve | Translation reserve | Accumulated losses | Total | ||||||||||||||||
| Balance at 1 January 2017 | 10,425,480 | 53,529 | (143 | ) | (10,032,879 | ) | 445,987 | |||||||||||||||
| Loss for the year | - | - | - | (1,612,481 | ) | (1,612,481 | ) | |||||||||||||||
| Other comprehensive income | - | - | 208 | - | 208 | |||||||||||||||||
| Total comprehensive income | - | - | 208 | (1,612,481 | ) | (1,612,273 | ) | |||||||||||||||
| Balance at 31 December 2017 | 10,425,480 | 53,529 | 65 | (11,645,360 | ) | (1,166,286 | ) | |||||||||||||||
| In thousands of RMB | Note | 2017 | 2016 | 2015 | ||||||||||
| Cash flows from operating activities | ||||||||||||||
| Loss for the year | (1,612,481 | ) | (1,896,882 | ) | (2,475,456 | ) | ||||||||
| Adjustments for: | ||||||||||||||
| Depreciation | 369,256 | 361,764 | 227,477 | |||||||||||
| Amortisation of | ||||||||||||||
| - intangible assets | 311,256 | 422,492 | 236,223 | |||||||||||
| - lease prepayments | 4,413 | 4,413 | 4,412 | |||||||||||
| (Reversal) / Provision of Impairment losses on other receivables | (7,113 | ) | 10,859 | 9,493 | ||||||||||
| Net finance costs | 338,372 | 403,019 | 345,697 | |||||||||||
| Tax expense | 96 | 255 | 575 | |||||||||||
| Share of loss / (profit) of equity - accounted, investee, net of tax | 354 | 45 | (7 | ) | ||||||||||
| Loss on disposal of property, plant, and equipment | 237 | 2,679 | 4,813 | |||||||||||
| Deferred income | (288,988 | ) | (44,496 | ) | (11,079 | ) | ||||||||
| (884,598 | ) | (735,852 | ) | (1,657,852 | ) | |||||||||
| Changes in: | ||||||||||||||
| - inventories | (66,379 | ) | (77,347 | ) | (47,332 | ) | ||||||||
| - trade and other receivables | 29,506 | (30,404 | ) | (322,106 | ) | |||||||||
| - VAT recoverable | (20,907 | ) | 25,019 | 170,112 | ||||||||||
| - prepayments | (159,997 | ) | 23,382 | 118,224 | ||||||||||
| - trade and other payables | 27,035 | 431,754 | 560,630 | |||||||||||
| - pledge deposit | 18,104 | 25,576 | - | |||||||||||
| - deferred income | 7,228 | 9,686 | 300,000 | |||||||||||
| Cash used in operating activities | (1,050,008 | ) | (328,186 | ) | (878,324 | ) | ||||||||
| Income taxes paid | (96 | ) | (255 | ) | (575 | ) | ||||||||
| Net cash used in operating activities | (1,050,104 | ) | (328,441 | ) | (878,899 | ) | ||||||||
| In thousands of RMB | Note | 2017 | 2016 | 2015 | ||||||||||
| Cash flows from investing activities | ||||||||||||||
| Interest received | 10,691 | 19,131 | 15,019 | |||||||||||
| Acquisition of available-for - sale financial assets | - | (126,000 | ) | (175,000 | ) | |||||||||
| Proceeds from disposal of available-for-sale financial assets | 100,000 | 26,000 | 175,000 | |||||||||||
| Collection of pledged deposits | 900 | 10,519 | 508,093 | |||||||||||
| Placement of pledged deposits | - | (10,519 | ) | (330,420 | ) | |||||||||
| Acquisition of property, plant and equipment and intangible assets | (64,075 | ) | (595,625 | ) | (1,334,856 | ) | ||||||||
| Net cash from (used in) investing activities | 47,516 | (676,494 | ) | (1,142,164 | ) | |||||||||
| In thousands of RMB | Note | 2017 | 2016 | 2015 | ||||||||||||
| Cash flows from financing activities | ||||||||||||||||
| Proceeds from advance capital injection | 1,096,878 | - | - | |||||||||||||
| Proceeds from borrowings | 20(c) | 1,972,000 | 2,949,985 | 5,564,733 | ||||||||||||
| Repayment of borrowings | 20(c) | (2,150,058 | ) | (1,470,344 | ) | (3,644,550 | ) | |||||||||
| Interest paid | 20(c) | (303,452 | ) | (310,863 | ) | (393,837 | ) | |||||||||
| Collection of guarantee deposit | - | 55,451 | 100,219 | |||||||||||||
| Placement of guarantee deposit | - | (12,500 | ) | (100,219 | ) | |||||||||||
| Net cash from financing activities | 615,368 | 1,211,729 | 1,526,346 | |||||||||||||
| Net increase/(decrease) in cash and cash equivalents | (387,220 | ) | 206,794 | (494,717 | ) | |||||||||||
| Cash and cash equivalents at 1 January | 464,759 | 257,270 | 752,088 | |||||||||||||
| Effect of foreign exchange rate changes | (585 | ) | 695 | (101 | ) | |||||||||||
| Cash and cash equivalents at 31 December | 76,954 | 464,759 | 257,270 | |||||||||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| Sales of goods | 1,583,826 | 2,495,479 | 1,435,136 | |||||||||
| Licencing income (note 23) | 270,000 | - | - | |||||||||
| Rental income | 23,291 | 9,150 | 12,009 | |||||||||
| Others | 9,213 | 7,296 | 12,194 | |||||||||
| Total | 1,886,330 | 2,511,925 | 1,459,339 | |||||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| Government grants | 46,120 | 35,796 | 33,024 | |||||||||
| Others | 2,255 | 41,332 | 3,666 | |||||||||
| Total | 48,375 | 77,128 | 36,690 | |||||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| Car platform and models | 321,943 | 204,242 | 278,008 | |||||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| (Reversal) / Provision of Impairment losses | (7,113 | ) | 10,859 | 9,493 | ||||||||
| Price adjustment on purchase of material and parts (Note 29(c)) | - | 72,953 | 42,877 | |||||||||
| Other taxes and surcharges | 12,520 | 13,106 | 8,066 | |||||||||
| Others | 13,792 | 9,659 | 13,738 | |||||||||
| Total | 19,199 | 106,577 | 74,174 | |||||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| (a) Net finance costs: | ||||||||||||
| Interest income from available-for-sale financial assets | 69 | 2 | 39 | |||||||||
| Interest income from bank deposits | 10,578 | 16,571 | 13,390 | |||||||||
| Finance income | 10,647 | 16,573 | 13,429 | |||||||||
| Interest expense | (338,561 | ) | (435,693 | ) | (381,586 | ) | ||||||
| Less: interest expenses capitalised into property, plant and equipment, and development costs | - | 24,603 | 92,975 | |||||||||
| Net foreign exchange loss | (1,974 | ) | (3,719 | ) | (65,725 | ) | ||||||
| Others | (8,484 | ) | (4,783 | ) | (4,790 | ) | ||||||
| Finance costs | (349,019 | ) | (414,592 | ) | (359,126 | ) | ||||||
| Net finance costs | (338,372 | ) | (403,019 | ) | (345,697 | ) | ||||||
| (b) Personnel expenses: | ||||||||||||
| Contributions to defined contribution retirement plan | (29,644 | ) | (30,954 | ) | (34,928 | ) | ||||||
| Salaries, wages and other benefits | (264,018 | ) | (253,148 | ) | (448,836 | ) | ||||||
| (293,662 | ) | (284,102 | ) | (483,764 | ) | |||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| (c) Other items: | ||||||||||||
| Amortisation | ||||||||||||
| - lease prepayment | (4,413 | ) | (4,413 | ) | (4,412 | ) | ||||||
| - intangible assets | (311,256 | ) | (422,492 | ) | (236,223 | ) | ||||||
| (315,669 | ) | (426,905 | ) | (240,635 | ) | |||||||
| Depreciation | ||||||||||||
| - property, plant and equipment | (369,256 | ) | (361,764 | ) | (227,477 | ) | ||||||
| Operating lease charges | ||||||||||||
| - hire of office rentals | (27,664 | ) | (24,026 | ) | (28,579 | ) | ||||||
| - hire of cars | (5,047 | ) | (2,516 | ) | (3,515 | ) | ||||||
| (32,711 | ) | (26,542 | ) | (32,094 | ) | |||||||
In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
Current tax expense - Germany Income Tax | ||||||||||||
Current year | 96 | 255 | 575 | |||||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| Loss before tax | (1,612,385 | ) | (1,896,627 | ) | (2,474,881 | ) | ||||||
| Income tax credit at the applicable PRC income tax rate of 25% | (403,096 | ) | (474,157 | ) | (618,720 | ) | ||||||
| Effect of tax rate differential | 45 | 99 | 155 | |||||||||
| Effect of tax losses not recognised | 571,104 | 539,836 | 521,005 | |||||||||
| Effect of other temporary differences not recognised | - | - | 98,021 | |||||||||
| Utilisation of previously unrecognised deductible temporary differences | (167,979 | ) | (65,590 | ) | - | |||||||
| Non-deductible expenses | 22 | 67 | 114 | |||||||||
| Income tax expense | 96 | 255 | 575 | |||||||||
| In thousands of RMB | 31 December | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Tax losses | 10,009,308 | 7,506,001 | 5,457,817 | |||||||||
| Other temporary differences | 963,792 | 2,250,829 | 2,513,187 | |||||||||
| Total | 10,973,100 | 9,756,830 | 7,971,004 | |||||||||
| In thousands of RMB | 31 December 2017 | |||
| 2019 | 2,476,346 | |||
| 2020 | 2,474,084 | |||
| 2021 | 2,774,461 | |||
| 2022 | 2,284,417 | |||
| 10,009,308 | ||||
| In thousands of RMB | Leasehold improvements | Equipment | Building | Construction in progress | Total | |||||||||||||||
| Cost | ||||||||||||||||||||
| Balance at 1 January 2016 | 41,411 | 2,465,516 | 1,246,143 | 957,342 | 4,710,412 | |||||||||||||||
| Additions | 4,577 | 3,851 | 895 | 335,965 | 345,288 | |||||||||||||||
| Transfer | - | 1,189,159 | 43,443 | (1,269,669 | ) | (37,067 | ) | |||||||||||||
| Disposal | (332 | ) | (4,401 | ) | - | - | (4,733 | ) | ||||||||||||
| Effect of movement in exchange rates | 6 | 103 | - | - | 109 | |||||||||||||||
| Balance at 31 December 2016 | 45,662 | 3,654,228 | 1,290,481 | 23,638 | 5,014,009 | |||||||||||||||
| Additions | 7,702 | 94 | - | 38,132 | 45,928 | |||||||||||||||
| Transfer | - | 137 | 14,883 | (15,020 | ) | - | ||||||||||||||
| Disposal | (89 | ) | (237 | ) | - | - | (326 | ) | ||||||||||||
| Adjustment | (126 | ) | (14,824 | ) | (5,604 | ) | - | (20,554 | ) | |||||||||||
| Effect of movement in exchange rates | 3 | 220 | - | - | 223 | |||||||||||||||
| Balance at 31 December 2017 | 53,152 | 3,639,618 | 1,299,760 | 46,750 | 5,039,280 | |||||||||||||||
| Depreciation | ||||||||||||||||||||
| Balance at 1 January 2016 | (26,442 | ) | (322,672 | ) | (86,131 | ) | - | (435,245 | ) | |||||||||||
| Depreciation for the year | (6,339 | ) | (304,455 | ) | (50,970 | ) | - | (361,764 | ) | |||||||||||
| Written off on disposal | 332 | 1,722 | - | - | 2,054 | |||||||||||||||
| Effect of movement in exchange rates | (1 | ) | (30 | ) | - | - | (31 | ) | ||||||||||||
| Balance at 31 December 2016 | (32,450 | ) | (625,435 | ) | (137,101 | ) | - | (794,986 | ) | |||||||||||
| Depreciation for the year | (10,146 | ) | (315,702 | ) | (43,408 | ) | - | (369,256 | ) | |||||||||||
| Written off on disposal | 89 | - | - | - | 89 | |||||||||||||||
| Effect of movement in exchange rates | (2 | ) | (132 | ) | - | - | (134 | ) | ||||||||||||
| Balance at 31 December 2017 | (42,509 | ) | (941,269 | ) | (180,509 | ) | - | (1,164,287 | ) | |||||||||||
| Carrying amount | ||||||||||||||||||||
| Balance at 31 December 2015 | 14,969 | 2,142,844 | 1,160,012 | 957,342 | 4,275,167 | |||||||||||||||
| Balance at 31 December 2016 | 13,212 | 3,028,793 | 1,153,380 | 23,638 | 4,219,023 | |||||||||||||||
| Balance at 31 December 2017 | 10,643 | 2,698,349 | 1,119,251 | 46,750 | 3,874,993 | |||||||||||||||
| In thousands of RMB | Software | Development costs | Total | |||||||||
| Cost | ||||||||||||
| Balance at 1 January 2016 | 434,852 | 4,522,631 | 4,957,483 | |||||||||
| Additions | 493 | 221,926 | 222,419 | |||||||||
| Transfer | 37,067 | - | 37,067 | |||||||||
| Adjustment | - | (170,607 | ) | (170,607 | ) | |||||||
| Effect of movement in exchange rates | 47 | - | 47 | |||||||||
| Balance at 31 December 2016 | 472,459 | 4,573,950 | 5,046,409 | |||||||||
| Additions | - | - | - | |||||||||
| Disposal | (415 | ) | - | (415 | ) | |||||||
| Effect of movement in exchange rates | 97 | - | 97 | |||||||||
| Balance at 31 December 2017 | 472,141 | 4,573,950 | 5,046,091 | |||||||||
| Amortisation | ||||||||||||
| Balance at 1 January 2016 | (84,457 | ) | (216,552 | ) | (301,009 | ) | ||||||
| Amortisation for the year | (48,820 | ) | (373,672 | ) | (422,492 | ) | ||||||
| Effect of movement in exchange rates | (8 | ) | - | (8 | ) | |||||||
| Balance at 31 December 2016 | (133,285 | ) | (590,224 | ) | (723,509 | ) | ||||||
| Amortisation for the year | (48,482 | ) | (262,774 | ) | (311,256 | ) | ||||||
| Disposal | 412 | - | 412 | |||||||||
| Effect of movement in exchange rates | (110 | ) | - | (110 | ) | |||||||
| Balance at 31 December 2017 | (181,465 | ) | (852,998 | ) | (1,034,463 | ) | ||||||
| Carrying amount | ||||||||||||
| Balance at 31 December 2015 | 350,395 | 4,306,079 | 4,656,474 | |||||||||
| Balance at 31 December 2016 | 339,174 | 3,983,726 | 4,322,900 | |||||||||
| Balance at 31 December 2017 | 290,676 | 3,720,952 | 4,011,628 | |||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Cost | ||||||||
| Balance at 1 January and 31 December | 220,631 | 220,631 | ||||||
| Amortisation | ||||||||
| Balance at 1 January | (21,328 | ) | (16,915 | ) | ||||
| Amortisation for the year | (4,413 | ) | (4,413 | ) | ||||
| Balance at 31 December | (25,741 | ) | (21,328 | ) | ||||
| Carrying amount | ||||||||
| Balance at 1 January | 199,303 | 203,716 | ||||||
| Balance at 31 December | 194,890 | 199,303 | ||||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Trade receivables | 14,300 | 20,168 | ||||||
| Bills receivables | - | 3,500 | ||||||
| Deposits | 81,407 | 76,805 | ||||||
| Deferred expenses | 21,498 | 26,275 | ||||||
| Receivables due from employees | 24 | 14,813 | ||||||
| Receivables due from related parties | 20,288 | 16,284 | ||||||
| Others | 5,602 | 14,737 | ||||||
| 143,119 | 172,582 | |||||||
| Less: allowance for doubtful debts | (13,635 | ) | (20,748 | ) | ||||
| 129,484 | 151,834 | |||||||
| Non-current | 91,567 | 91,743 | ||||||
| Current | 37,917 | 60,091 | ||||||
| 129,484 | 151,834 | |||||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Balance at 1 January | (20,748 | ) | (9,889 | ) | ||||
| Impairment loss recognised | (2,463 | ) | (10,859 | ) | ||||
| Impairment loss reversed | 9,576 | - | ||||||
| Balance at 31 December | (13,635 | ) | (20,748 | ) | ||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Non-current | - | 8,403 | ||||||
| Current | 25,636 | 36,237 | ||||||
| 25,636 | 44,640 | |||||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Raw materials and consumables | 102,309 | 81,723 | ||||||
| Work in progress | 5,641 | 2,861 | ||||||
| Finished goods | 280,630 | 237,617 | ||||||
| Total | 388,580 | 322,201 | ||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| Carrying amount of inventories sold | 2,164,541 | 2,999,396 | 1,704,515 | |||||||||
| Total | 2,164,541 | 2,999,396 | 1,704,515 | |||||||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Prepayment for purchase of equipment | 21,679 | 1,061 | ||||||
| Prepayment for services and materials | 171,517 | 12,435 | ||||||
| Prepayment for staff rent | 1,498 | 584 | ||||||
| Others | 31 | 30 | ||||||
| 194,725 | 14,110 | |||||||
| Non-current | 21,679 | 1,061 | ||||||
| Current | 173,046 | 13,049 | ||||||
| 194,725 | 14,110 | |||||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Cash at bank | 76,954 | 464,759 | ||||||
| 76,954 | 464,759 | |||||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Conversion of debt into capital | - | 2,147,022 | ||||||
| Loans and borrowings | Trade and other payables | Total | ||||||||||
| (Note 22) | ||||||||||||
| Balance at 1 January 2017 | 6,890,146 | 123,739 | 7,013,885 | |||||||||
| Changes from financing cash flows: | ||||||||||||
| Proceeds from borrowings | 1,972,000 | - | 1,972,000 | |||||||||
| Repayment of borrowings | (2,150,058 | ) | - | (2,150,058 | ) | |||||||
| Interest paid | - | (303,452 | ) | (303,452 | ) | |||||||
| Total changes from financing cash flows | (178,058 | ) | (303,452 | ) | (481,510 | ) | ||||||
| Other changes: | ||||||||||||
| Reclassifications | 25,950 | (25,950 | ) | - | ||||||||
| Interest expense (Note 11(a)) | - | 338,561 | 338,561 | |||||||||
| Total other changes | 25,950 | 312,611 | 338,561 | |||||||||
| Balance at 31 December 2017 | 6,738,038 | 132,898 | 6,870,936 | |||||||||
| 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Wuhu Chery | 2,606,370 | 5,212,740 | ||||||
| Quantum | 2,502,115 | 5,212,740 | ||||||
| HCI | 5,316,995 | - | ||||||
| 10,425,480 | 10,425,480 | |||||||
| 31 December | ||||||||||||
| In thousands of RMB | Note | 2017 | 2016 | |||||||||
| Denominated in: | ||||||||||||
| RMB | 6,738,038 | 6,890,146 | ||||||||||
| 6,738,038 | 6,890,146 | |||||||||||
| Non-current | 22(a) | 4,227,338 | 4,248,660 | |||||||||
| Current | 22(b) | 2,510,700 | 2,641,486 | |||||||||
| 6,738,038 | 6,890,146 | |||||||||||
| In thousands of RMB | Note | Banking facility | Accumulated drawdown | Accumulated repayment | Reclassified to current | Balance as at 31 December 2017 | ||||||||||||||||
| Consortium loan I | (i) | 3,000,000 | 2,906,000 | (354,245 | ) | (24,417 | ) | 2,527,338 | ||||||||||||||
| Consortium loan II | (ii) | 1,200,000 | 1,200,000 | (30,000 | ) | (90,000 | ) | 1,080,000 | ||||||||||||||
| Consortium loan III | (iii) | 700,000 | 700,000 | - | (80,000 | ) | 620,000 | |||||||||||||||
| PingAn | (iv) | 62,500 | 62,500 | (54,167 | ) | (8,333 | ) | - | ||||||||||||||
| Total | 4,962,500 | 4,868,500 | (438,412 | ) | (202,750 | ) | 4,227,338 | |||||||||||||||
| In thousands of RMB | Government Grant | Licence rights | First Free Service | Total | ||||||||||||
| Balance at 1 January 2016 | 194,245 | 300,000 | - | 494,245 | ||||||||||||
| Addition | - | - | 9,686 | 9,686 | ||||||||||||
| Amortisation | (11,082 | ) | (30,000 | ) | (3,414 | ) | (44,496 | ) | ||||||||
| Balance at 31 December 2016 | 183,163 | 270,000 | 6,272 | 459,435 | ||||||||||||
| Addition | - | - | 7,228 | 7,228 | ||||||||||||
| Amortisation | (11,080 | ) | (270,000 | ) | (7,908 | ) | (288,988 | ) | ||||||||
| Balance at 31 December 2017 | 172,083 | - | 5,592 | 177,675 | ||||||||||||
| Non-current | 161,002 | - | - | 161,002 | ||||||||||||
| Current | 11,081 | - | 5,592 | 16,673 | ||||||||||||
| 172,083 | - | 5,592 | 177,675 | |||||||||||||
| At 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Trade payables | 745,337 | 826,070 | ||||||
| Bills payables | 11,000 | 43,000 | ||||||
| Other payables for | ||||||||
| - research and development activities | 242,383 | 246,763 | ||||||
| - property, plant and equipment | 131,014 | 181,717 | ||||||
| - marketing and promotion | 424,494 | 519,642 | ||||||
| - services | 252,404 | 267,503 | ||||||
| Accrued payroll and other employee benefits | 44,017 | 53,628 | ||||||
| Interest payable | 132,898 | 37,379 | ||||||
| Liabilities due to related parties | 558,370 | 402,188 | ||||||
| Advance capital injection from HCI (note 21) | 1,096,878 | - | ||||||
| Receipt in advance | 17,766 | 39,950 | ||||||
| Others | 255,790 | 179,317 | ||||||
| 3,912,351 | 2,797,157 | |||||||
| Non-current | 1,208,256 | 112,488 | ||||||
| Current | 2,704,095 | 2,684,669 | ||||||
| 3,912,351 | 2,797,157 | |||||||
| Contractual undiscounted cash flow | ||||||||||||||||||||||||
| Within 1 year or on demand | More than 1 year but less than 2 years | More than 2 years but less than 5 years | More than 5 years | Total | Carrying amount at balance sheet date | |||||||||||||||||||
| As at 31 December 2017 | ||||||||||||||||||||||||
| Trade and other payables | 2,704,095 | 46,096 | 74,398 | 1,096,878 | 3,921,467 | 3,912,351 | ||||||||||||||||||
| Loans and borrowings | 2,788,020 | 1,067,208 | 3,037,039 | 627,385 | 7,519,652 | 6,738,038 | ||||||||||||||||||
| Total | 5,492,115 | 1,113,304 | 3,111,437 | 1,724,263 | 11,441,119 | 10,650,389 | ||||||||||||||||||
| As at 31 December 2016 | ||||||||||||||||||||||||
| Trade and other payables | 2,684,669 | 21,426 | 103,885 | - | 2,809,980 | 2,797,157 | ||||||||||||||||||
| Loans and borrowings | 2,881,389 | 852,455 | 2,646,014 | 1,489,919 | 7,869,777 | 6,890,146 | ||||||||||||||||||
| Total | 5,566,058 | 873,881 | 2,749,899 | 1,489,919 | 10,679,757 | 9,687,303 | ||||||||||||||||||
| At 31 December | ||||||||
| EUR | 2017 | 2016 | ||||||
| RMB’000 | RMB’000 | |||||||
| Cash and cash equivalent | 912 | 1,549 | ||||||
| Prepayments | 741 | 784 | ||||||
| Trade and other payables | (22,135 | ) | (18,673 | ) | ||||
| Net statement of financial position exposure | (20,482 | ) | (16,340 | ) | ||||
| At 31 December | ||||||||
| USD | 2017 | 2016 | ||||||
| RMB’000 | RMB’000 | |||||||
| Cash and cash equivalent | 9,411 | 9,987 | ||||||
| Prepayments | 131 | 284 | ||||||
| Trade and other payables | (7,652 | ) | (7,922 | ) | ||||
| Net statement of financial position exposure | 1,890 | 2,349 | ||||||
| At 31 December | ||||||||
| GBP | 2017 | 2016 | ||||||
| RMB’000 | RMB’000 | |||||||
| Trade and other payables | (1,229 | ) | (706 | ) | ||||
| Net statement of financial position exposure | (1,229 | ) | (706 | ) | ||||
| Average rate | Year end spot rate | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| EUR | 7.5546 | 7.2010 | 7.8023 | 7.3068 | ||||||||||||
| USD | 6.7356 | 6.7153 | 6.5342 | 6.9370 | ||||||||||||
| GBP | 8.6443 | 9.0627 | 8.7792 | 8.5094 | ||||||||||||
| At 31 December | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Strengthening | Weakening | Strengthening | Weakening | |||||||||||||
| RMB’000 | RMB’000 | RMB’000 | RMB’000 | |||||||||||||
| EUR (10% movement) | (2,048 | ) | 2,048 | (1,634 | ) | 1,634 | ||||||||||
| USD (10% movement) | 189 | (189 | ) | 235 | (235 | ) | ||||||||||
| GBP (10% movement) | (123 | ) | 123 | (71 | ) | 71 | ||||||||||
| 2017 | 2016 | |||||||||||||||
| Interest rate % | RMB’000 | Interest rate % | RMB’000 | |||||||||||||
| Net fixed rate borrowings: | ||||||||||||||||
| Bank loans | 4.35~6.70 | 2,316,283 | 4.35~6.70 | 2,232,333 | ||||||||||||
| Net variable rate borrowings: | ||||||||||||||||
| Bank loans | 4.90~5.39 | 4,421,755 | 4.90~5.39 | 4,657,813 | ||||||||||||
| Total net borrowings | 6,738,038 | 6,980,146 | ||||||||||||||
| Net fixed rate borrowings as a percentage of total net borrowings | 34 | % | 32 | % | ||||||||||||
Fair value measurements as at 31 December 2016 categorised into | ||||||||||||||||
| Fair value at 31 December 2016 | Level 1 | Level 2 | Level 3 | |||||||||||||
| RMB’000 | RMB’000 | RMB’000 | RMB’000 | |||||||||||||
| Recurring fair value measurement | ||||||||||||||||
| Available-for-sale financial assets | 100,000 | - | 100,000 | - | ||||||||||||
| At 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Within 1 year | 28,202 | 35,202 | ||||||
| After 1 year but within 5 years | 94,113 | 96,197 | ||||||
| After 5 years | 24,881 | 49,762 | ||||||
147,196 | 181,161 | |||||||
| At 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Within 1 year | - | 20,016 | ||||||
| After 1 year but within 5 years | - | - | ||||||
| - | 20,016 | |||||||
| At 31 December | ||||||||
| In thousands of RMB | 2017 | 2016 | ||||||
| Contracted for | 216,875 | 266,103 | ||||||
| Authorised but not contracted for | - | - | ||||||
| 216,875 | 266,103 | |||||||
| In thousands of RMB | 2017 | 2016 | 2015 | |||||||||
| Salaries, benefit and contribution to the defined contribution retirement plan | 17,007 | 12,979 | 19,700 | |||||||||
| In thousands of RMB | Note | 2017 | 2016 | 2015 | ||||||||||||
| Loan from Wuhu Chery | 244,250 | 975,000 | 1,662,783 | |||||||||||||
| Loan from Quantum | 244,250 | 975,000 | 800,000 | |||||||||||||
| Conversion of loan to capital | ||||||||||||||||
| - Wuhu Chery | - | 1,046,820 | 900,000 | |||||||||||||
| - Quantum | - | 1,046,820 | 900,000 | |||||||||||||
| Advance capital injection from HCI | 1,096,878 | - | - | |||||||||||||
| Sale of goods | ||||||||||||||||
| - Chery Auto | 3,567 | 11,170 | 6,717 | |||||||||||||
| - Fund & Liberty Car Rental/Leasing Co., Ltd. (“Fund”) | - | - | 1,153 | |||||||||||||
| - Chery Auto's subsidiary | 6,074 | 4,533 | ||||||||||||||
| Purchase of materials and parts | ||||||||||||||||
| - Chery Auto | 166,327 | 327,694 | 189,754 | |||||||||||||
- Chery Auto’s subsidiaries | 1,574 | 2,317 | - | |||||||||||||
| Price adjustment on purchase of material and parts | ||||||||||||||||
| - Chery Auto | 10 | - | 72,953 | 42,877 | ||||||||||||
| Service fee | ||||||||||||||||
| - Chery Auto | 1,951 | 4,817 | 42,339 | |||||||||||||
| - Shanghai SICAR Vehicle Technology Development Co., Ltd. (“SICAR”) | - | - | 4,453 | |||||||||||||
| Rental and other expenses | ||||||||||||||||
| - Chery Huiyin Motor Finance Service Co., Ltd. (“Huiyin”) | 32,045 | 33,644 | 16,821 | |||||||||||||
| - Chery Auto’s subsidy | 61 | - | 18 | |||||||||||||
| - Fund | 171 | 2,703 | - | |||||||||||||
| - Chery Holdings Ltd. | 69 | 59 | - | |||||||||||||
| - Kenon Holdings Ltd. | - | - | 2,167 | |||||||||||||
| Charge for licence agreement | 23 | - | - | 300,000 | ||||||||||||
| Sales proceeds received from Huiyin pursuant to tri-party agreements | (i) | 1,022,822 | 2,425,437 | 1,173,051 | ||||||||||||
| In thousands of RMB | Note | At 31 December 2017 | At 31 December 2016 | |||||||
| Amounts due from related parties | ||||||||||
| - trade receivables from Fund | - | 3,790 | ||||||||
| - trade receivables from Chery Auto’s subsidiary | 5,692 | 1,689 | ||||||||
| - trade receivables from Chery Auto | 1,144 | 1,144 | ||||||||
| - other receivables from Chery Auto | 13,447 | 9,661 | ||||||||
| - other receivables from Chery Auto’s subsidiary | 5 | - | ||||||||
| - prepayment to Chery Auto’s subsidiary | 445 | - | ||||||||
| 20,733 | 16,284 | |||||||||
| Amounts due to related parties | ||||||||||
| - loan payable to Wuhu Chery | 944,250 | 700,000 | ||||||||
| - loan payable to Quantum | 944,250 | 700,000 | ||||||||
| - payables to Chery Auto | 554,907 | 373,058 | ||||||||
| - payables to Kenon Holdings Ltd. | - | - | ||||||||
| - payables to Fund | - | 200 | ||||||||
| - payables to Chery Auto’s subsidiary | 852 | 624 | ||||||||
| - payables to SICAR | 1,570 | 1,570 | ||||||||
| - receipt in advance from Huiyin | (i) | - | 26,408 | |||||||
| - receipt in advance from Chery Auto’s subsidiary | 1,041 | 328 | ||||||||
- advance capital injection from HCI | 1,096,878 | - | ||||||||
| 3,543,748 | 1,802,188 | |||||||||
In March 2016, in order to help increase the credit lines2019, OPC declared a dividend of dealers from Huiyin, the Group offered guarantees to Huiyin for selected dealers pursuant to which the Group was responsible for any defaultNIS 36 million (approximately $10 million). Kenon’s share of the loans released during the period between March 2016 and February 2017, including both principal and interests, for a maximum amount of RMB 700 million which were the amount of total lines of credit of these dealers with Huiyin. The interest rate of loans offered by Huiyin to dealers before and after the Group committed such guarantee was the same. As at 31 December 2017, the outstanding loan balance were RMB 247 million and none of them were overdue. The guarantee was subsequently extended to December 2018.dividend is approximately $7.5 million.
F - 15692
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Kenon Holdings Ltd. | |||
By: | /s/ Robert L. Rosen | ||
Name: Robert L. Rosen | |||
Title: |
Date: April 9, 20188, 2019
ITEM 19. Exhibits
Index to Exhibits
| Exhibit Number | Description of Document | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.
| 1. | Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act. Omitted information has been filed separately with the SEC. |
| 2. | Portions of this exhibit have been omitted because they are both (i) not material and (ii) would be competitively harmful if publicly disclosed. |