|
|
|
1
|
|
A. Directors and Senior Management |
1
|
|
|
|
1
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
A. Reserved |
1
|
|
B. Capitalization and Indebtedness |
1
|
|
C. Reasons for the Offer and Use of Proceeds |
1
|
|
D. Risk Factors |
1
|
|
|
|
57
|
|
|
57
|
|
B. Business Overview |
58
|
|
C. Organizational Structure |
146
|
|
D. Property, Plants and Equipment |
146
|
|
|
|
146
|
|
|
|
146
|
|
A. Operating Results |
163
|
|
B. Liquidity and Capital Resources |
168
|
|
C. Research and Development, Patents and Licenses, Etc. |
182
|
|
D. Trend Information |
182
|
|
E. Critical Accounting Policies and Significant Estimates |
184
|
|
|
|
184
|
|
A. Directors and Senior Management |
184
|
|
B. Compensation |
187
|
|
C. Board Practices |
187
|
|
D. Employees |
190
|
|
E. Share Ownership |
190
|
|
|
|
191
|
|
A. Major Shareholders |
191
|
|
B. Related Party Transactions |
192
|
|
C. Interests of Experts and Counsel |
192
|
|
|
|
192
|
|
A. Consolidated Statements and Other Financial Information |
192
|
|
B. Significant Changes |
192
|
|
|
|
193 |
|
A. Offer and Listing Details |
193 |
|
B. Plan of Distribution |
193 |
|
C. Markets |
193 |
|
D. Selling Shareholders |
193 |
|
E. Dilution |
193 |
|
F. Expenses of the Issue |
193 |
|
|
|
193 |
|
A. Share Capital |
193 |
|
B. Constitution |
193
|
|
|
205
|
|
D. Exchange Controls |
205
|
|
E. Taxation |
205
|
|
F. Dividends and Paying Agents |
212
|
|
G. Statement by Experts |
212
|
|
|
H. Documents on Display |
212 |
|
|
I. Subsidiary Information |
212 |
|
|
|
212 |
|
|
|
213
|
|
|
A. Debt Securities |
213 |
|
|
B. Warrants and Rights |
213 |
|
|
C. Other Securities |
213 |
|
|
D. American Depositary Shares |
213 |
|
|
|
213 |
|
|
|
213 |
|
|
|
213 |
|
|
|
214
|
|
|
|
214 |
|
|
|
214 |
|
|
|
214 |
|
|
|
215 |
|
|
|
215 |
|
|
|
215 |
|
|
|
215 |
|
|
|
215 |
|
|
|
215
|
|
|
|
216
|
|
|
|
216
|
INTRODUCTION
AND USE OF CERTAIN TERMS
We have prepared this annual report using
a number of conventions, which you should consider when reading the information contained herein. In this annual report, the
“Company,”
“we,” “us” and
“our” shall refer to Kenon Holdings Ltd., or Kenon, and each of our
subsidiaries and
associated company, collectively, as the context may require, including:
|
• |
“CPV” means the CPV Group (i.e., CPV Power Holdings LP, Competitive Power Ventures Inc. and
CPV Renewable Energy Company Inc.), a business engaged in the development, construction and management of power plants running conventional
energy (powered by natural gas) and renewable energy in the United States, which was acquired in January 2021 by CPV Group LP, an entity
in which OPC indirectly holds a 70% interest; |
|
• |
OPC Energy Ltd. (“OPC”), an owner, developer and operator of power generation facilities
in the Israeli and United States power markets, in which Kenon has an approximately 55% interest; |
|
• |
Qoros Automotive Co., Ltd. (“Qoros”), a Chinese automotive company based in China, in which
Kenon, through its 100%-owned subsidiary Quantum (as defined below), has a 12% interest; and |
|
• |
ZIM Integrated Shipping Services, Ltd. (“ZIM”), an Israeli global container shipping company,
in which Kenon has an approximately 21% interest. |
Additionally, this annual report uses the
following conventions:
|
• |
“Ansonia” means Ansonia Holdings Singapore B.V., a company organized under the laws of Singapore,
which owns approximately 60% of the outstanding shares of Kenon; |
|
• |
“Chery” means Chery Automobile Co. Ltd., a supplier to and shareholder of Qoros; |
|
• |
“IC” means Israel Corporation Ltd., an Israeli corporation traded on the Tel Aviv Stock Exchange,
or the “TASE,” and Kenon’s former parent company; |
|
• |
“IC Green” means IC Green Energy Ltd., an Israeli corporation and a wholly-owned subsidiary
of Kenon; |
|
• |
“IC Power” means IC Power Ltd., formerly IC Power Pte. Ltd, a Singaporean company and a wholly-owned
subsidiary of Kenon; |
|
• |
“Inkia” means Inkia Energy Limited, a Bermuda corporation, which was wholly-owned subsidiary
of IC Power. In December 2017, Inkia sold all of its Latin American and Caribbean businesses and has since been wound up; |
|
• |
“Inkia Business” means Inkia’s Latin American and Caribbean power generation and distribution
businesses, which were sold in December 2017; |
|
• |
“Kallpa” means Kallpa Generación SA, a company within the Inkia Business. Kallpa was
owned by Inkia until December 2017; |
|
• |
“Majority Shareholder” means the China-based investor related to Shenzhen Baoneng Investment
Group Co., Ltd. (“Baoneng Group”) that holds 63% of Qoros; |
|
• |
“our businesses” shall refer to each of our subsidiaries and associated company, collectively,
as the context may require; |
|
• |
“Quantum” means Quantum (2007) LLC, a Delaware limited liability company, is a wholly-owned
subsidiary of Kenon and which is the direct owner of our interest in Qoros; |
|
• |
“Spin-off” shall refer to (i) IC’s January 7, 2015 contribution to Kenon of its interests
in IC Power, Qoros, ZIM and other entities, and (ii) IC’s January 9, 2015 distribution of Kenon’s issued and outstanding ordinary
shares, via a dividend-in-kind, to IC’s shareholders; and |
|
• |
“Tower” means Tower Semiconductor Ltd., an Israeli specialty foundry semiconductor manufacturer,
listed on the NASDAQ stock exchange, or “NASDAQ,” and the TASE, in which Kenon used to hold an interest until June 30, 2015.
|
Additionally, this annual report uses the
following conventions for OPC and ZIM.
OPC
|
• |
“Availability factor” refers to the number of hours that a generation facility is available
to produce electricity divided by the total number of hours in a year; |
|
• |
“COD” means the commercial operation date of a development project; |
|
• |
“distribution” refers to the transfer of electricity from the transmission lines at grid
supply points and its delivery to consumers at lower voltages through a distribution system; |
|
• |
“EA” means Israeli Electricity Authority; |
|
• |
“EPC” means engineering, procurement and construction; |
|
• |
“firm capacity” means the amount of energy available for production that, pursuant to applicable
regulations, must be guaranteed to be available at a given time for injection to a certain power grid; |
|
• |
“Gnrgy” means Gnrgy Ltd.; |
|
• |
“GWh” means gigawatt per hour (one GWh is equal to 1,000 MWh); |
|
• |
“Hadera Energy Center” means OPC Hadera’s boilers and a steam turbine. The Hadera Energy
Center currently serves as back-up for the OPC-Hadera power plant’s supply for steam and its turbine is not currently operating
and is not expected to operate with generation of more than approximately 16MW; |
|
• |
“IEC” means Israel Electric Corporation, a government-owned entity, which generates and supplies
the majority of electricity in Israel, transmits and distributes all of the electricity in Israel, acts as the system operator of Israel’s
electricity system, determines the dispatch order of generation units, grants interconnection surveys, and sets spot prices, among other
roles; |
|
• |
“IEC Reform” means the following: reform in the Israeli electricity sector and the restructuring
of the IEC pursuant to a government resolution (Government Resolution No. 3859) received in 2018, including amendment to the Electricity
Sector Law as published in the Official Gazette (Electricity Sector Law (Amendment No. 16 and Temporary Order), 2018); |
|
• |
“Infinya” means Infinya Ltd. (formerly Hadera Paper Ltd.), an Israeli corporation;
|
|
• |
“installed capacity” means the intended full-load sustained output of energy that a generation
unit is designed to produce (also referred to as name-plate capacity); |
|
• |
“IPP” means independent power producer, excluding co-generators and generators for self-consumption;
|
|
• |
“Kiryat Gat Power Plant” means a combined-cycle power plant powered by conventional energy
with installed capacity of 75 MW located in the Kiryat Gat area, which began commercial operation in November 2019; |
|
• |
“kWh” means kilowatt per hour; |
|
• |
“Minimum Price” means the minimum price of gas in USD set forth in gas purchase agreements
between Tamar Group and each of OPC-Hadera and OPC-Rotem based on a natural gas price formula described in the agreements that may be
affected by generation component tariff; |
|
• |
“MW” means megawatt (one MW is equal to 1,000 kilowatts or kW); |
|
• |
“MWh” means megawatt per hour; |
|
• |
“OPC’s capacity” or “OPC’s installed capacity” means, with respect
to each asset, 100% of the capacity of such asset, regardless of OPC’s ownership interest in the entity that owns such asset;
|
|
• |
“OPC-Hadera” is an Israeli corporation, in which OPC has a 100% interest; |
|
• |
“OPC-Rotem” means O.P.C. Rotem Ltd., an Israeli corporation, in which OPC Israel has an 100%
interest; |
|
• |
“OPC Israel” or “OPC Holdings Israel Ltd” is an Israeli corporation which owns
and operates OPC’s businesses in Israel, in which OPC holds an 80% interest; |
|
• |
“OPC Power” means OPC Power Ventures LP; |
|
• |
“PPA” means power purchase agreement; |
|
• |
“Samay I” means Samay I S.A., a Peruvian corporation; |
|
• |
“Sorek” means OPC Sorek 2 Ltd.; |
|
• |
“transmission” refers to the bulk transfer of electricity from generating facilities to the
distribution system at load center station in which the electricity is stabilized by means of the transmission grid; |
|
• |
“Tzomet” means Tzomet Energy Ltd., an Israeli corporation in which OPC has a 100% interest;
and |
|
• |
“Veridis” means Veridis Power Plants Ltd. |
ZIM
|
• |
“cooperation agreements” means one or more vessel sharing arrangements, swap agreements and
slot sharing arrangements; |
|
• |
“strategic alliance” means a more extensive type of cooperation arrangement and is longer-term
than a strategic cooperation. It involves cooperation arrangements and usually includes all of ZIM’s East/West routes, such as Asia-Europe,
Asia-Med, Cross Atlantic and Trans Pacific; |
|
• |
“strategic cooperation” means a more extensive type of cooperation arrangement, generally
being longer term and involving more trade routes. It involves some joint planning mechanism, but joint planning is less extensive as
compared to a strategic alliance. A strategic cooperation can take the form of one or a combination of cooperation arrangements; and
|
|
• |
“TEU” means twenty-foot equivalent unit. |
FINANCIAL
INFORMATION
We produce financial statements in accordance
with the International Financial Reporting Standards issued by the International Accounting Standards Board, or IFRS, and all financial
information included in this annual report is derived from our IFRS financial statements, except as otherwise indicated. In particular,
this annual report contains certain non-IFRS financial measures which are defined under “Item 5
Operating and Financial Review and Prospects” and “Item
4.B Business Overview—Our Businesses—OPC.”
Our consolidated financial statements included
in this annual report comprise the consolidated statements of profit and loss, other comprehensive income (loss), changes in equity, and
cash flows for the years ended
December 31, 2022,
2021 and
2020 and the consolidated statements of financial position as of
December 31,
2022 and
2021. We present our consolidated financial statements in U.S. Dollars.
All references in this annual report to (i)
“U.S. Dollars,” “$” or “USD” are to the legal currency of the United States of America (“United
States” or “U.S.”); (ii) “RMB” are to Yuan, the legal currency of the People’s Republic of China,
or China; and (iii) “NIS” or “New Israeli Shekel” are to the legal currency of the State of Israel, or Israel.
This annual report contains translations of
certain RMB and NIS amounts into USD at certain foreign exchange rates solely for the convenience of the reader. All convenience translations
from RMB or NIS to USD with respect to amounts relating to transactions that occurred during 2022 are based on the certified foreign exchange
rates published by the Federal Reserve Board of Governors and foreign exchange rates published by the Bank of Israel, respectively, on
December 31, 2022, which was 6.73 RMB per USD and 3.36 NIS per USD, respectively. All other convenience translations from RMB or NIS to
USD with respect to amounts relating to transactions that occurred before 2022 are based on the same exchange rate publications for applicable
periods. The convenience translations contained in this annual report should not be construed as representations that the RMB or NIS amounts
referred to herein actually represent the USD amounts in the convenience translations presented or that they could have been or could
be converted into USD at the exchange rate used in the convenience translations or at any particular rate.
We have made rounding adjustments to reach
some of the figures included in this annual report. Consequently, numerical figures shown as totals in some tables may not be arithmetic
aggregations of the figures that precede them.
NON-IFRS
FINANCIAL INFORMATION
In this annual report, we disclose non-IFRS
financial measures, namely EBITDA and Adjusted EBITDA for OPC and ZIM, respectively, each as defined under “Item
5 Operating and Financial Review and Prospects.” 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 Adjusted EBITDA provide transparent and useful information
to investors and financial analysts in their review of these businesses’ 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.
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 company 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 company 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.
PRESENTATION
OF OPC CAPACITY AND PRODUCTION FIGURES
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 MWh, and one MWh
is equal to 1,000 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, 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; |
|
• |
the strategies, business plans and funding requirements of our businesses; |
|
• |
the potential spin-off, listing, offering, distribution or monetization of our businesses; |
|
• |
expected trends in the industries and markets in which each of our businesses operate; |
|
• |
our tax status and treatment and expected status and treatment under relevant regulations; |
|
• |
our treasury activities; |
|
• |
statements relating to litigation; |
|
• |
critical accounting estimates and the expected effect of new accounting standards on Kenon; |
|
• |
the assumptions used in impairment analysis conducted by Kenon and its businesses; and |
|
• |
the expected effects of COVID-19 on our businesses; |
|
• |
the expected cost and timing of commencement and completion of development and construction projects,
as well as the anticipated installed capacities and expected performance (e.g., efficiency) of such projects, including the license and
approvals for the development of and financing for projects; |
|
• |
expected macroeconomic trends in Israel and the US, including the expected growth in energy demand;
|
|
• |
potential expansions (including new projects or existing projects); |
|
• |
expected trends in energy consumption; |
|
• |
anticipated capital expenditures, and the expected sources of funding for capital expenditures;
|
|
• |
projections for growth and expected trends in the electricity market in Israel and the US; and
|
|
• |
the price and volume of gas available to OPC in Israel and the US; |
|
• |
statements relating to the agreement to sell Kenon’s remaining interest in Qoros to the Majority
Shareholder; and |
|
• |
statements with respect to the litigation and arbitration with the Majority Shareholder. |
|
• |
expectations regarding general market conditions, including as a result of rising inflation and corresponding
increasing interest rates, the Russian invasion of Ukraine, the COVID-19 pandemic and other global economic trends; |
|
• |
expectations regarding trends related to the global container shipping industry, including with respect
to fluctuations in container supply, industry consolidation, demand for containerized shipping services, bunker prices, charter/ freights
rates, container values and other factors affecting supply and demand; |
|
• |
ZIM’s plans regarding its business strategy, areas of possible expansion and expected capital spending
or operating expenses; |
|
• |
anticipated ability of ZIM to obtain additional financing in the future to fund expenditures; |
|
• |
expectation of modifications with respect to ZIM’s 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; |
|
• |
the expected benefits of ZIM’s cooperation agreements and strategic partnerships; |
|
• |
formation of new alliances among global carriers, changes in and disintegration of existing alliances
and collaborations, including alliances and collaborations to which ZIM is not a party to; |
|
• |
anticipated insurance costs; |
|
• |
beliefs regarding the availability of crew; |
|
• |
expectations regarding ZIM’s environmental and regulatory conditions, including changes in laws
and regulations or actions taken by regulatory authorities, and the expected effect of such regulations; |
|
• |
beliefs regarding potential liability from current or future litigation; |
|
• |
plans regarding hedging activities; |
|
• |
ability to pay dividends in accordance with ZIM’s dividend policy; |
|
• |
expectations regarding ZIM’s competition and ability to compete effectively; and |
|
• |
ability to effectively handle cyber-security threats and recover from cyber-security incidents.
|
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.
You should read this annual report, and each of the documents filed or
incorporated by reference 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 is
indicated in such forward-looking statements.
| ITEM 1. |
Identity of Directors, Senior Management and Advisers |
| A. |
Directors and Senior Management |
Not applicable.
Not applicable.
Not applicable.
| ITEM 2. |
Offer Statistics and Expected Timetable |
Not applicable.
| B. |
Capitalization and Indebtedness |
Not applicable.
| C. |
Reasons for the Offer and Use of Proceeds |
Not applicable.
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 adversely impact our 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.
Risks Related to Our
Strategy and Operations
We may raise financing to make further investments (in existing or new businesses).
Our business may require or seek to raise
debt or equity financing. Kenon may also seek to raise financing at the Kenon level to meet its obligations or make investments or acquisitions
in its existing or new businesses. In the event that Kenon or one or more of our businesses requires capital, irrespective of whether
such business are able to raise such financing, Kenon may provide financing by (i) utilizing cash on hand, (ii) issuing equity in the
form of shares or convertible instruments (through a pre-emptive offering or otherwise), (iii) using funds received from distributions
from or sales of Kenon’s other businesses, (iv) selling part, or all, of its interest in any of its businesses or using the proceeds
from sales of or distributions from its businesses, (v) raising debt financing at the Kenon level or (vi) providing guarantees or pledging
collateral in support of the debt of its businesses. See “Item 4.B Business Overview—Our
Businesses.” To the extent that Kenon raises debt financing, any debt financing that Kenon incurs may not be on favorable
terms, may impose 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. Investments by Kenon reduce amounts potentially available for distribution to shareholders.
In the event that funds from its businesses
or external financing are not available to meet Kenon’s obligations or make investments it seeks to make 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 of some of Kenon’s businesses. Any sales of assets may not be at attractive prices, particularly
if such sales must be made quickly.
In addition, our directors have broad discretion
on the use of the capital resources for investments in our businesses or other investments or other purposes and we may make investments
or acquisitions in our existing or new businesses. See also “Item 4.B Business Overview—Our
Businesses.” Kenon has provided loans and guarantees and made equity investments to support its businesses, such as investments
in OPC (including equity investments in 2022 and 2021), 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. To the extent Kenon uses cash on hand or other availably liquidity to make
an investment in existing or new businesses, it will reduce amounts available for distribution to shareholders. Third-party financing
sources for Kenon’s businesses may require Kenon to guarantee an individual business’ indebtedness and/or provide collateral,
including collateral via a cross-collateralization of assets across businesses (i.e., pledging shares or assets of one of our businesses
to secure debt of another of our businesses). To the extent Kenon guarantees an individual business’ indebtedness, it may divert
funds received from one business to another business. We may also sell some or all of our interests in or use dividends received from
any of our businesses to provide funding for another business. Additionally, if we cross-collateralize assets in order to provide additional
collateral to a lender, we may lose an asset associated with one business in the event that a separate business is unable to meet its
debt obligations. Furthermore, if Kenon provides any of its businesses with additional capital, provides any third parties with indemnification
rights or a guarantee, and/or provides additional collateral, including via cross-collateralization, this could reduce our liquidity.
For further information on the capital resources and requirements of each of our businesses, see “Item
5.B Liquidity and Capital Resources.”
If
we fail to identify opportunities or consummate investments and acquisitions on favorable terms, or at all, in existing or new businesses,
we may not be able to successfully execute our strategy.
Our business strategy includes making investments
or acquisitions in its existing or new businesses. This strategy depends on our ability to successfully identify and evaluate investment
opportunities or consummate acquisitions on favorable terms.
However, the limited number of investment
opportunities in the current market environment may make it challenging to identify and successfully consummate investment or acquisitions
that meet our objectives. The identification of suitable investment or acquisition candidates can be difficult, time-consuming and costly,
and we may not complete investment or acquisitions successfully that we target.
Our ability to consummate future investments
and acquisitions may also depend on our ability to obtain any required government or regulatory approvals for such investments, including,
but not limited to, any approvals in the countries in which we may purchase assets in the future or in the United States.
Furthermore, we may face competition with
other local and international companies, including financial investors, for acquisition or investment opportunities, which may increase
our cost of making investments or cause us to refrain from making acquisitions from third parties. Some of our competitors for investments
and acquisitions may have greater resources and lower costs of capital, be willing to pay more for acquisitions and may be able to identify,
evaluate, bid for and purchase a greater number of assets or projects under development than our resources permit. If we are unable to
identify and consummate future investments and acquisitions, it may impede our ability to execute our strategy.
Our ability to consummate future investments
or acquisitions may also depend on the availability of financing. See “—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.”
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 access capital markets
for various purposes, which may include raising funding for the repayment of indebtedness, acquisitions, capital expenditures or for general
corporate purposes. Kenon may seek to access the capital or lending markets to obtain financing in the future, including to support its
businesses or to make new investments. The ability of Kenon or its businesses to access capital markets, and the cost of such capital,
could be negatively impacted by disruptions in those markets. Disruptions in the capital or 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. The recent global inflation and increases in interest rates
as well as geopolitical developments including the war in Ukraine have adversely impacted financial markets and the cost of debt financing
and have increased volatility in financial markets.
The availability of such financing and the
terms thereof will be impacted by many factors, including: (i) our financial performance, (ii) credit ratings or absence of a credit rating,
(iii) the liquidity of the overall capital markets, (iv) the state of the global economy, including inflation and rising interest rates
and (v) geopolitical events such as the Russian invasion of Ukraine. There can be no assurance that Kenon or its businesses will be able
to access the capital markets on acceptable terms or at all. If Kenon or its businesses 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. In addition,
the recent bank failures and concerns over certain banks’ financial condition have resulted in market volatility.
We
are subject to volatility in the capital 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, and in February 2021, ZIM completed an IPO on the New York Stock Exchange, or NYSE. The ability of one or more of our businesses
to complete a public offering, distribution or listing is heavily dependent upon the public equity markets. Financial market conditions
have been volatile in 2022 and remain volatile and these conditions could become worse.
As our holdings in OPC and ZIM securities
are publicly traded (and to the extent any of our other holdings in companies are listed in the future), 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
effect or defer such a sale, potentially for a long period of time.
We have in the past, and may in the future
enter into lockup agreements with respect to our shares in listed companies in connection with offerings by those companies, and in some
cases, we may be required to enter into a lockup agreement. In addition, we are subject to securities laws restrictions on resales, including
in the United States the requirement to register resales with the SEC or to make sales under a relevant exemption.
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 and our cash on hand and treasury investments. As a result, we depend on funds from our businesses or external financing
to make distributions, to make investments, to pursue our strategy and for our other liquidity requirements.
In addition, as Kenon’s businesses are
legally distinct from it and will generally be required to service their debt and other obligations before making distributions to Kenon,
Kenon’s ability to access such cash flows 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 each respective 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. In addition, OPC’s CPV business holds minority interests in most of its
operations. 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 addition, we rely on the internal controls
and financial reporting controls of our businesses and any failure by 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 that comply with applicable accounting standards
and legal requirements 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 company. 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, 2022:
|
• |
OPC had $1,163 million of outstanding indebtedness, including $159 million of outstanding indebtedness
at the CPV level, and |
|
• |
ZIM had outstanding indebtedness (mostly lease liabilities) of approximately $4.3 billion; |
In addition, we understand that
Qoros continues to have significant external loans and borrowings of RMB 2,734 million (approximately $406 million), all of which we understand
is in default and has been accelerated, and we believe significant loans and other advances from parties related to the Majority Shareholder
still remain outstanding.
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 that are leveraged 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.
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:
|
• |
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; |
|
• |
limits on the ability to pay dividends to shareholders, including us; |
|
• |
limits on the 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, they 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 instruments, 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.
As a result, our businesses’ leverage
could have a material adverse effect on our business, financial condition, results of operations or liquidity.
We
face risks in relation to the agreement to sell all of Kenon’s remaining interest in Qoros.
In 2018, the Majority Shareholder acquired
51% of Qoros from Kenon and Chery pursuant to transactions that resulted in Kenon’s interest being reduced to 24% of Qoros. In April
2020, Kenon sold half of its remaining interest in Qoros (i.e., 12%) to the Majority Shareholder. As a result, Kenon holds a 12%
interest in Qoros, the Majority Shareholder holds 63% and Chery holds 25%.
In April 2021, Kenon’s subsidiary Quantum
(which holds Kenon’s share in Qoros) entered into an agreement with the Majority Shareholder to sell its remaining 12% interest
in Qoros for RMB 1.56 billion (approximately $245 million). The agreement provided that a deposit of 5% was due
July 30, 2021 and that
the purchase price would be payable in installments from September 2021 through
March 31, 2023. Neither the deposit nor any of the installments
have been paid. In the fourth quarter of 2021, Quantum initiated arbitral proceedings against the Majority Shareholder and Baoneng Group
with China International Economic and Trade Arbitration Commission (
“CIETAC”). The proceedings are ongoing.
In connection with the payment delay, Quantum
had the right to exercise a put option over its remaining shares, and it has exercised this put option. As a result, the Majority Shareholder
is now required to assume Quantum’s obligations relating to Quantum’s pledge of its remaining shares in Qoros. Baoneng Group
has provided a guarantee of the Majority Shareholder’s obligations under its agreement to purchase Kenon’s remaining interest
in Qoros. This guarantee provides for a number of obligations, including the obligation for Baoneng Group to reimburse Kenon in the event
Quantum’s shares are foreclosed upon. Baoneng Group is required to deposit an amount sufficient in escrow to ensure sufficient collateral
to avoid the banks foreclosing the Qoros shares pledged by Quantum. Baoneng Group has failed to do so after Kenon made a demand in the
fourth quarter of 2021, and in November 2021, Kenon filed a claim against Baoneng Group at the Shenzhen Intermediate People’s Court
relating to the breaches of the guarantee agreement by the Majority Shareholder. The court proceedings are ongoing. Kenon has obtained
an order freezing certain assets of Baoneng Group in connection with the litigation pursuant to a court order. There is no assurance as
to the outcome of these proceedings, which could affect Kenon’s ability to realize any value in respect of Kenon’s remaining
shares in Qoros. In 2021, Kenon wrote down the value of Qoros to zero.
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. Dollars.
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. Dollars. However, a material portion of ZIM’s expenses are denominated in local currencies. In addition, OPC is subject
to exchange rate fluctuations in its operations in Israel, and a portion of its PPAs and its supply arrangements are determined by reference
to the NIS to USD exchange rate. Furthermore, OPC is indirectly influenced by changes in the U.S. Dollar to NIS exchange rate, including
as a result of the following factors: (i) OPC’s investment in CPV which operates in the U.S., (ii) the expected investment in CPV’s
new and existing project backlog and pipelines and (iii) the IEC electricity tariff being partially linked to increases in fuel prices
(mainly coal and gas) that are denominated in U.S. Dollars. In general, decline in the exchange rate of the U.S. Dollar is expected to
have an adverse effect on OPC in the long term or on OPC’s U.S. Dollar investments. From time to time, and in accordance with its
business considerations, OPC uses currency forwards. However, there is no certainty as to the reduction of the exposure to exchange rates
under such currency forwards, and OPC incurs costs in respect of those forwards.
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:
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• |
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; |
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• |
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 do not 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 (the “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 and shipping industries
in which our businesses operate. 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, increased import and
export tariffs and other forms of trade protectionism, geopolitical events such as the Ukraine invasion and other challenges affecting
the global economy. Volatility in global financial markets and in prices for oil and other commodities and geopolitical events could result
in a deterioration of global economic conditions which could impact our business and could lead to deterioration of business, cash flow
shortages, or difficulty in obtaining financing.
In addition, the business and operating results
of each of our businesses have been and may continue to be adversely affected by the effects of a widespread outbreak of contagious disease,
including the COVID-19 outbreak, which has and could continue to adversely affect the economies and financial markets of many countries,
which has had and could continue to have an adverse effect on our businesses. Further outbreaks and spread and new variants of COVID-19
could cause additional quarantines, reduction in business activity, labor shortages and other operational disruptions.
Furthermore,
the Russian invasion of Ukraine has led
to and is expected to continue to lead to disruption, instability and volatility in global markets and industries. Our business could
be negatively impacted by such conflict. The U.S. government and other governments in jurisdictions in which we operate have imposed severe
sanctions and export controls against Russia and Russian interests and threatened additional sanctions and controls. The impact of these
measures, as well as potential responses to them by Russia, is currently unknown and they could adversely affect our business.
We are exposed to interest
rate risk because we and our businesses depend on debt financing to finance our projects. Additionally, due to recent increases in inflation,
certain governmental authorities responsible for administering monetary policy have recently increased, and are likely to continue to
increase, applicable central bank interest rates. For example, U.S. Federal Reserve raised various interest rates during 2022 including
US Federal Reserve Interest on Reserve Balances to 4.4% effective
December 15, 2022. An increase in the benchmark rate would result in
an increase in market interest rates. An increase in interest rates could make it difficult for us and our businesses to obtain future
financing or service existing one on favorable terms, or at all, and thus reduce revenue and adversely affect our operating results. An
increase in interest rates could lower our or our businesses’ return on investments or make alternative investments more attractive
relative to our businesses products and services, which, in each case, could cause our customers to seek alternative investments that
promise higher returns or demand higher returns from our services, which could reduce our businesses’ revenue and gross margin and
adversely affect our operating results. Our interest expense would increase to the extent interest rates rise in connection with our variable
interest rate borrowings. If in the future we have a need for significant borrowings and interest rates increase, our cost of capital
would increase which may lower our margins. Conversely, lower interest rates have an adverse impact on our interest income.
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. Slower
growth or deterioration in the global economy (as a result of current volatility in global markets, the COVID-19 outbreak and measures
taken to contain this COVID-19, a continuation or worsening of the Russian invasion of Ukraine and measures taken in response to that
action, 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 where they operate.
Through our businesses, we operate and service
customers in geographic regions around the world which exposes us to risks, including:
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• |
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; |
|
• |
increased costs and risks of developing, staffing and simultaneously managing a number of operations
across a number of countries as a result of language and cultural differences; |
|
• |
issues related to occupational safety, work hazard, and adherence to local labor laws and regulations;
|
|
• |
adverse tax developments; |
|
• |
geopolitical events such as military actions; |
|
• |
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,
our businesses require a number of 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. Our businesses 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. 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. 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.
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, solar panels for CPV Group, wind turbines for CPV Group and bunker 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 “
Item 3.D Risk Factors—Risks Related to OPC’s
Israel Operations—OPC depends on infrastructure, securing space on the grid and infrastructure providers.”
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 the Russian invasion of Ukraine and measures taken
in response to that action, the COVID-19 outbreak and measures taken to contain COVID-19 or catastrophic events or global inflation, 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.
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, 2022, OPC employed 150
employees in Israel and, 131 employees in the United States and ZIM employed 6,530 employees. Our businesses have experienced and could
experience strikes, industrial unrest, work stoppages or labor disruptions. Any disruptions in the operations of any of our businesses
could materially and adversely affect our or the relevant businesses’ reputation and could adversely affect operations. Additionally,
a work stoppage or other disruption 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.
A
disruption in our and each of our business’ information technology systems, including incidents related to cyber security, could
adversely affect our business operations.
Our business operations, and the operations
of our businesses, rely upon the 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. A number of companies around the world have been the subject of cyber security attacks in recent years, including
in Israel where we have a large part of our businesses. Other Israeli businesses are facing cyber-attack campaigns, and it is believed
the attackers may be from hostile countries. These attacks are increasing and becoming more sophisticated, and may be perpetrated by computer
hackers, cyber terrorists or other perpetrators of corporate espionage.
Cyber security attacks could include malicious
software (malware), attempts to gain unauthorized access to data, social media hacks and leaks, ransomware attacks 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. The COVID-19 pandemic and the resulting reduced staff
in in offices and increased reliance on remote access for employees have increased the likelihood of cyber security attacks. 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 we or any of our 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 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. Changes in trade policies and or changes in the political and regulatory environment in
the markets in which we operate, such as foreign exchange import and export controls, sanctions, tariffs and other trade barriers and
price or exchange controls, could affect our businesses in such markets, impact our profitability and or our ability to repatriate profits,
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 governmental regulation as a result of our regulatory status, which could subject us to restrictions that could
make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
The U.S. Investment Company Act of 1940 (the
“Investment Company Act”) regulates
“investment companies,” which includes, in relevant part, issuers 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 (as defined in the Investment Company Act) 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. Pursuant to a rule adopted under the
Investment Company Act, notwithstanding the 40% test described above, an issuer is excluded from the definition of investment company
if no more than 45% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) consists
of, and no more than 45% of the issuer’s net income after taxes (for the last four fiscal quarters combined) is derived from, securities
other than (i) U.S. government securities, (ii) securities issued employees’ securities companies, (iii) securities issued by majority-owned
subsidiaries of the issuer that are not investment companies and not relying on certain exclusions from the definition of investment company
and (iv) securities issued by companies that are not investment companies and are controlled primarily by the issuer through which the
issuer engages in a business other than that of investing, reinvesting, owning, holding or trading in securities. We do not believe that
we are subject to regulation under the Investment Company Act. We are organized as a holding company that conducts its businesses primarily
through majority owned and primarily controlled
subsidiaries. We intend to continue to conduct our operations so that we will not be deemed
to be an investment company under the Investment Company Act. However, 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, including
as a result of a company in which we have an ownership interest ceasing to be majority owned or primarily controlled, including as a result
of dispositions or dilution of interests in majority owned and primarily controlled
subsidiaries, we could, among other things, be required
to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company, which
could have an adverse effect on us and the market price of our securities. If we were to be deemed an
“inadvertent” investment
company, we may seek to rely on Rule 3a-2 under the Investment Company Act, which provides that an issuer will not be treated as an investment
company subject to the provisions of the Investment Company Act provided the issuer has the requisite intent to be engaged in a non-investment
business, evidenced by the issuer’s business activities and an appropriate resolution of the issuer’s board of directors,
during a one year cure period.
The Investment Company Act contains substantive
legal requirements that regulate the manner in which an “investment company” is permitted to conduct its business activities.
Among other things, the Investment Company Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations
on the issuance of debt and equity securities, prohibit the issuance of stock options, and impose certain governance requirements. In
any case, 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 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.
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.
The U.S. Foreign Corrupt Practices Act (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
substantial anti-bribery law enforcement activity, with 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 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 restrictions.
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, may
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.
Risks Related to OPC’s
Israel Operations
OPC’s
profitability depends on the EA’s electricity rates.
Since the price of electricity for OPC’s
customers is directly affected by the electricity generation component tariff, and this is the basis of linking the price of natural gas
pursuant to gas purchase agreements, OPC is exposed to changes in the electricity generation component. Decrease in the electricity tariffs
and changes in the tariff structure or related components, such as structure of demand time clusters published by the EA, and specifically
the tariff of the generation component, may have a material adverse effect on OPC’s profits and operating results. For example,
changes in the electricity generation component (including changes in the structure of the electricity generation component), which is
published by the EA (which may be caused by various factors, including changes in exchange rates, the cost of IEC’s fuels, changes
in the attribution of costs to the generation component or system costs), will impact OPC’s revenues from sales to private customers
and the cost of sales arising from its activity. This is because the price of electricity stated in the agreements between OPC and its
customers is directly affected by the generation component, and the generation component serves as the basis for linking the natural gas
price under the gas purchase agreements.
Furthermore, the gas price formula set in
the gas agreements of OPC is linked to the electricity generation component and is subject to the Minimum Price. The total original financial
amount of the agreements was estimated at $1.3 billion for OPC-Rotem and OPC-Hadera (assuming they consume the total basic quantity under
the original agreements, and in accordance with the gas price formula, and depends mainly on the electricity generation component and
the gas consumption quantity). Therefore, when the gas price is equal to or lower than the Minimum Price, reductions in the generation
component will not cause a reduction in the cost of natural gas consumed by OPC-Rotem and OPC-Hadera. Such reductions will reduce the
profit margins and will have an adverse effect on OPC’s profits.
OPC
is subject to changes in the electricity market and technological changes.
Most of OPC’s electricity and energy
generation and supply activities are carried out using conventional technologies. As a result of the acquisition of CPV, OPC now has generation
activity in which renewable energy is used to generate electricity, mainly in projects under development and construction. OPC is working
to expand its renewable energy activities in Israel and the United States, including through carbon capturing technologies. A delay or
failure to adopt new production technologies, as well a failure to manage and lead internal organizational innovation processes or to
adjust the transactions to the developments in the supply chain, may lead to OPC missing out on business opportunities and impair the
prospect of positioning itself as a leader in the industry, or to a decrease in its market share. The introduction of renewable energies
may lead to decreased generation using conventional energy (e.g., through OPC’s production facilities), including reduction of production
operations at the OPC-Rotem power plant. The increasing preference to use renewable energies by OPC’s consumers may have adverse
effect on the demand for OPC’s products and its results.
OPC
is leveraged and may be unable to comply with its financial covenants and undertakings under its financing agreements (including equity
subscription agreements), or meet its debt service or other obligations.
As of
December 31, 2022, OPC had $1,163 million
of total outstanding consolidated indebtedness. The debt instruments to which OPC and its operating companies are party to require compliance
with certain covenants and limitations, including:
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minimum liquidity, loan life coverage ratios and debt service coverage ratios covenants; and |
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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. |
A breach of covenants could result, among
other things, in acceleration of the debt, restrictions in the declaration or payment of dividends or cross-defaults across the debt instruments.
For example, the deeds of trust for OPC’s
debentures and the financing agreements of OPC include undertakings to comply with certain financial covenants and various other undertakings
to debentures holders and/or the financing entities. Interest rates may also increase, resulting tin downgrading of rating or failure
to comply with financial covenants. In addition, distributions may be subject to compliance with certain financial covenants (including
the repayment of shareholders’ loans). Financing agreements may impose certain restrictions in connection with change of control
in OPC, expiry of licenses, termination or change of material agreements, etc. Failure to comply with such covenants or the occurrence
of any of the events set out in the agreements may restrict distributions by OPC, increase finance costs, advance the transfer of funds
to financing entities, raise the collateral or equity, or trigger demand by the lenders for immediate repayment and realization of collateral,
including guarantees provided by OPC. Immediate repayment demands or collateral realization or debt collection procedures may have an
adverse effect on OPC’s activity and results of operations (including due to inclusion of cross-default provisions in OPC’s
financing agreements).
OPC may be face restrictions
on receiving credit.
OPC may be limited as to the amount of credit
it may receive in Israel due to regulatory restrictions placed on financial institutions on the 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 may not achieve its
environmental, social, and governance (the “ESG”) goals or meet and comply with emerging ESG expectations and regulations.
In recent years, there has been an increase
in investors and other stakeholders’ awareness of the climate and environmental effects of various activities in various jurisdictions
around the world, including Israel. In addition, there has been an increase in the imposition of provisions related to the above areas
under new regulations.
Under the trend, existing and potential investors
and other stakeholders take into account ESG considerations relating to environmental, social and corporate governance aspects as part
of their investment and business policies, including in relation to the provision of credit. This trend may manifest itself in various
ways, including various stakeholders refraining from making investments in the field of natural gas, difficulty in obtaining credit, increase
in finance costs, difficulty in recruiting employees, etc. These trends may have an adverse effect on OPC’s business and financial
position, including restricting OPC’s ability to implement its growth plan, impairment of assets, increase in the price of debt,
erosion of OPC’s value, or an adverse effect on OPC’s positioning in its areas of activity.
OPC’s
operations in Israel are significantly influenced by regulations.
OPC is subject to significant government regulation
in Israel. See
“Item 4.B Business Overview—Our Businesses—OPC—OPC’s Description
of Operations—Regulatory, Environmental and Compliance Matters.” OPC 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 in Israel and results or on its terms of engagement with third parties, such as its customers
and suppliers, including natural gas suppliers, such as the Tamar Group. Furthermore, these processes might lead to delays in obtaining
permits and licenses, the imposition of monetary sanctions, the filing of criminal indictments or the instigation of administrative proceedings
against OPC and its management, and damage to OPC’s reputation. 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 based on the Israeli
government’s goals and development of incentives and renewable energies in Israel and worldwide. 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. Such regulatory arrangements may apply pursuant to competition laws or to promote competition.
Furthermore, OPC’s activity is subject
to legislation and regulation whose objective is to protect the environment and to reduce damages from environmental nuisances by, among
other things, imposing restrictions on noise, emission of pollutants, and treatment of hazardous substances. Failure by OPC to identify
a new or revised legislation, inadequate interpretation of the provisions of the law, failure to apply controls and monitor the implementation
of and compliance with the provisions of the applicable law and regulations, including the terms of licenses, failure to obtain permits
or licenses or non-renewal of licenses or stricter licensing terms, imposition of stricter regulations to independent power producers
or failure to comply with such regulations may lead to OPC’s incurring expenses or being required to make significant investments
or may have a material adverse effect on OPC’s results. Furthermore, adoption and implementation of ESG (environmental, social and
corporate governance goals) objectives set by various organizations, voluntarily or pursuant to new regulatory provisions, may expose
OPC to additional requirements or, in the event of failure to comply with the foregoing goals, to restrictions on obtaining investments
and credit, and impair the positioning of its status in its areas of operations.
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, OPC-Rotem applied
to the EA to obtain a supply license. In February 2018, the EA responded that OPC-Rotem needs a supply license to continue selling electricity
to customers and that the license will not change the terms of the PPA between OPC-Rotem and the IEC (which will be assigned by IEC to
the System Operator). In February 2023, the EA proposed a resolution (as described below) to, among other things, grant a supply license
to OPC-Rotem. The award of the license has not yet been completed (including the terms for its award). Given that OPC -Rotem power plant
is a material asset of OPC, failure to obtain a supply license for OPC Rotem and to establish supplementary arrangements would have material
adverse effects on its operations. There is no assurance regarding the receipt of the license and the terms of such a license if granted.
If OPC-Rotem does not receive a supply license, or if the supply license that is obtained has terms that are inferior to those of relevant
competitors, or if resolutions are imposed which limit the ability to sell without suitable complementary arrangements, OPC’s activity
in the area of electricity sale and trade in Israel and the results of OPC’s operations may be adversely impacted.
In February 2020, the EA issued standards
regarding deviations from consumption plans submitted by private electricity suppliers, which became effective on
September 1, 2020. See
“Item 4.B Business Overview—Our Businesses—OPC—OPC’s Description of Operations—Regulatory,
Environmental and Compliance Matters.” The EA had stated that this regulation will apply to OPC-Rotem after supplementary
arrangements have been determined for OPC-Rotem. On
February 19, 2023, the EA published a proposed resolution in respect of OPC-Rotem
on the application of criteria regarding deviation from a consumption plan, and the application of the complementary arrangements and
criteria required for that purpose (in this subsection - the
“Proposed Resolution”). According to the publication, the Proposed
Resolution aligns, in many respects, the regulation applicable to OPC-Rotem with that applicable to generation facilities that are allowed
to enter into bilateral transactions, and thereby should enable OPC-Rotem to operate in the energy market in a similar and equal manner
to that of other generation facilities that are allowed to conduct bilateral transactions.
The Proposed Resolution includes, among other
things, the following arrangements: (i) further criteria regarding supply, including criteria regarding deviation from a consumption plan
and criteria in connection therewith will be added to Transmission and Backup Appendix (the “Appendix O”) to OPC-Rotem’s
original PPA with IEC; and (ii) application of criteria to OPC-Rotem in connection with generation (instead of the arrangements by virtue
of OPC-Rotem’s original PPA with IEC), including arrangements that apply to other producers that enter into bilateral transactions,
until those criteria are canceled as part of the application of the market model that will apply to OPC-Rotem upon its effective date.
As to the quotes to reduce the available capacity used to execute private transactions, the Proposed Resolution notes that at this stage,
the existing status will prevail, including that the quotes to reduce load will reflect the generation cost of the generation unit as
set out in the existing agreement. According to the Proposed Resolution, if circumstances change to a material extent, including, among
other things, due to the integration of renewable energies in the grid in general and in the region covered by the power plant in particular,
the EA will reassess the quote for reduction of load in order to fairly reflect the cost of load reduction. This will be done taking into
account, among other things, the terms of the gas agreements, the operating costs, and the capacity changes occurring due to the changes
to the operation regime. Subject to setting a regulated quote for all of the quote components set in the criterion, OPC-Rotem will be
awarded a supply license with wording similar to that of other independent suppliers, subject to the terms for receipt of a supply license,
among other terms. As part of the proposed amendment in relation to the complementary arrangements, OPC-Rotem will be awarded a supply
license that will allow it to purchase energy and capacity from other producers, and also sell capacity and energy to other suppliers.
This option will allow OPC-Rotem to mitigate its risks regarding capacity deviations in a reasonable manner similar to the way other producers
and suppliers in the market mitigate that risk.
The implementation of the resolution, including
OPC-Rotem’s filing of an application for a supply license, constitutes a consent by OPC-Rotem of application of the above-mentioned
regulation in its entirety, and also constitutes a waiver in respect of any claim in connection with the 2002 tender won by OPC-Rotem,
and all of its appendices, following which OPC-Rotem’s original PPA with IEC was signed.
In accordance with the Proposed Resolution,
the commencement date will be
April 1, 2023.
The Proposed Resolution has not yet been given
the status of a final resolution. OPC assesses the particulars of the Proposed Resolution, and there is no certainty as to the final arrangements
that will be set, if any. That is, the award of the license has not yet been completed (including the terms of its award). If such supply
license is not obtained, or if the supply license that is obtained has terms that are inferior to those of relevant competitors, or if
resolutions are imposed which limit OPC-Rotem’s ability to sell without suitable complementary arrangements, OPC’s activity
in the field of electricity sale and trade in Israel and the results of OPC’s operations may be adversely impacted.
OPC believes, the Proposed Resolution, if
passed and as derived from the final arrangements, may reduce the uncertainty as to the arrangements applicable to OPC-Rotem and allow
OPC-Rotem to operate under a supply license, as is the case of other relevant private producers. Furthermore, the grant of a permanent
generation license to Tzomet, upon expiration of the conditional license, is subject to Tzomet’s compliance with conditions set
by law. If Tzomet is unable to obtain the permanent generation license in time or at all, this 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.
See “Item 3.D Risk Factors—Risks Related to OPC’s Israel operations—OPC
faces limitations under Israeli law in connection with the expansion of its business.”
OPC
faces risks relating to PPAs, the System Operator and the IEC.
OPC has agreed to purchase
minimum quantities in its gas supply agreements
In accordance with the OPC-Rotem gas agreements,
OPC-Rotem is required to consume minimum quantities of gas as defined by the parties to the agreement (a “take or pay” undertaking).
Cause for failure to withdraw the minimum quantities of gas (the “Low Gas Consumption”) may include, among other things, an
operative malfunction as a result of which it would be impossible to generate electricity, or a material decrease in OPC-Rotem and OPC-Hadera’s
generation needs, including due to lower generation quantities prescribed by the System Operator. In the past two years, there was an
increase in the volume of generation reductions in OPC-Rotem at the instruction of the System Operator. Acquisition of gas in quantities
lower than what is required under the contractual obligation may expose OPC-Rotem to additional payments obligations.
Similar to OPC-Rotem, OPC-Hadera is required
to consume minimum quantities of gas as defined by the parties to the gas supply agreements. As of
December 31, 2022, OPC-Hadera consumed
gas quantities that exceeded the minimum quantities. However, in the event of a malfunction or a decrease in its electricity generation
needs, OPC-Hadera may consume less than the minimum gas quantities. Low Gas Consumption exposes OPC-Hadera to payment of penalties as
set out in the natural gas supply agreements. Such an exposure is not covered by OPC’s insurance policy.
Following the commercial operation date of
the Karish Tanin Reservoir, the total take or pay obligation to Energean Israel Ltd. (“Energean”) and Tamar by OPC-Rotem and
OPC-Hadera is expected to be higher than current obligation. Therefore, the above risk may increase. However, the quantity of gas in the
abovementioned gas supply agreements are expected to meet the gas requirements of all power plants in Israel.
Disputes between OPC-Rotem,
IEC and the System Operator
In connection with OPC-Rotem PPA, the IEC
and System Operator and OPC-Rotem have certain open issues, including contentions regarding past netting in respect of the energy purchase
cost for OPC-Rotem customers in a case of a load reduction of the power plant by the System Operator, and collection differences due to
a failure to transfer meter data from 2013 through 2015, in amounts that are immaterial to OPC. In addition, the IEC stated its position
with respect to additional matters in the arrangement between the parties relating to the acquisition price of surplus energy and the
acquisition cost of energy by OPC-Rotem during performance of tests. OPC-Rotem’s position regarding the matters raised by IEC is
different, and the parties are currently negotiating with the aim of reaching agreements. In March 2022, a settlement agreement was signed
between OPC-Rotem and IEC, under which OPC-Rotem paid IEC a total of NIS 5.5 million to the IEC in respect of past disputes and certain
other matters. The agreement does not constitute a settlement or waiver of the claims regarding other existing or future open issues,
including in relation to current open issues under dispute with the System Operator, IEC and OPC-Rotem which have not yet been resolved.
Furthermore, the System Operator and IEC also
dispute application of the EA’s decision with respect to deviations from OPC-Rotem’s consumption plans. In 2021, the System
Operator notified OPC-Rotem of sale of energy to end-consumers in excess of the generation capacity of OPC-Rotem’s power plant which
deviates from the provisions of the PPA agreement between OPC-Rotem and IEC. OPC-Rotem was also informed that the System Operator disputes
OPC-Rotem’s position as to the applicability of Appendix O including as to OPC-Rotem’s electricity sale options. According
to Appendix O, among other things, the IEC must supply transmission and backup services to OPC-Rotem and its consumers in connection with
private transactions between OPC-Rotem and its customers, and thereby set the tariffs to be paid by OPC-Rotem to the IEC for these services.
In addition, Appendix O regulates the sale of surplus energy to the IEC and the purchase of electricity from the grid by the OPC-Rotem
power plant and sets forth the relevant rates. OPC-Rotem disputes System Operator’s claims. The matter is expected to be affected
by complementary arrangements that are to be set by the EA.
As of
March 19, 2023, there is no certainty
as to the terms of the final regulations that will be decided upon, or whether the disputes will be resolved at all. If such disputes
are not settled between the relevant parties, this may have an adverse effect on OPC. Furthermore, the loading of the power plant is carried
out in accordance with the directives of the System Operator, and OPC-Rotem also sells surplus electricity to the System Operator. Load
declines or a decline in sales to the System Operator may have an adverse effect on OPC-Rotem’s results. As part of the proposed
resolution of the EA, the authority is demanding that OPC enter into non-mutual waivers of claims involving entities related to OPC-Rotem.
Unavailability of the
power plants in accordance with the PPAs
Unavailability of OPC’s power plants
as required in accordance with the terms of the PPAs may expose OPC to excess payments or breach of their obligations or detract from
their ability to benefit from the arrangements that apply to them.
Engagement in new PPAs
and renewal of existing PPAs
Most of the energy sold by OPC in Israel is
sold to private customers under PPAs for defined periods. When the PPAs signed by OPC expire, OPC will need to sign new PPAs with other
customers or renew the existing PPAs. There is no certainty that OPC will be successful in entering into new PPAs or renewing existing
PPAs upon their expiry, nor is there certainty that the new or renewed PPAs will have terms as favorable as those of the expired PPAs,
due to, among other things, changes in market conditions and an increase in competition among suppliers. If OPC fails to renew or enter
into new PPAs with terms and conditions that are favorable for OPC, its operating results may be adversely affected.
OPC
faces limitations under Israeli law in connection with the expansion of its business.
Existing regulation, such as antitrust laws,
regulations under the Israeli Law for Promotion of Competition and Reduction of Concentration, enacted in 2013 (the “Market Concentration
Law”) or regulations under the Israeli Electricity Sector Law, 5756-1996 (the “Electricity Sector Law”) with respect
to holding generation licenses may lead to restrictions, including restrictions on maximum capacity, which may limit the expansion of
OPC’s activity in Israel.
According to the Market Concentration Law,
when issuing and determining the terms of certain rights, including the right to an electricity generation license under certain circumstances,
the regulator must consider the promotion of competition in the relevant industry sector 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
regarding sector concentration. Kenon, OPC, and OPC’s
subsidiaries are considered concentration entities under the Israel Corporation
group for purposes of sector-specific and economy-wide concentration. 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. With respect to economy-wide concentration, this 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. For example, in
August 2017, the Israel Antitrust Authority and the Chairman of the Committee for the Reduction of Concentration, or the Concentration
Committee, recommended to the EA not to grant a conditional license for the Tzomet project. The conditional license was eventually approved
after OPC and the Idan Ofer group had complied with certain conditions agreed with the Concentration Committee, including the completion
of the sale of the Idan Ofer group’s shares in Reshet Media Ltd. in April 2019. Therefore, OPC’s expansion activities and
future projects have been and could in the future be limited by the Market Concentration Law.
As of
March 19, 2023, the capacity set in
the generation licenses (in accordance with conditional and permanent generation licenses) of entities, which are considered related parties
of OPC, is deemed to be held by a single
“person.” The held capacity attributed to OPC under the Market Concentration regulations
is approximately 1,500 MW. Furthermore, in accordance with the relevant regulation, a stake of 5% or more in OPC or its Israeli investees
(including Veridis’ holdings in OPC Israel) may attribute to OPC the capacity set in the licenses of the holder of such a stake
(or its shareholders). Therefore, the held capacity attributed to OPC (plus the capacity attributed to entities that may be considered
related parties for that purpose) may constitute a barrier and prevent OPC from making certain purchases (including participating in the
IEC Reform tenders) or executing certain projects, thereby limiting OPC’s ability to expand its activity in Israel. Furthermore,
as of
March 19, 2023, OPC is included in the list of concentrated entities, and accordingly is subject to the restrictions applicable
to concentrated entities and significant non-financial corporations.
Following the Israeli Government’s electricity sector reform, the Israel Competition
Authority issued regulations for sector concentration consultation in such sale process. The regulations were published under a temporary
order and are in effect for three years until
November 30, 2024. The purpose of the regulations is to promote competition in the generation
segment of the electricity sector. According to regulations, a person will not be granted a generation license or approval in accordance
with Sections 12 or 13 of the Electricity Sector Law upon existence of one of the following: (i) following the issuance, the person will
hold generation licenses or connection commitment for gas-fired power plants the total capacity of which exceeds 20% of the planned capacity
for this type of power plant. As of
March 19, 2023, the planned capacity for 2024 for gas-fired power generation units is 16,700 MW; (ii)
after the allocation, the person will hold generation licenses or connection commitment for more than one power plant using pumped storage
technology; (iii) after the allocation, the person will hold generation licenses or connection commitment for wind-powered power plants
where the total capacity exceeds 60% of the planned capacity for this type of power plant, which 730 MW for 2024. Also according to the
regulations, notwithstanding the above, the EA may grant such a generation license or approval on special grounds that shall be recorded
(after consultation with the Israel Competition Authority) and for the benefit of the electricity sector. Furthermore, the EA may refrain
from granting a generation license or from approving a connection to the grid if it believes that the allocation is likely to prevent
or reduce competition in the electricity sector after taking into account additional considerations, including the impact of holdings
of a person in other generation licenses that do not constitute a holding of a right as defined in the regulations, the impact of joint
holdings in companies with a holder of other rights, as well as the impact of holdings of a person in holders of licenses that were granted
under the Natural Gas Market Law. These regulations may impose limitations on OPC’s ability to expand its business in Israel. As
of
March 19, 2023, the aggregate MW currently attributable to OPC as well as Israel Chemicals Ltd., as a party with generation licenses
that are related to OPC, is approximately 1,500 MW (including the Kiryat Gat Power Plant, subject to the completion of its acquisition),
based on OPC’s assessment.
OPC
may not be able to enter into new markets, complete the merger process of, or integrate, acquired operations.
Expanding OPC’s activity into other
markets and geographic regions involves risk factors, which are specific to those markets, including local regulations and the economic
and political situation in those markets. Also, operating in other markets depends on various factors, including knowledge of the market,
identifying transactions that will suit OPC, conducting due diligence studies, recruiting suitable employees and securing any required
financing. Failure of one or more of the foregoing factors may adversely affect the success of projects in such markets and OPC’s
operations and results. Furthermore, completion of the integration of significant new operations into the existing operations may involve
failure of certain processes, including control and information flow processes, assimilation of management processes, assimilation of
the format for financial reporting, completion of the successful absorption of the new operations and relevant human resources, as well
as OPC’s understanding of the market in which the acquired activity operates and the integration of its business strategy and development
plans. The regulatory environment or other limitations or restrictions in such jurisdictions may restrict OPC’s ability to expand
its business in such other jurisdictions. Failure of one or more of the foregoing factors may adversely affect the realization of the
potential of the acquired activity.
OPC’s
projects may not be wholly owned by OPC.
In addition, OPC does not hold and/or will
not hold all the rights to all of OPC’s projects (including - OPC Israel, Gnrgy, OPC Power and projects of CPV Group), including
future projects. A less than 100% stake in projects might restrict OPC’s flexibility when conducting its activities, including entering
into agreements with other holders of rights. It can also restrict OPC’s ability to fulfill all the advantages and freedom of action
of exclusive ownership.
Changes
in the CPI in Israel, interest rates, or exchange rates could adversely affect OPC.
OPC is exposed to changes in the CPI, directly
and indirectly, due to the linkage of a substantial portion of its revenues to the generation tariff (which is partly affected by changes
in the CPI) and to the CPI. Natural gas purchases are also affected by generation tariff (which is partly affected by changes in the CPI).
OPC’s capital costs and investments are also affected by changes in the CPI. OPC is further exposed to changes in the CPI through
OPC’s debentures (Series B) and some of the OPC-Hadera loans, which are CPI-linked. Generally, an increase in the CPI increases
OPC’s liabilities and costs.
OPC is also exposed to changes in interest
rates. Since OPC has interest bearing loans and obligations based on Prime or LIBOR interest plus a margin. An increase in variable interest
rates may lead to an increase in OPC’s finance costs, and a hike in interest rates also increases projects’ discount rates
(whether those projects are active, under construction or under development), and may make further development/acquisition of projects
no longer economically viable, thereby slowing down OPC’s growth and causing impairment of assets and/or recording of impairment
losses.
Further, OPC is exposed to changes in the exchange rate, mainly the U.S. Dollar to NIS
exchange rate, both indirectly and directly, due to the linkage of a substantial portion of its revenues to the generation tariff (which
is partly affected by changes in such exchange rate). Also, some of the natural gas purchases are either linked to the exchange rate and/or
are denominated in U.S. Dollars, and are linked to the generation tariff and include floor prices. Although an appreciation of the U.S.
Dollar increases the cost of natural gas purchased by OPC, an increase in the generation component may partially mitigate the exposure.
However, since the generation component is usually updated once a year, there may be timing gaps between the effect of the U.S. Dollar’s
appreciation on the current gas cost and its effect on OPC’s gross margin. Such timing difference may adversely affect OPC’s
profitability and current cash flow in the short term. In the long term, an appreciation of the U.S. Dollar will lead to a higher generation
tariff, and accordingly to higher revenues for OPC, but also to a simultaneous increase in gas costs, such that OPC’s profitability
may be adversely affected. Furthermore, from time to time, OPC also enters into construction and maintenance
contracts in various currencies,
specifically the U.S. Dollar and Euro. With respect to OPC’s investment in CPV Group, which operates in the United States, and whose
functional currency is U.S. Dollar, generally, a decrease in the exchange rate has an adverse effect on such dollar-denominated investment.
On the other hand, an increase in the exchange rate of U.S. Dollar may trigger outflows to finance the investments (in NIS) expected under
CPV Group’s backlog of projects under development in Israel.
In addition, from time to time, and in accordance
with its business considerations, OPC uses currency forwards. However, there is no certainty as to the mitigation of the exposure to exchange
rates under such currency forwards, and OPC may incur costs associated with such forwards.
If
OPC or its businesses, including CPV, are unable to obtain necessary financing for development of projects or refinancing as required
this could have a material adverse effect on OPC’s business, financial condition and results of operation.
As a group that is engaged in initiation,
development and acquisition of power generation projects, OPC will need to raise large amount of money in the next few years in connection
with execution of its strategic plans. OPC’s and its
subsidiaries and associated companies’ financing agreements, including
OPC’s debentures, restrict the amount of debt they are permitted to incur and provision of collateral to secure such debt. In addition,
raising capital involves risks relating to the level of leverage and financing costs. High leverage exposes OPC and its
subsidiaries and
associated companies to inherent risks involved with leveraging and could have an adverse impact on their credit rating, operating results
and businesses and on their ability to distribute dividends and/or to comply with the terms of the financing agreements, and could also
involve provision of collateral or guarantees by OPC. Therefore, OPC may also be required to raise capital from investors (in addition
to or instead of credit), both at the OPC level and/or at the level of its
subsidiaries or associated companies. Raising capital could
result in OPC shareholder dilution or the sale of OPC shares at a discount, as well as additional costs. There is no assurance that the
amounts required will be raised under favorable terms or at all, and the ability to raise capital will depend on market conditions, the
provisions of OPC’s and its
subsidiaries and associated companies’ financing agreements and their debt structure, investors’
willingness to take part in capital raising (including OPC’s shareholders) and OPC’s operating results. Difficulties with
securing the required financing and/or failure to maintain an optimal debt structure might have an adverse effect on
the Company’s
ability to execute its future strategic plans, its financial strength, its compliance with the terns of its financing agreement and its
operating results An inability to raise the required financing and/or a failure to maintain an optimal debt/equity structure could harm
OPC’s ability to execute its business plans, and have an adverse effect on its business, financial condition and results of operations.
Failure to comply with the aforesaid conditions and restrictions may, among other things, have an adverse effect on the financing extended,
increase the equity required for the project and consequently increase costs, delay or prevent the completion of the project, and have
a material adverse effect on OPC.
Furthermore, certain project financing agreements of OPC (such as those of CPV, OPC-Hadera,
Tzomet, and the planned agreement of the Kiryat Gat Power Plant) include various undertakings, including compliance with the terms of
licenses and permits, performance and other conditions (including the terms attached to the withdrawal of facilities), and failure to
comply with them may limit the volume of financing or distributions, and may also give rise to a demand to repay the financing. In addition,
such agreements include conditions which, if met, will require the projects to transfer the cash flows to lenders, and provisions, under
which the lenders’ consent is required to execute certain actions relating to the commercial outline, the projects’ activity
or their holdings. Failure to comply with the aforesaid conditions and restrictions, or failure to obtain the lenders’ consent may,
among other things, have an adverse effect on the financings to be extended (or establish grounds for the lenders to demand the repayment
of the financing), increase the equity required for the project, lead to a demand to provide shareholders’ financial support and
consequently increase costs, delay or prevent the completion of the project (if it is a project under construction), adversely affect
the project’s commercial operation, delay or prevent the execution of certain measures and have a material adverse effect on OPC.
OPC
is dependent on dividends from
subsidiaries and associated companies.
OPC is a holding company, and OPC itself does
not hold any independent power generation operation other than its investments in companies it owns. Therefore, OPC is dependent on cash
flows from the
subsidiaries and associated companies its owns (in the form of dividends or repayment of shareholder loans) in order to
meet its various liabilities. OPC’s ability to receive such cash flows may be limited due to various factors, including operating
results and restrictions placed on distributions under agreements with the financing entities of the project companies owned by OPC. A
decrease in cash inflows from OPC-Rotem, OPC-Hadera, CPV and other future projects, or restrictions on OPC’s ability to receive
those cash flows may have an adverse effect on OPC’s operating results and its ability to meet its liabilities.
OPC
may be subject to instability in global market
Instability in global markets, including political
or other instability due to various factors, as well as economic instability, including concerns about a recession or a slowdown in growth,
might affect, among other things, the availability and prices of OPC’s raw materials, gas and electricity tariffs, the cost and
availability of OPC’s workforce in the power plants, the availability and financial stability of its suppliers, and the financial
strength of OPC’s customers. Such instability may also cause disruption in the construction and maintenance of the production facilities
and power plants as well as the activity of OPC as a whole. Furthermore, instability in global markets may have an adverse effect on OPC’s
projects under development or construction in Israel and the U.S., including OPC’s ability to secure the financing required for
the projects, and the ongoing establishment of project under construction or in development.
In 2022, the global geopolitical environment,
with the Russian invasion of Ukraine, remained unstable, which greatly affected the macroeconomic environment, volatility in energy prices,
economic uncertainty, supply chain, commodity prices and availability, etc. During 2022, commodities and energy prices increased, and
the availability of various raw materials was adversely affected, which resulted in higher costs and delays in the supply of equipment.
As of
March 19, 2023, there is no certainty as to the scope and duration of those trends and their long-term consequences.
OPC
may be affected by critical equipment failure.
Disruptions and technical malfunctions in
critical equipment of OPC’s generation facilities, and any inability to maintain inventory levels and quality as well as a sufficient
level of spare parts, may damage OPC’s operating activities and its ability to maintain power generation continuity and cause, among
other things, delays in the generation of electricity, difficulties with fulfilling contractual obligations, loss of income and excess
expenses, which will adversely affect OPC’s profits, if not covered under its insurance policies. Although OPC has long-term service
agreements with the manufacturers of the critical equipment, there is no certainty as to OPC’s ability to prevent damages and shutdowns
as a result of such disruptions and malfunctions.
OPC’s
activities and operations may be affected by natural disasters, climate damages, and fire.
OPC’s ongoing activities and operations
may be affected by various natural disasters, such as flood, extreme climate conditions, earthquakes, or fire, which may damage OPC’s
facilities in Israel and the United States and impair their operations including their continuous, high-quality, and reliable supply of
electricity to customers, thereby adversely impacting OPC’s results and activities. In particular, OPC’s activities in the
United States may be materially impacted by extreme weather events. In addition, in view of the nature of OPC’s activities, including
its use of flammables, operations involving high temperatures and pressures and storage of fuels, OPC’s facilities are exposed to
risks related to fire. Should OPC’s facilities be damaged from natural disasters or fire, renovation of affected facilities may
involve cost and expense, which may include full or partial shutdown of the damaged electricity generation facilities and loss of income.
Although OPC purchases insurance policies required to cover risks associated with its activity, as required in the licenses it was granted
and under the financing agreements it is a party to, there is no certainty that in such cases OPC will be compensated for some or all
the damages it may suffer.
The
political and security situation in Israel may affect OPC.
A deterioration in the political and security
situation in Israel may adversely affect OPC’s activities and harm its assets. Security and political events such as a war or acts
of terrorism may cause damage to the facilities used by OPC, including damage to the power station facilities owned by OPC, the construction
of OPC’s current development projects and future projects, IT systems, facilities for transmission of natural gas to the power stations
and the electricity grid. In addition, such acts may cause damage to OPC’s material suppliers, thereby affecting continuous high-quality
supply electricity. For example, during the second half of 2022, security threats were made against the Karish Tanin Reservoir and natural
gas facilities in Israel by entities hostile to Israel. Likewise, a deterioration in the political and security situation in Israel (for
example, the significant instability with regards to changes promoted by the Israeli government in the judiciary branch) may have a negative
effect on Israel’s economic situation and on OPC’s ability to execute new projects, to raise funding for its operations and
plans. In addition, such deterioration may have an adverse effect on the consumption patterns and scope of OPC’s customers in Israel
and/or their financial position. Negative developments in the political and security situation in Israel may trigger the imposition of
additional restrictions on OPC, including boycotts by various parties and may lead to claims by parties with whom OPC has contracted due
to, for example, the occurrence of force majeure events. In addition, some of OPC’s employees may be drafted as reservists and their
absence may affect OPC’s operations. Although certain damages in connection with acts of terrorism and war may be recovered under
the Property Tax Law and Compensation Fund and certain covenants and insurance policies taken out with liability limits were agreed with
the insurers, there is no certainty that in such cases, OPC will be compensated for some or all of the damages it may have suffered. Furthermore,
changes in the political conditions in the United States or security or global geopolitical events may also affect OPC’s activities,
including due to changes in natural gas and energy prices or government policies in the field of energy.
OPC’s
operations and financial condition may be adversely affected by the outbreak of pandemics.
Pandemics (such as COVID-19) may make governments
impose restrictions on trade and movement and restrictions on business activity, whose effects might be felt across the globe. The spread
of the COVID-19 or another pandemic and infections at OPC’s power plants and other sites, the continuation of the COVID-19 pandemic
(or a similar pandemic event) and its restrictions over time, a material impact on main suppliers (such as suppliers of natural gas, construction
and maintenance contractors) or OPC’s main customers, may adversely affect OPC’s activities and performance, as well as its
ability to complete projects under construction on time or at all and/or on its ability to execute future projects. Further to the foregoing,
in 2022, the effects of COVID-19 pandemic continued in Israel and around the world, characterized by disruptions in the global supply
chain of various commodities and raw materials due to overload, as well as delays in the supply of equipment and a rise in the budgets
of projects under construction and development.
OPC
requires professionally trained workforce.
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 appropriate qualifications. During the power plants’ construction stage,
most of the employees, experts and advisors employed by OPC (whether as employees or as external service providers) are experts in their
respective fields and are recruited by OPC from different countries. Any lack of availability of qualified personnel could negatively
impact OPC’s activity and results of operations. There are risks of potential difficulties in finding experts that possess specific
knowhow and qualifications, shortage of manpower, high employment costs and failures in HR management (employees and managers retention
and development, knowledge conservation and other issues), all of which could lead to a loss of essential knowledge, failure to meet OPC’s
objectives, failure by OPC to adapt its workers’ placement needs and provide infrastructures that are in line with OPC’s growth
rate. Furthermore, travel restrictions placed during the COVID-19 pandemic (or a pandemic or natural disaster) or any future event of
deterioration or escalation in the political and/or security situation, may lead to shortage of expert employees, which may lead to delays
in the construction of the power plants and have an adverse effect on OPC’s activity and results of operations. In case of a shortage
of professionally trained employees, OPC will be required to find alternative employees, make changes to the required training or find
other solutions by using external service providers. However, there is no certainty that the alternatives will fully meet OPC’s
needs.
Similarly, the success of CPV rests on its
ability to recruit and retain talented and skilled employees, both in technical/operative positions and in headquarter/management positions.
CPV depends on key employees for the development, implementation and execution of its business strategy. Difficulties in recruitment and
retention of talented and skilled employees, difficulties in effective transfer of the expertise and knowhow of the employees to new team
members once those employees retire, or unexpected resignation/retirement of key employees might have an adverse effect on the performance
of CPV.
OPC’s
management decisions may be restricted by collective agreements.
Most of OPC-Rotem’s operative workers
and OPC-Hadera’s workers are employed under collective agreements. The collective agreements may restrict OPC’s management’s
ability to conduct itself in a flexible manner, and may lead to additional costs to OPC. In addition, difficulty with renewal of the collective
agreements or any related labor disputes might have an adverse effect on OPC’s activity in Israel and its operating results. For
further information on these collective agreements, see “Item 4.B Business Overview—Our Businesses—OPC—OPC’s
Description of Operations—Employees.”
An
interruption or failure of OPC’s information technology, communication and processing systems or external attacks and invasions
of these systems, including incidents relating to cyber security, could have an adverse effect on OPC.
OPC uses information technology systems, telecommunications
and data processing systems to operate its businesses.
Although OPC is taking actions to enhance
protection against cyber events in its organizational networks and power plants, it is uncertain how much OPC would be able to prevent
any cyber-attacks or damage to OPC’s IT and data systems. Such physical, technical, or logical damage to the administrative and/or
operational systems, for any reason whatsoever, might expose OPC to harm and disruptions in OPC’s electricity production and supply,
in OPC’s IT systems, or in OPC’s reputation and may also result in data theft or leaks (including private information). The
fact that OPC is an Israeli company puts it at a higher risk of cyber-attacks. In the event that a major cyber-attack against OPC occurs
and is not prevented by the defense systems, this may adversely affect (including a material effect) on OPC’s operations and reputation.
In addition, OPC may incur costs to protect itself against damage to its IT systems and to recover from such damage, including, for example,
a system recovery, protection against any legal actions or compensation to affected third parties.
OPC
is exposed to litigation and 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, see note 18 to our financial
statements included in this annual report.
Legal disputes, litigation and/or regulatory
proceedings are inherently unpredictable (including against regulatory entities such as Israel Independent System Operator Ltd., a system
management company, (“Noga”), IEC, Israel Tax Authority, or ILA), and outcomes may be materially different from the parties’
expectations. 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 various
insurance policies that cover damages customary in the industry. The decision as to the type and scope of the insurance is made taking
into account, among other things, the cost of the insurance, its nature and scope, regulatory and contractual requirements, and the ability
to find adequate coverage in the insurance market. 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 (due to, for example, co-pays or exclusions in the
policies). In addition, OPC may not be able to renew or obtain insurance on comparable terms in the future (and may only be able to renew
or obtain policies on less favorable terms than those of its existing policies) or renew or obtain insurance that cover certain risks,
which may have an adverse effect on OPC. There is no certainty that OPC or its
subsidiaries will receive full compensation from the policies
in its possession in the event of damage. In addition,
the Company’s failure to renew insurance policies may constitute a breach
of OPC’s licenses and/or financing agreements. OPC is subject to health and safety risks.
OPC operations involve various safety risks
including operation of power plant equipment, use chemical substances by power plants, some of which are toxic and/or flammable. Safety
incidents may cause injuries and even loss of life among employees and subcontractors’ employees. Such incidents may cause reputational
damage, and give rise to lawsuits including in respect of bodily injury or other damages. OPC’s expansion of its activities in constructing
and operating power plants and generation facilities in consumer’s premises increased the chances such risks may materialize. OPC
operates in accordance with internal procedures in place, which include reporting of safety incidents and the steps to be taken should
such incidents occur, including bodily injury. However, it may not be sufficient to prevent damage from occurring as a result of such
incidents. In addition, third-party insurance and employers’ liability insurance maintained by OPC does not guarantee full coverage
in respect of the damage caused by such incidents.
Furthermore, OPC’s activities are subject
to environmental, safety and business licensing laws and regulations that are updated regularly. Legislative changes and stricter environmental
standards might affect the activity of OPC’s facilities and the costs involved therein. Furthermore, deficiencies and/or non-compliance
with the provisions of environmental and safety laws and the terms of permits and licenses granted to OPC thereunder might expose OPC
and its management to criminal and administrative sanctions, including the imposition of penalties and sanctions, issuance of closure
orders to facilities, and exposure to expenses relating to cleaning and remediation of environmental damages, which might have an adverse
effect on the activity and operating results of OPC.
OPC
faces risks in the construction of its projects.
Projects under construction or development,
including Tzomet, involve specific risks in addition to general or industry-specific risks, especially since Tzomet is a project under
construction or at a preliminary phase. The construction of a power plant involves a range of construction risks, such as risks associated
with the construction contractor and its financial strength, the supply of key equipment and its proper state including increases in equipment
and material prices, transport costs and supply schedules thereof, the proper state of the facilities and their systems, execution of
the work at the required quality and on time, receipt of the services required for the construction of the power plant and its connection
to the grid, the applicable regulation and obtaining the permits required both for execution of the work and operation of the power plant,
including obtaining the necessary permits for the construction of the facility, environmental permits, such as emission permits and compliance
with their terms. Such construction risks may affect the construction costs and project budget, the schedules for construction completion
and potential delays. Such risks are also relevant for similar projects in other geographic regions, including the regions in which CPV
operates. The materialization of any such construction risks may, among others, adversely impact OPC’s operating results and operations
due to an increase in construction expenses compared to the projected budget, impair the contractor’s ability to complete the project
or pay compensation to OPC in respect of its inability to complete the project, or cause delays in the project, loss of profits due to
the delays in the completion of the project and its commercial operation, compensation to customers, non-compliance with commitments towards
third parties in relation to the execution schedule or cancellation of the projects and loss of investments in OPC. It should be noted
that the agreed compensation for under-performance of the power plants and for the delay is restricted in amount. Therefore, there is
no certainty that OPC will be able to receive full compensation for direct and indirect damages it sustains.
Such construction risks and failure to comply
with performance requirements, including meeting deadlines, may have adverse effect on OPC’s businesses and activity, including
its liabilities to financing entities, authorities and customers and on collateral OPC has taken out in their favor.
Further, projects under development may be
exposed to risks that involve, among other things, objections by the public or other parties, non-suitability of the project’s planned
site, infrastructure or technology, delay in approval/ refusal to approve statutory plans, lack of the permits/consents required to promote
the projects. The materialization of those factors may result in the cancellation or delay in the execution of projects under development,
and an increase in OPC’s development expenses.
OPC
faces competition in its operations.
The policy of the governments where OPC operates
has been to open the electricity market to competition. In Israel, while such a policy reduces the IEC’s market share in the generation
and supply segment, it may lead to an increase in the number of electricity producers and intensify competition in the Israeli electricity
generation and supply market, which might have an adverse effect on OPC’s competitive position. Regulations set by the EA with the
aim of opening the Israeli electricity supply market further intensify competition in the supply segment, and this trend is expected to
be on the rise in the next few years. In recent years, competition in the supply to customers segment in Israel has intensified, which
may have an adverse effect on the terms of engagement between OPC and its customers. Furthermore, the activity of the CPV Group is also
exposed to competition in the market in which it operates. Although OPC seeks to maximize its competitive advantages and its experience
in developing and leading power plants, there is no certainty that this will prevent or reduce the risk of competition on OPC and its
operating results.
OPC
is dependent on certain material 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 two customers represented approximately 31% of its revenues in 2022; therefore, OPC’s revenues from the
generation of electricity are highly sensitive to the consumption by material customers. Therefore, should there be a loss of any material
customer, decrease in demand for electricity from OPC’s material customers (including due to malfunctions, suspension or others)
or should such customers not fulfill their obligations, including by failing to make payments to OPC, OPC’s revenues may be materially
affected.
There is no certainty that OPC will be able
to renew agreements with its material customers, and there is no certainty as to the terms of such agreements if they are renewed (due
to, among others, increased the competition in the market in which OPC operates). In addition, OPC is exposed to collection risks and/or
consumption risks in connection with the material customers.
For example, the Bazan Group, a former related
party of OPC, is a major OPC customer representing approximately 13% of OPC’s revenues in 2022. The PPA with Bazan Group is expected
to end in July 2023, and there is no certainty that it will be extended or renewed.
In addition, in January 2023, Rotem and another
material customer extended their engagement, as a result of which this customer is expected to significantly increase the capacity it
will acquire over the next few years, under the terms of the revised PPA. Other terms of this PPA were also revised, including the option
that a generation facility will be built at the customer’s premises and the sale of electricity from renewable energies. If this
customer acquires the amount of capacity as expected, it will have acquired a significant portion of OPC’s capacity in Israel by
2027, without giving effect to any increase in capacity by OPC, and OPC’s dependence on this customer will increase even further.
Furthermore, OPC-Hadera is dependent
on Infinya’s consumption of steam. If such consumption ceases, it could have a material effect on OPC’s operations and OPC-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—Our Businesses—OPC—OPC’s
Description of Operations—Regulatory Framework for Cogeneration IPPs.”
Failure to analyze the electricity consumption
profile of OPC’s customers, including its material customers, and its improvement over the production capacity of OPC’s production
facilities and power plants and tariffs may adversely affect OPC’s. It should also be noted that OPC is exposed to the financial
strength of the System Operator.
OPC
may suffer from temporary or continued interruption to regular supply of fuels and fuel prices.
OPC’s power generation activity depends
on regular supply of fuels (natural gas or diesel fuel). Fuel shortages and disruptions of the supply or transmission of natural gas may
disrupt the electricity generation activity and consequently adversely affect OPC’s operating results. Continued interruption to
the supply of natural gas requires OPC to generate electricity by using an alternative fuel (in Israel, the main alternative fuel is diesel
fuel). Covenant 125, which regulates compensation in the event of shortages of natural gas in Israel, does not always apply to OPC-Rotem
due to the EA’s interpretation of the covenant’s applicability to OPC-Rotem, in which case OPC-Rotem may not be entitled to
compensation arrangement applicable to other generators.
Furthermore, there is no certainty that OPC
will be able to negotiate substantially the same natural gas prices with a gas supplier in the event additional natural gas is required
for projects as compared to natural gas price arrangements under existing binding agreements of OPC (for example, for new projects or
in the event of maintenance work or suspension of activity of the gas suppliers with whom the agreements are in place). For example, in
2022, the natural gas prices remained volatile. The cost of natural gas affects OPC’s margins.
There is no certainty that OPC will be able
to reduce the effects of disruptions of supply of natural gas or price of natural gas on its operations, which depends on factors beyond
OPC’s control.
OPC
depends on key suppliers.
The power plants and generation facilities
built or operated by OPC are fully reliant on long-term construction and/or maintenance agreements with suppliers of essential equipment
in connection with maintenance and servicing of the power plant and facilities, including the maintenance of generators and gas and steam
turbines. In the event of failure to comply with performance targets, or if the key suppliers’ undertakings under the maintenance
agreements are breached, their liability in respect of compensation shall be limited in amount, as is generally accepted in agreements
of this type. Therefore, any disruptions and technical malfunctions in the continued operation of the power plants, or any equipment failure
might lead to delays in the construction of projects, disruption to electricity generation, shutdowns, loss of income and a decrease in
OPC’s profits. This also applies to the construction of other projects that will mature and reach commercial activation regarding
maintenance during the operation period. Furthermore, projects under construction and development depend on construction contractors in
all matters pertaining to the completion of the project, its performances and OPC’s ability to fulfill its undertakings as of the
relevant commercial activation dates in accordance with agreements or the regulation applicable to the project. A delay or failure by
the construction contractor to meet its undertakings or any other difficulties it faces in the construction of the project, might have
an adverse effect (potentially even a material effect) on OPC. Furthermore, OPC is dependent upon infrastructure suppliers such as Israel
National Gas Lines Ltd. (“INGL”) and IEC in Israel.
OPC
depends on infrastructure, securing space on the grid and infrastructure providers.
The power plants owned by OPC (including future
projects) in Israel use electricity grid to sell electricity to their customers, and therefore are dependent on the IEC (which manages
the transmission and distribution network) and the System Operator. Unavailability or damage to the grid infrastructures or disruptions
in their operations or inadequate supply may damage OPC’s facilities and impair its ability to transmit the electricity generated
in the power plant to the electricity grid, which may have material adverse effect on OPC’s businesses. Similarly, pressures on
the transmission and distribution networks (including due to the introduction of renewable energies), and delays in the development of
infrastructure that will support the generation and demand, may have an adverse effect on the operation of OPC’s existing generation
facilities, the timetables and the development phases of new projects. Furthermore, in Israel, the power plants and projects under development
are exposed to the system management, regulation of generation sources by the System Operator and prioritization of other generation plants
over those of OPC. The power plants and projects under development depend on the ability to secure the outflow of electricity from the
site and capacity in the grid, and the execution of projects (as well as projects’ costs and timetables) may be impacted by securing
the connection to the grid. In the United States, OPC’s development operations are dependent on securing agreements to connect to
the grid and agreements for the transmission of natural gas to the power plants and projects.
OPC’s operations are also dependent
on the integrity and availability of the national gas pipelines and distribution, and therefore are dependent on natural gas suppliers
in Israel and on INGL, which oversees transmission of gas. Failure in the gas transmission network or failure in the electrical grid may
interrupt the supply of electricity from OPC’s power plants, and there is no certainty that OPC will be compensated for some or
all the damages it may sustain in the event of a failure in those systems. The power plants and projects under development depend on the
ability to secure the outflow of electricity from the site and capacity in the grid, and the execution of projects (as well as projects’
costs and timetables) may be impacted by securing the connection to the grid.
Furthermore, the power plants owned by OPC
use water in the process of their operation, such that a continued water supply malfunction may prevent the operation of the power plants.
In this respect, OPC is dependent on Mekorot (the national water company).
OPC
is subject to regulations in connection with ties with hostile entities and anti-corruption legislation.
In their capacity as members of a group that
has activities in Israel and the U.S., OPC is subject to Israeli and U.S. regulations regarding business ties with hostile entities or
countries (such as Iran), and to anti-corruption, bribery and money laundering regulations, whose breach might trigger the imposition
of various sanctions in Israel and in other countries. OPC implements measures to ensure it is compliant with such regulations. However,
considering the extensive scope of OPC’s activity (including the controlling shareholder group of which OPC is a member), OPC may
be exposed to sanctions under regulations despite taking precautionary measures.
OPC
may be exposed to fraud, embezzlement, or scams.
Misuse of OPC’s assets, intentional
theft or fraud by insiders or and/or external parties may damage OPC financially and in terms of its image and reputation. Although OPC
applies various controls to monitor the risk, there is no certainty as to OPC’s ability to prevent such fraud, embezzlement or scams.
OPC
may face barriers to exit in connection with the disposal or transfer of OPC and its businesses, development projects or other assets.
OPC may face exit barriers, including lack
of adequate market conditions, high exit costs or objections from various parties, in connection with dispositions of its assets or companies.
Most important barrier OPC may face is obtaining required approvals from third parties for the transfer of control or retention of certain
holding in a corporation in electricity generation. Financing and other agreements in place may also restrict OPC’s ability to transfer
control (including by virtue of guarantees provided by OPC). Such restrictions and other similar restrictions applicable to companies
controlled by OPC may prevent it from disposing of some of its assets, which may have a material effect on OPC.
OPC
is exposed to tax liabilities in Israel.
The calculation of the provision for income
tax and indirect taxes of OPC, and the calculation of the tax payment component of the cost of OPC’s assets are based on OPC’s
estimates and assessments regarding various tax positions which may not be accurate. Furthermore, tax-exempt restructuring and reorganization
need to comply with the exemption eligibility criteria. Should the Israel Tax Authority reject OPC’s tax positions or in case of
non-compliance with the tax exemption terms and conditions or loss recognition, OPC’s may be expected to incur further tax liabilities
and interest thereon, which may affect OPC’s tax expenses, its liabilities and the cost of its assets.
OPC
may be exposed to liabilities related to its guarantees.
Most of OPC’s activities are carried
out by special-purpose project companies. From time to time, OPC provides guarantees in favor of entities related to the project companies
(in Israel and in the U.S.) or to the generation facilities in consumers’ premises in order to, for example, obtain consent from
financing entities, the system/market operator in the U.S., key suppliers or government agencies. Any projects’ failure to fulfil
such undertakings secured by OPC’s guarantees may expose OPC to potential enforcement of the guarantees.
Risks Related to OPC’s
U.S. Operations
With the acquisition of CPV in January 2021,
OPC is subject to risks relating to the regulations applicable to CPV’s business in the United States. Many of the risks relating
to OPC’s Israel operations also apply to CPV. Additional risks relating to CPV are indicated below.
CPV’s
operations are significantly influenced by energy market risks and federal and local regulations.
CPV is subject to significant federal and
local regulations relating to the U.S. electricity market and natural gas market, including environmental regulations as well as to steps
affecting U.S. businesses in general. Such regulations may change and could also be affected by changes in political and governmental
policies at the federal and state levels as a result of which the CPV Group’s projects may be adversely affected from the enhanced
licensing requirements, including public hearings or administrative proceedings in connection with the management of its businesses. In
addition, CPV’s results and development projects in the renewable energy sector as well as carbon capture projects are affected
by governmental policies (federal and state) relating to the promotion and granting of incentives to renewable energy. In case such incentives
are minimized or revoked, such change will adversely affect the profitability of such projects. Furthermore, CPV is subject to environmental
laws and regulations, including those that seek to regulate air pollution, disposal of hazardous wastewater and garbage, preservation
of vegetation and endangered species and historical sites. CPV’s projects and operations also require certain licenses and permits
under environmental and other regulations, which require compliance with their terms, including the renewal of the licenses and/or permits.
A failure or deviation from the standards or regulations and/or non-compliance with the terms of the issued licenses and/or permits, could
have a material adverse effect on CPV’s business, results of operation and financial condition and/or prevent advancement of its
development projects. If stricter regulatory requirements are imposed on CPV or if CPV does not comply with such requirements, laws and
regulations, this could have an adverse effect on CPV’s results and activity. Furthermore, stricter regulatory requirements could
require material expenditures or investments by CPV.
In addition, CPV is subject to policies and
decisions made by Regional Transmission Organizations (“RTO”) or Independent System Operator (“ISO”) of the markets
in which it operates or expects to operate. Changes in such policies or decisions (for example, the capacity prices tenders) and/or projects
under development (for example, steps pertaining to interconnection and transmission agreements) could have an adverse effect on CPV’s
results and activity.
CPV
is subject to market risks, including energy price fluctuations and any hedging may not be effective.
CPV’s activities are subject to market
risks, including inflation and price fluctuations, mainly related to prices of electricity, natural gas, emission allowances and Renewable
Energy Certificates (the “REC”s). In addition, the CPV Group is exposed to fluctuations in the price indices associated with
the projects’ hedging agreements. The projects act to enter into commodity price hedging agreements to mitigate some of the exposure
to price fluctuations and/or to ensure minimum cash flows as an inherent part of the activities; however, the hedging agreements may not
always be available (or may be on non-profitable terms, involving high costs or strict requirements for collaterals) and may not assure
full protection, due to, among other things, hedging less than the total amount of electricity being sold; the delivery point or prices
in the hedge agreement being different than the delivery points in the CPV Group’s project operations. The hedging agreements may
not be renewed or may be renewed on different terms and conditions and/or the hedge counterparty may not fulfill its financial obligations
due to financial distress or other factors. It is noted that hedging may also set off the energy margins of the CPV Group (as in 2022).
In addition, the CPV Group is exposed to changes in the capacity payments which are determined by auctions in the operating markets, such
that there is no assurance that the projects of the CPV Group will be cleared at the auctions as well as no assurance to the results of
the auctions which may vary according to market terms.
CPV’s
facilities are subject to disruptions, including as a result of natural disasters, terrorist attacks, and infrastructure failure.
Local or national disasters, terrorist attacks,
catastrophic failure of infrastructure on which the CPV Group’s facilities depend (such as gas pipeline system, RTO or ISO systems)
and other extreme events, pose a threat to the CPV Group’s facilities and to their proper operation. Disasters and terrorist attacks
may affect third parties with which the CPV Group collaborates in a manner that will also have an impact on its financial results. In
addition, such events may affect the ability of the CPV Group’s personnel to meet the operation and maintenance agreement it entered
for the operation and maintenance of the facilities or to perform additional tasks necessary for their proper operation. Disasters and
terrorist attacks may also disrupt capital market and financial market activity and, consequently, the CPV Group’s ability to raise
financing for its activity and operate with financial entities. Additionally, the CPV Group’s operations and results are impacted
by external factors related to its activities, such as, construction contractors for projects under construction, maintenance service
providers, suppliers of natural gas and capacity of the natural gas transmission network, including some of the projects that are exposed
to risks involving securing uninterrupted transmission of natural gas. Global events, such as the ongoing COVID-19 pandemic that started
in 2020, and which triggered an increase in demand for raw materials, equipment and related services, which, in turn, contributed to increase
in costs of raw materials, equipment and freight and supply delays. A decline or performance failure in provision of the services or equipment
by the suppliers, as stated, could adversely affect the activities of the CPV Group (operational and development activities in all segments)
and its results.
CPV’s
operations and financial condition may be adversely affected by the outbreak of the COVID-19.
The COVID-19 pandemic affected global economic
activity and conditions, and the recovery from the pandemic may have a material effect on the fundamentals of the supply market, businesses
and commodities both in the United States and globally.
The CPV Group worked to deal with certain
aspects of the COVID-19 pandemic; and it continues to assess the effects of the pandemic on its workforce, liquidity, reliability, cyber
security, customers, suppliers, as well as other macroeconomic conditions. Due to the dynamic nature of the pandemic (the development
of new strains) and the consequences of COVID-19 related events (such as disruptions to supply chains and an increases in the prices of
raw materials and shipping costs), there is still uncertainty about the broad impacts of the COVID-19 pandemic on the markets and on factors
related to the CPV’s activity if outbursts of the COVID-19 or another epidemic will happen in the markets of activity (including
markets of relevant suppliers). During the reporting period and thereafter, due to high global demand for raw materials and for transportation
and shipping, the trajectory of significant increase in the costs of raw materials continued, and production and supply chain delays.
This resulted in global delays in delivery dates for equipment alongside increased prices of raw materials and equipment used for the
construction and maintenance of the CPV Group’s power plants. This trend affects the construction and/or maintenance costs of the
CPV Group’s projects in the markets of activity and the schedules for their completion. The effect of this trend is evident, especially
with respect to projects under construction, as well as availability and prices of solar panels for solar projects under development or
construction by the CPV Group. There is no certainty as to the duration or scope of the trend.
Accordingly, the COVID-19 or other pandemic
may have a material adverse effect on the results of the CPV Group’s operations results, its financial condition and cash flow,
following, among other factors, a continuous slowdown in sectors of the economy, changes in the demand or supply of goods, significant
changes in legislation or regulatory policies dealing with the pandemic, a decrease in demand for electricity (especially from commercial
or industrial customers), negative impacts on the health on the CPV Group’s workforce and the workforce of its service providers,
and the inability of the CPV Group’s contractors, suppliers, and other business partners to complete their contractual obligations.
To the extent that such events will adversely affect the business of the CPV Group and its financial results, they may also have the effect
of accelerating, intensifying or increasing the negative effects of many of the other risk factors described herein.
Malfunctions
in the interconnections’ systems may delay or adversely affect availability of the operation or construction of CPV projects.
CPV’s facilities are subject to malfunctions
such as mechanical breakdowns, technical disruption, malfunctions in the electricity and natural gas transmission systems, malfunctions
in electricity connections, gas transmission connections etc., fuel supply issues, malfunctions in the equipment of the renewable energy
projects, accidents, safety events or disruptions of the facilities’ activity or of the infrastructures on which they operate. Any
such disruption (particularly a material one) could adversely affect the reliability and efficiency of the power plants on availability
of the operating or construction projects, on schedule or the compliance with obligations towards third parties and market operators to
increase operating and equipment acquisition costs, and adversely affect the CPV’s business, financial condition and results of
operation.
A
damage to or a disruption in CPV’s business’ information technology systems, including incidents related to cyber security,
could adversely affect its business operations.
The CPV Group uses IT, communication and data
processing systems for its operating activities. Physical or logical damage to such administrative and/or operational systems for any
reason whatsoever may expose the CPV Group to delays and disruptions in the supply of electricity, including causing damage to property,
IT systems, or theft of information. In addition, the CPV Group may need to incur significant costs to protect against IT vulnerabilities,
as well as in order to repair damage caused by such vulnerabilities as they occur, including, for example, establishing internal defense
systems, implementing additional safeguards against cyber threats, cyber-attack protection, payment of compensation or taking other corrective
measures against third parties.
The CPV Group takes measures to boost information
security - including by using network monitoring and control systems, hardening of hardware and operating systems, backups, written policies
and procedures, access restrictions, employee training, etc. In addition, the CPV Group employs a dedicated full-time employee overseeing
its cybersecurity program at its power generating facilities and corporate offices focusing on security for enterprise applications and
operational technology networks. Notwithstanding the aforementioned, there is no certainty as to its ability to prevent cyber-attacks
or vulnerabilities on the Group’s IT systems.
Third-party
disruptions could have a material adverse effect on CPV’s business.
CPV’s business relies on third parties,
such as construction contractors for construction projects, main equipment suppliers, maintenance contractors, suppliers of natural gas
and capacity of natural-gas transmission grids, including natural gas projects that are exposed to risks involving securing uninterrupted
transmission of natural gas. For example, global events and macro events, such as an increase in demand for raw materials, equipment and
related services, which contributed to increase in costs of raw materials, equipment and freight and supply delays which may adversely
affect the operations and results of CPV Group. In addition, the projects are dependent on main suppliers, in a manner that termination
of engagement, change of its terms, or termination of operations of the supplier may materially affect the projects and their results.
A decline or performance failure in provision of the services or equipment by the suppliers, as stated, could adversely affect the activities
of the CPV Group (operational and development activities in all segments) and its results.
In addition, the changes in the costs in the
production and supply chain of equipment for CPV’s projects due to high global demand for raw materials, and shipping and delivery,
on the one hand, and limited production capacity and limited shipping and delivery capacity, on the other hand, brought about a significant
increase in costs in the production and supply chain. The continuation of this trend may have a continued effect on the cost of inputs
for the CPV Group. There is no certainty as to the duration or scope of the trend, therefore CPV is unable to assess with full certainty
its effect on the CPV Group’s activity.
Many of the components required for the purpose
of building gas-fired or renewable energy projects are dependent on global suppliers, and local supply options are unable to meet the
demand. The energy sector, including the value and costs of the CPV Group’s projects may be affected by a policy whose objective
is to increase local production by levies placed on products required to build facilities, and by global disruptions to the supply chain.
Supply of certain components, such as, for
example, solar panels, may be affected by government policies and investigations. For example, on
March 28, 2022, the United States Ministry
of Trade announced that it is investigating a claim whereby the importation of solar panels to the United States from Malaysia, Thailand,
Vietnam and Cambodia allegedly bypasses the customs duty tariffs that apply to importation from China. In November 2022, the United States
Department of Commerce issued the initial investigative findings and determined that four solar panel manufacturers circumvented tariffs.
A final determination on the resulting tariffs and potential penalties on the offending solar panel manufacturers is expected to be completed
in the second quarter of 2023. This investigation may result, among other things, in the imposition of higher customs duty tariffs (potentially
significantly higher) in respect of solar panels imported from those countries. There is no certainty as to the results of the proceeding
or the period of time it will take to complete it; (it should be clarified that the proceeding is not conducted against the CPV Group).
If the claim under review is accepted as justified, the proceeding and its results may affect the entire solar panels market and, indirectly,
the execution of solar energy projects in the United States. In June 2022, President Biden set an exemption from customs duty tariffs
in respect of solar modules and their components, which are imported from the four above-mentioned countries; the said exemption will
apply for 24 months during which the investigation is held. The effects of the investigation and the said step taken by President Biden
are not yet clear, and the CPV Group continues to assess the issue. It is noted that availability of solar panels in the U.S., considering
the demand, remains challenging during the report period. It is further noted that during 2022, the CPV Group replaced the solar panel
supplier of the Maple Hill project.
CPV
is subject to environmental risks associated with the construction and operation of power plants, including renewable energy power plants
(including wind and solar), and compliance with environmental regulations.
The environmental effects of CPV’s activity
include, among others, the carbon emissions, emission of pollutants into the air, including greenhouse gases; the discharge of wastewater;
the storage and use of petroleum products and hazardous substances; production and disposal of hazardous waste; and, as applicable, potential
effects to threatened and endangered or otherwise protected species, wetlands and waters of the United States and cultural resources.
CPV is subject to environmental federal, state and local laws and regulations. Such regulations may be stricter in the future, for example,
due to ESG trends and promotion of policy aimed to deal with climate change and environmental dangers. As the key entity providing project’s
facilities with day-to-day activities and services, the CPV Group requires providers of the operating and maintenance services to implement
specific compliance plans and procedures, whose objective is to ensure compliance with the applicable environmental protection laws and
regulations; the CPV Group regularly monitors the activities of the service providers in accordance with the provisions of the applicable
operating and maintenance agreements. Furthermore, the CPV Group’s project companies enter into emergency response and environmental
protection services agreements in the event of environmental incidents. Compliance with environmental protection laws and regulations
may cause significant costs arising from investments required for adjusting the facilities and for operating activities, including requirements
to install controls over air pollution or a discharge of wastewater, or requirements to mitigate the environmental effects of building
electricity power projects.
In addition, CPV is also required to obtain
permits and licenses for the development, construction and operation of its facilities, permits that often include specific emission restrictions
and pollution control requirements. CPV’s operating permits normally need to be renewed every month. A failure to obtain the required
permits and to meet their terms and conditions on an ongoing basis may prevent the CPV Group from constructing and/or operating its projects.
A failure to meet the requirements of the environmental protection standards or regulations, or deviations therefrom and/or failure to
meet the terms and conditions of the permits issued may result with administrative or civil significant penalties, or, in extreme cases,
criminal liability, that may have a material adverse impact on CPV’s activity and results, and/or may prevent the promotion of projects
under development.
Certain environmental protection laws, such
as the Comprehensive Environmental Response, Compensation and Liability Act (the “CERCLA”), place strict liability, jointly
and severally, for the costs of cleaning up and restoring sites where hazardous substances have been dumped or discharged. CPV may be
liable to all undertakings related to any environmental pollution in the site in which its power plants are located. These undertakings
may include the costs of cleaning up any soil or groundwater pollution that may be present, regardless of whether pollution was caused
by prior activities or by third parties.
Environmental protection laws and regulations
are often changed or amended and such developments often result in the imposition of more stringent requirements. Amendments to wastewater
discharge restrictions, air pollution control regulations or stricter national air quality standard may require CPV Group to make further
material investments in order to maintain compliance with such standards.
The expected expansion of regulation on greenhouse
gases poses a particular risk to the CPV Group’s gas-fired power plants, although it also encourages the growth of renewable energy
projects. The United States is a party to the Paris Agreement (having rejoined in 2021); the parties to the Paris Agreement undertook
to try and limit global warming. The Biden administration has set a United States national objective of achieving a reduction of 50%-52%
of greenhouse gases emission by 2030, compared to emission levels in 2005.
Certain states, including states in which
the CPV Group operates, also legislate laws for dealing with global warming, and such laws might impact the operation of the CPV Group’s
Energy Transition power plants. A significant law in that context is the New York’s Climate Leadership and Community Protection
Act, which requires the promulgation of regulations aimed to achieve a 40% reduction in greenhouse gases emission in New York by 2030,
zero greenhouse gases emission by 2050, and 100% carbon-free electricity by 2040. Such regulations may require the CPV Group to limit
emissions, purchase emission credit to offset carbon emissions, or reduce or shutdown the activity.
The most significant environmental risks in
connection with construction and operation of renewable energy projects pertain to the potential impact on endangered species, migratory
birds and golden eagles. Harming such species may result in significant civil and criminal penalties. However, the risk of such a liability
is mitigated if projects are located in suitable places, an assessment of the potential effects was conducted, and the recommendations
of federal and state agencies in charge of protecting wildlife were implemented as part of the development of the project. However, there
is no certainty that said reduction actions will prevent exposure to said penalties.
CPV
faces risks in connection with the construction and development of its projects’ power plants.
CPV is involved in the development, construction
and management of power plants, the activities of the CPV Group are subject to development and construction risks in all aspects relating
to construction of power plants, including obtaining the required financing, filing of the required permits and regulatory procedures,
connection of the facility to transmission and distribution grids, meeting timelines, dependency on teams and availability of suitable
technical equipment, and for carbon capture projects, adequate storage or offtake for captured carbon. Failure or delay in any of the
aforesaid factors may result, inter alia, in delays in project completion, increase in costs and adversely affect the CPV Group’s
operating results and its strategy materialization.
In addition, implementation of the growth
plans in the areas of activity depends on the ability to place the required equity for the development or acquisition of projects. Currently,
main source for equity depends on the investors holding interests in the CPV Group (including OPC being the main investor). Difficulty
in ensuring the required equity in the required amounts (that may be material considering the advanced projects by the CPV Group) may
mean that the CPV Group will not be able to execute its plans and strategy, at all or with a considerable delay than expected.
Mild
or atypical (i.e., warmer winter) or severe weather conditions could have a material adverse effect on CPV’s operations and financial
results.
Severe weather conditions, natural disasters
and other natural phenomena (such as hurricanes and tornadoes) could adversely affect the CPV Group’s profits, operations and results.
Such severe weather conditions could also affect suppliers and the pipelines supplying natural gas to gas-fired facilities. In addition,
severe weather conditions could cause damage to facilities, increase repair costs and loss of revenue if CPV fails to supply electricity
to the markets in which it operates or exposes the CPV Group to capacity penalties in PJM or ISO-NE. To the extent that these losses are
not covered by the CPV Group’s insurance or are not recovered by CPV through electricity prices, this could have a materially adverse
effect on the financial results, operating results and cash flows of the CPV Group.
An
inability to obtain required financing or inability to comply with terms of any financing agreements may have a material adverse effect
on CPV’s business, financial condition and results of operation.
CPV’s results and its development projects
could be adversely impacted if it is unable to obtain financing on attractive terms or at all, to comply with the conditions of CPV’s
existing financing agreements and the ability to refinance existing debt and credit on favorable terms. In the absence of a debt refinance,
repayment of the original financing will be required, in a way that may adversely affect the CPV Group’s results. For example, Valley
is still seeking to obtain an extension of “air permit” from the State of New York. Under a court ruling, Valley continues
to be able to operate but has been unable to obtain a refinancing of its approximately $502 million loan facility due in June 2023 as
a result of this outstanding permit. CPV is in the process of negotiating refinancing terms with Valley’s existing lenders and the
terms of such refinancing are expected to increase Valley’s finance costs. The CPV Group’s financing agreements include restrictions,
covenants and obligations that limit distributions or require or accelerate making of repayments upon occurrence of certain events (such
as cash sweeps provisions). Difficulty in obtaining financing or refinancing under inferior conditions may adversely affect the ability
of the CPV Group to refinance existing financing agreements and/or carry out projects under development and ultimately effecting whether
projects are economically worthwhile. In addition, difficulty in complying with the terms and conditions of financing agreements may require
the provision of financial support or collateral and additional guarantees in favor of the entities providing financing to the CPV Group
or the investors in the projects, and under certain circumstances - even the calling for immediate repayment of the credit and realization
of collateral given to lenders (projects assets, projects rights and guarantees, as applicable), thus adversely affecting the CPV Group’s
results and its financial strength.
An
inability to extend or renew certain agreements could have an adverse impact on CPV’s business, financial condition and results
of operation.
Most of the CPV Group’s material agreements
(including hedging agreements, financing agreements, gas supply agreements, gas transmission agreements and asset management agreements)
are for the short- to medium terms, as is customary in the market in which it operates. Difficulties in renewing or extending agreements
that are close to expiration and/or entering into new undertakings on inferior commercial terms could adversely affect the results and
activities of the CPV Group.
An
inability to place the required equity for the development or acquisition of additional projects could have an adverse impact on CPV’s
ability to execute its plans and strategy.
Realization of the growth plans in CPV’s
areas of activity, depends on the ability to place the required equity for the development or acquisition of projects. The main source
for equity depends on the investors holding the CPV Group (OPC is CPV’s main investor). Difficulty in ensuring the required equity
in the required sums (that may be material considering the advanced projects by the CPV Group) may mean that the CPV Group will not be
able to execute its plans and strategy, at all, or with a considerable delay than expected.
Risks Related to Our
Interest in ZIM
ZIM
predominantly operates in the container segment of the shipping industry, and the container shipping industry is dynamic and volatile.
ZIM’s principal operations are in the
container shipping market and ZIM is significantly dependent on conditions in this market, which are for the most part beyond its control.
For example, ZIM’s results in any given period are substantially impacted by supply and demand in the container shipping market,
which impacts freight rates, bunker prices, and the prices ZIM pays under the charters for its vessels. Unlike some of its competitors,
ZIM does not own any ports or similar ancillary assets (except for minority ownership rights in a company operating a terminal in Tarragona,
Spain). Due to ZIM’s relative lack of diversification, an adverse development in the container shipping industry would have a significant
impact on ZIM’s financial condition and results of operations.
The container shipping industry is dynamic
and volatile and has been marked in recent years by instability and uncertainties as a result of global economic crises 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 the short- and long-term impact of the
COVID-19 pandemic on the global economy, armed conflicts (including the Russia-Ukraine conflict), terrorist activities, embargoes, strikes,
rising inflation, climbing interest rates and trade wars; |
|
• |
the global 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 protectionism (for example, in the U.S.-China trade); |
|
• |
currency exchange rates; |
|
• |
prices of energy resources, including vessel fuels and marine LNG; |
|
• |
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; |
|
• |
outbreaks of diseases, including the COVID-19 pandemic; and |
|
• |
development of digital platforms to manage operations and customer relations, including billing and services.
|
As a result of some of these factors, including
cyclical fluctuations in demand and supply, container shipping companies have experienced volatility in freight rates. For example, the
comprehensive Shanghai (Export) Containerized Freight Index (SCFI) increased from 818 points on
April 23, 2020, with the global outbreak
of COVID-19, to 5,047 as of
December 31, 2021, but since then decreased to 1,108 as of
December 30, 2022. Freight rates have significantly
declined in 2022 as a result of reduced demand as well as the easing of both COVID-19 restrictions and congestion in ports. Furthermore,
rates within the charter market, through which ZIM sources most of its capacity, may continue to fluctuate significantly based upon changes
in supply and demand for shipping services. The severe shortage of vessels available for hire during 2021 and the first half of 2022 has
resulted in a significant increase of charter rates and longer charter periods dictated by owners. Since September 2022, charter hire
rates have been normalizing, with vessel availability for hire still very low. According to Clarksons Research December 2022 market report,
in 2023, charter hire rates are expected to continue to fall to average or below average historical levels (compared to the exceptional
highs in 2021 and the first half of 2022), as additional capacity that will enter the market is expected to increase pressure on charter
rates. See
“Item 3.D Risk Factors—Risks Related to Operating ZIM’s Vessel Fleet—ZIM
charters-in most of its fleet, which makes it more sensitive to fluctuations in the charter market, and as a result of its dependency
on the vessel charter market, the costs associated with chartering vessels are unpredictable.”
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 predict
and respond to market changes, they could have a material adverse effect on ZIM’s business, financial condition, results of operations
and liquidity.
Global
economic downturns and geopolitical challenges throughout the world could have a material adverse effect on ZIM’s business, financial
condition and results of operations
ZIM’s business and operating results
have been, and will continue to be, affected by worldwide and regional economic and geopolitical challenges, including global economic
downturns. In particular, the outbreak of the military conflict between Russia and Ukraine has caused an immediate sharp decline in the
financial markets and a sharp increase in energy prices. The continued conflict impedes the global flow of goods, results in product and
food shortage, harms economic growth and places more pressure on already rising inflation. Furthermore, freight movement and supply chains
in Ukraine and neighboring countries have been, and may continue to be, significantly disrupted. Economic sanctions levied on Russia,
its leaders and on Russian oil and oil products may cause further global economic downturns, including additional increases in bunker
costs. A further deterioration of the current conflict or other geopolitical instabilities may cause global markets to plummet, affect
global trade, increase bunker prices and may have a material adverse effect on ZIM’s business a financial condition, results of
operations and liquidity.
Currently, global demand for container shipping
is highly volatile across regions and remains subject to downside risks stemming mainly from factors such as reduction in consumption,
increase of interest rates, remaining government-mandated shutdowns and other COVID-19 pandemic restrictions that still persisted during
2022 (mostly in China), severe hits to the GDP growth of both advanced and developing countries, fiscal fragility in advanced economies,
high sovereign debt levels, highly accommodative macroeconomic policies and persistent difficulties accessing credit. During 2020 the
outbreak of the COVID-19 pandemic resulted in an immediate and sharp decline in economic activity worldwide. From the second half of 2020
market conditions improved with higher demand mainly by heavy consumers’ purchase orders and e-commerce sales. The increase in demand
combined with congestions and bottlenecks in the terminals, led to a temporary significant containers shortage which also resulted in
surge in the freight rates, climbing up to record-breaking levels. Economic recoveries from the COVID-19 pandemic are still uncertain,
vary from each country and are influenced by government economic support measures as well as the remaining COVID-19 policies and restrictions.
According to a report by the International Monetary Fund (IMF), as of January 2023, global growth is expected to fall to 2.9% in 2023
compared to 3.4% in 2022, but rise to 3.1% in 2024. Global inflation is expected to fall to 6.6% in 2023 and 4.3% in 2024, still above
pre-COVID-19 pandemic levels.
The deterioration in the global economy has
caused, and may continue to cause, volatility or a decrease in worldwide demand for certain goods shipped in containerized form. In particular,
if growth in the regions in which ZIM conducts significant operations, including the United States, Asia and the Black Sea, Europe and
Mediterranean regions, slows for a prolonged period and/or there is significant additional deterioration in the global economy, such conditions
could have a material adverse effect on ZIM’s business, financial condition, results of operations and liquidity.
If these or other global conditions continue
to deteriorate during 2023, global growth may take another downturn and demand in the shipping industry may decrease. Geopolitical challenges
such as rising inflation in the U.S. as well as in other dominant countries, enhanced and other political crises and military conflicts
and further escalation between the U.S. and Russia, trade wars, weather and natural disasters, embargoes and canal closures could also
have a material adverse effect on ZIM’s business, financial condition and results of operations.
In addition, as a result of weak economic
conditions, some of ZIM’s customers and suppliers have experienced deterioration of their businesses, cash flow shortages and/or
difficulty in obtaining financing due to, among other causes, an increase in interest rates. As a result, ZIM’s existing or potential
customers and suppliers may delay or cancel plans to purchase ZIM’s services or may be unable to fulfill their obligations to ZIM
in a timely fashion.
The
global COVID-19 pandemic has created significant business disruptions and affected ZIM’s business and may continue to create significant
business disruptions and affect its business in the future.
In March 2020, the World Health Organization
declared the outbreak of COVID-19 a global pandemic. During the past three years the COVID-19 pandemic has spread globally and caused
high mortality and morbidity rates world-wide, with some geographic regions affected more than others. The COVID-19 pandemic has significantly
impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets and increased
unemployment levels in some of its phases, all of which may become heightened concerns upon additional waves of infection or future developments.
In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering
in place requirements in many states and communities. In particular, the State of Israel where ZIM’s head office is located has
been highly affected by COVID-19, with a high and steady increase in percentage per capita of reported cases of infected patients, especially
with the recent Omicron variant. Since March 2020, and in response to new pandemic waves of COVID-19, the Government of Israel imposed
from time to time certain measures such as restrictions on travel, mandatory quarantines, partial home confinement and other movement
restrictions, reducing staffing of nonessential businesses, restricting public transportation and other public activities. Although ZIM
is considered an essential business and therefore enjoys certain exemptions from the restrictions under Israeli regulations, ZIM has voluntary
reduced its maximum permitted percentage of staffing in its offices in order to mitigate the COVID-19 risks and has therefore relied more
on remote connectivity. Similarly, ZIM’s sea crews and staff located in offices worldwide have been adversely affected as a result
of the COVID-19 pandemic and may continue to be adversely affected by the pandemic in the future. In addition, since December 2020 the
US Food and Drug Administration FDA issued Emergency Use Authorizations (EUAs) for COVID-19 vaccines applications, launching COVID-19
vaccination campaigns in many countries worldwide. While certain countries such as the State of Israel, the US and the UK are in advanced
stages of the COVID-19 vaccination campaigns, other countries have been unable to vaccinate their population at the same pace. In addition,
as new variants of the virus emerge, there is no certainty that the vaccines will continue to be effective for all existing and future
variants of the virus. ZIM continues to monitor its operations and government regulations, guidelines and recommendations.
The COVID-19 pandemic has resulted in reduced
industrial activity in various countries around the world, with temporary closures of factories and other facilities such as port terminals,
which led to a temporary decrease in supply of goods and congestion in warehouses and terminals. For example, in January 2020, the government
of China imposed a lockdown during the Chinese New Year holiday which prevented many workers from returning to the manufacturing facilities,
resulting in prolonged reduction of manufacturing and export. Government-mandated shutdowns in various countries have also temporarily
decreased consumption of goods, negatively affecting trade volumes and the shipping industry globally during the first half of 2020. In
China, many of the COVID-19 restrictions and factory lockdowns persisted until December 2022. Moreover, because of COVID-19, and despite
the overall easing of supply chain congestion, ZIM still face risks to its personnel and operations. Such risks include delays in the
loading and discharging of cargo on or from ZIM’s vessels due to severe congestion at ports and inland supply chains, difficulties
in carrying out crew changes, off hire time due to quarantine regulations, delays and expenses in finding substitute crew members if any
of ZIM’s vessels’ crew members become infected, delays in drydocking if insufficient shipyard personnel are working due to
quarantines or travel restrictions, difficulties in procuring new containers due to temporary factory shutdowns and increased risk of
cyber-security threats due to ZIM’s employees working remotely. Fear of the virus and the efforts to prevent its spread continue
to exert increasing pressure on the supply-demand balance, which could also put financial pressure on ZIM’s customers and increase
the credit risk that ZIM faces in respect of some of them. Such events have affected ZIM’s operations and may have a material adverse
effect on its business, financial condition and results of operations. In addition, these and other impacts of the COVID-19 pandemic could
have the effect of heightening many of the other risk factors disclosed herein.
A
decrease in the level of China’s export of goods could have a material adverse effect on ZIM’s business.
According to the world shipping council (WSC),
the Asia trade regions represent approximately 70% of the total TEUs of international container trade, and the Intra-Asia trade alone
accounts for at least one quarter of the global market. Although ZIM also operates in many countries in Asia, the Far East and southeast
Asia (such as Vietnam, South Korea and Thailand), a significant portion of ZIM’s business originates from China and therefore depends
on the level of imports and exports to and from China. Trade tensions between the United States and China have intensified in recent years,
and trade restrictions have reduced bilateral trade between the United States and China and led to shifts in trade structure and reductions
in container trade. For more information on the risks related to US/China trade restrictions, see “Item
3.D—Risk factors—Risks Related to Our Interest in ZIM—ZIM’s
business may be adversely affected by trade protectionism in the markets that ZIM serves, particularly in China.” Furthermore,
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, seasonal decrease in manufacturing levels due to the Chinese New Year
holiday, factory shutdowns due to COVID-19 pandemic or other factors, could have a material adverse effect on ZIM’s business. For
instance, in recent years the Chinese government has implemented economic policies aimed at increasing domestic consumption of Chinese-made
goods and national security measures for Hong Kong which 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 price limit 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 government. Changes in laws and regulations, including
with regard to tax matters, and their implementation by local authorities could affect ZIM’s vessels calling on Chinese ports and
could have a material adverse effect on ZIM’s business, financial condition and results of operations.
Imbalance
between supply of global container ship capacity and demand may limit ZIM’s ability to operate its vessels profitably.
According to Alphaliner, as of
December 31,
2022, global container ship capacity was approximately 26 million TEUs, spread across approximately 5,700 vessels. Furthermore, global
container ship capacity is expected to increase by 8.2% in 2023, with a vessel order book of 7.5 million TEU, the highest since 2010,
while demand for shipping services is projected to increase only by 1.4%, therefore the increase in vessel capacity is expected to be
higher than the increase in demand for container shipping. During the second half of 2020 and in 2021 carriers resumed temporarily halted
service lines, performed additional sailings, and reduced the number of idle vessels to a minimum because of a significant increase in
demand and a market shift to consumption of goods over services. The increased demand for container shipping and inventory restocking
during 2021 persisted for a longer period than initially anticipated, leading to reduced port productivity, disrupted sailing schedule,
shortage of trucks, railways and warehousing capacity. Supply chain disruptions became a factor influencing demand and supply, while concerns
regarding the vaccine rates, turnaround in the pandemic, renewed waves and new variants of the virus continue to pose risk for future
worldwide demand. During 2022 demand declined partially due to reduction in consumption and higher interest rates, while both COVID-19
restrictions and congestion in ports have generally eased.
In an attempt to meet the sharp demand increase
during 2021, ZIM has expanded its operated vessel fleet from 87 vessels as of
January 1, 2021, to 150 vessels as of
December 31, 2022
(including eight purchased secondhand), as well as entered into strategic long term charter transactions. See
“Item
4.B Business Overview—Our Businesses—ZIM—Strategic
Chartering Agreements.”
Responses to changes in market conditions
may be slower as a result of the time required to build new vessels and adapt to market needs and due to the shortage of vessels in the
charter market. As shipping companies purchase vessels years in advance of their actual use to address expected demand, vessels may be
delivered during times of decreased demand (or oversupply if other carriers act in kind) or unavailable during times of increased demand,
leading to a supply/demand mismatch. The container shipping industry may face oversupply in the coming years and numerous other factors
beyond ZIM’s control may also contribute to increased capacity, including deliveries of new, refurbished or converted vessels, as
a response to, among other factors, port and canal congestion, any increase 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, drydocked, or are otherwise
not available for hire) as well as decreased scrapping levels of older vessels. In the event of overcapacity, there is no guarantee that
measures of blank sailings and redelivery of chartered vessels will prove successful, partially or at all in mitigating the gap between
excess supply and demand. Excess capacity generally depresses freight rates and can lead to lower utilization of vessels, which may adversely
affect ZIM’s revenues and costs of operations, profitability and asset values. Overcapacity can cause the industry 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.
Access
to ports could be limited or unavailable, including due to congestion in terminals and inland supply chains, and ZIM may incur additional
costs as a result thereof.
Global development of new terminals continues
to be outpaced by the increase in demand. In addition, the increasing vessel size of containership newbuilding has forced adjustments
to be made to existing container terminals. As such, existing terminals are coping with high berth utilization and space limitations of
stacking yards, which are at near-full capacity. This results in longer cargo operations times for the vessels and port congestion, which
could increase operational costs and have a material adverse effect on affected shipping lines. Decisions about container terminal expansion
and port access are made by national or local governments and are outside of ZIM’s control. Such decisions are based on local policies
and concerns and the interests of the container shipping industry may not be considered.
ZIM’s access to ports may also be limited
or unavailable due to other reasons. As industry capacity and demand for container shipping continue to grow, ZIM may have difficulty
in securing sufficient berthing windows to expand its operations in accordance with its growth strategy, due to the limited availability
of terminal facilities.
ZIM’s status as an Israeli company has
limited, and may continue to limit, its ability to call on certain ports. Furthermore, major ports may close for long periods of time
due to maintenance, natural disasters, strikes, pandemics, including COVID-19, or other reasons beyond ZIM’s control. The COVID-19
pandemic has caused disruptions to global trade and severe congestion at ports and inland supply chains. Ports and terminals may implement
certain measures and work procedures intended to relieve congestion which may also limit ZIM’s access to terminals and apply additional
costs to it or to its customers. For example, in October 2021 the port of Los Angeles and the port of Long Beach, California, together
with the Biden-Harris Supply Chain Disruptions Task Force, U.S. Department of Transportation, introduced a new dwell fee to be applied
against containers that remained in the terminal longer than a specified permitted amount of days. While the implementation date of this
dwell fee was delayed several times as congestion conditions improved until it was finally terminated on
January 24, 2023, similar congestion
related charges have been declared by the port in New York and New Jersey and the Houston Port Authority in August and September 2022.
Although ZIM has taken measures to relieve congestion at these and other ports and to avoid dwell fee and similar charges, dwell fees
or similar charges and other measures may be imposed in additional ports and terminals in other geographical areas, and ZIM may not be
able to recover or mitigate the additional costs by applying similar charges on ZIM’s customers. Although port, terminal and inland
supply chain congestion generally eased during the second half of 2022, macroeconomic and geopolitical factors such as accelerating inflation,
high energy costs and the Russian-Ukraine conflict may place pressure on terminals to increase their services rates, thereby increasing
ZIM’s operational costs. ZIM cannot ensure that its efforts to secure sufficient port access will be successful. Any of these factors
may have a material adverse effect on ZIM’s business, financial condition and results of operations.
Changing
trading patterns, trade flows and sharpening trade imbalances may adversely affect ZIM’s business, financial condition and results
of operations.
ZIM’s TEUs carried can vary depending
on the balance of trade flows between different world regions. For each service ZIM operates, it measures the utilization of a vessel
on the “strong,” or dominant, leg, as well as on the “weak,” or counter-dominant, leg by dividing the actual number
of TEUs carried on a vessel by the vessel’s effective capacity. Utilization per voyage is generally higher when transporting cargo
from net export regions to net import regions (the dominant leg). Considerable expenses may result when empty containers must be transported
on the counter-dominant leg. ZIM seeks to manage the container repositioning costs that arise from the imbalance between the volume of
cargo carried in each direction by utilizing its global network to increase cargo on the counter-dominant leg and by triangulating its
land transportation activities and services. If ZIM is unable to successfully match demand for container capacity with available capacity
in nearby locations, it may incur significant balancing costs to reposition its containers in other areas where there is demand for capacity.
It is not guaranteed that ZIM will always be successful in minimizing the costs resulting from the counter-dominant leg trade, which could
have a material adverse effect on ZIM’s business, financial condition and results of operations. Furthermore, sharpening imbalances
in world trade patterns—rising trade deficits of net import regions in relation to net export regions — may exacerbate imbalances
between the dominant and counter-dominant legs of ZIM’s services. This could have a material adverse effect on ZIM’s business,
financial condition and results of operations.
ZIM’s
ability to participate in operational partnerships in the shipping industry is limited, which may adversely affect its business, and ZIM
or the 2M Alliance, which recently announced its termination in January 2025, can unilaterally terminate the agreement earlier than January
2025 by providing a six-month prior written notice following a period of 12 months from April 2022, the effective date of the agreement.
The container shipping industry has experienced
a reduction in the number of major carriers, and until recently, a continuation and increase 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 2016, CSCL was acquired by COSCO, APL-NOL was acquired by CMA CGM, United Arab Shipping Company merged
with Hapag-Lloyd and Hanjin Shipping exited the market as a result of a bankruptcy, during 2017, Hamburg Sud was acquired by Maersk, three
large Japanese carriers, K-Line, MOL and NYK merged into ONE and OOCL was acquired by COSCO, and in April 2020, Hyundai Merchant Marine
(HMM) consummated the termination of its strategic cooperation with 2M and joined THE Alliance. Past 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 in 2019 and replaced by the Ocean Alliance,
consisting of COSCO Shipping Group (including China Shipping and OOCL), CMA CGM Shipping Group (including APL) and Evergreen Marine. In
January 2023, the 2M Alliance members, MSC and Maersk, announced that the 2M Alliance will be terminated in January 2025, and it is not
yet known how this will affect other existing alliances, if at all.
ZIM is currently not party to any strategic
alliances and therefore has not been able to achieve the benefits associated with being a member of such an alliance. If, in the future,
ZIM would like to enter into a strategic alliance but is unable to do so, it may be unable to achieve the cost and other synergies that
can result from such alliances. However, ZIM is party to operational partnerships with other carriers in some of the trade zones in which
it operates, including a strategic operational agreement with the 2M Alliance, and may seek to enter into additional operational partnerships
or similar arrangements with other shipping companies or local operators, partners or agents.
In September 2018, ZIM entered into a strategic
operational cooperation agreement with the 2M Alliance in the Asia-U.S. East Coast (“USEC”) trade zone, which was expanded
to additional services in other trades between 2019-2022. In April 2022, ZIM amended its agreement with the 2M Alliance to extend the
existing collaboration agreements on the Asia- USEC and Asia-U.S. Gulf Coast (“USGC”), as well as launched two independent
services on the Asia-Mediterranean and Pacific Northwest trades, replacing its cooperation with the 2M Alliance on those trades. In accordance
with the 2M Alliance announcement, the 2M Alliance will terminate in January 2025. Furthermore, under ZIM’s new collaboration agreement
with the 2M which went into effect in April 2022, ZIM or the 2M Alliance may terminate the agreement after the first 12 months of the
agreement term (by providing a six-month prior written notice following a 12-month period from the effective date of the agreement), which
is a shorter period compared to the 2018 original agreement terms. For additional information on ZIM’s strategic operational cooperation
with the 2M Alliance, see “Item 4.B—Business Overview—ZIM’s
operational partnerships.” The termination of ZIM’s existing operational agreements, including with the 2M Alliance,
or any future cooperation agreement it may enter into, could adversely affect its business, financial condition and results of operations.
These strategic cooperation agreements and
other arrangements could also 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 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 (i.e., strategic alliances or operational agreements). 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, its ability to enter into alliances
or operational partnerships with certain shipping companies. In addition, ZIM’s existing collaboration with the 2M Alliance may
limit its ability to enter into alliances or other certain operational agreements. If ZIM is not successful in expanding or entering into
additional operational partnerships which are beneficial to ZIM, this could adversely affect its business.
ZIM’s
business may be adversely affected by trade protectionism in the markets that ZIM serves, particularly in China.
ZIM’s operations are exposed to the
risk of increased trade protectionism. Governments may use trade barriers in an effort to protect their domestic industries against foreign
imports, thereby further depressing demand for container shipping services. In recent years, increased trade protectionism in the markets
that ZIM accesses and serves, particularly in China, where a significant portion of its business originates, has caused, and may continue
to cause, increases in the cost of goods exported and the risks associated with exporting goods as well as a decrease in the quantity
of goods shipped. In November 2020 China and additional 15 countries in the Asia-Pacific region entered into the largest free trade pact,
the RCEP Regional Comprehensive Economic Partnership, which is expected to strengthen China’s position on trade protectionism related
matters. China’s import and export of goods may continue to be affected by trade protectionism, specifically the ongoing U.S.-China
trade dispute, which has been characterized by escalating trade barriers between the U.S. and China as well as trade relations among other
countries. These risks may have a direct impact on demand in the container shipping industry. In January 2020 China and the U.S. reached
an agreement aimed at easing the trade war. However, there is no assurance that further escalation will be avoided.
The U.S. administration has advocated greater
restrictions on trade generally and significant increases on tariffs on certain goods imported into the United States, particularly from
China and has taken steps toward restricting trade in certain goods. China and other countries have retaliated in response to new trade
policies, treaties and tariffs implemented by the United States. China has imposed significant tariffs on U.S. imports since 2018. Such
trade escalations have had, and may continue to have, an adverse effect on manufacturing levels, trade levels and specifically, may cause
an increase in the cost of goods exported from Asia Pacific 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. Further, increased
tensions may adversely affect oil demand, which would have an adverse effect on shipping rates. They could also result in an increased
number of vessels sailing 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 maritime shipping. In addition, there is uncertainty regarding further trade agreements
such as with the EU, trade barriers or restrictions on trade in the United States. Any increased trade barriers or restrictions on trade
may affect the global demand for ZIM’s services and could have a material adverse effect on its business, financial condition and
results of operations.
The
container shipping industry is highly competitive and competition may intensify even further, which could negatively affect ZIM’s
market position and financial performance.
ZIM competes with a large number of global,
regional and niche container shipping companies, including, for example, Maersk, MSC, COSCO Shipping, CMA CGM S.A., Hapag-Lloyd AG, ONE
and Yang Ming Marine Transport Corporation to provide transport services to customers worldwide. In each of its key trades, ZIM competes
primarily with global container shipping companies. The cargo shipping industry is highly competitive, with the top three carriers in
terms of global capacity — A.P. Moller-Maersk Group, Mediterranean Shipping Company and CMA CGM — accounting for approximately
46.3% of global capacity, and the remaining carriers together contributing less than 53.7% of global capacity as of
December 31, 2022,
according to Alphaliner. Certain of ZIM’s large competitors may be better positioned and have greater financial resources than ZIM
and may therefore be able to offer more attractive schedules, services and rates. Some of these competitors operate larger fleets with
larger vessels and with higher vessel ownership levels than ZIM and may be able to gain market share by supplying their services at aggressively
low freight rates for a sustained period of time. In addition, mergers and acquisition activities within the container shipping industry
in recent years have further concentrated global capacity with certain of ZIM’s competitors. See
“Item
3.D Risk Factors—Risks Related to Our Interest in ZIM—ZIM’s
ability to participate in operational partnerships in the shipping industry is limited, which may adversely affect ZIM’s business,
and ZIM or the 2M Alliance, which recently announced its termination in January 2025, can unilaterally terminate the agreement by providing
a six-month prior written notice following a period of 12 months from April 2022, the effective date of the agreement.” If
one or more of ZIM’s competitors expands its market share through an acquisition or secures a better position in an attractive niche
market in which ZIM operates or intends to enter, ZIM could lose market share as a result of increased competition, which in turn could
have a material adverse effect on ZIM’s business, financial condition and results of operations.
ZIM
may be unable to retain existing customers or may be unable to attract new customers.
ZIM’s continued success requires it
to maintain its current customers and develop new relationships. ZIM cannot guarantee that its customers will continue to use its services
in the future or at the current level. ZIM may be unable to maintain or expand its relationships with existing customers or to obtain
new customers on a profitable basis due to competitive dynamics, especially in periods of market downturn. In addition, as some of its
customer
contracts are longer-term in nature (up to one year), if market freight rates increase, ZIM may not be able to adjust the contractually
agreed rates to capitalize on such increased freight rates until the existing
contracts expire, while if freight rates decline below the
agreed
contract terms ZIM may face pressure from its customers to adjust the
contract rates to the prevailing market rates. Upon the expiration
of its existing
contracts, ZIM cannot assure you that its customers will renew the
contracts on favorable terms, or if at all, or that
it will be able to attract new customers. Any adverse effect would be exacerbated if ZIM loses one or more of its significant customers.
In 2022, ZIM’s 10 largest customers represented approximately 16% of its freight revenues and its 50 largest customers represented
approximately 31% of its freight revenues. Although ZIM believes it currently has a diversified customer base, its may become dependent
upon a few key customers in the future, especially in particular trades, such that ZIM would generate a significant portion of its revenue
from a relatively small number of customers. Any inability to retain or replace its existing customers may have a material adverse effect
on ZIM’s business, financial condition, and results of operations.
Technological
developments which affect global trade flows and supply chains are challenging some of ZIM’s largest customers and may therefore
affect its business and results of operations.
By reducing the cost of labor through automation
and digitization and empowering consumers to demand goods whenever and wherever they choose, technology is changing the business models
and production of goods in many industries, including those of some of ZIM’s largest customers. Consequently, supply chains are
being pulled closer to the end-customer and are required to be more responsive to changing demand patterns. As a result, fewer intermediate
and raw inputs are traded, which could lead to a decrease in shipping activity. If automation and digitization become more commercially
viable and/or production becomes more regional or local, total containerized trade volumes would decrease, which would adversely affect
demand for ZIM’s services. Supply chain disruptions caused by COVID-19, rising tariff barriers and environmental concerns also accelerate
these trends.
ZIM
relies on third-party contractors and suppliers, as well as its partners and agents, to provide various products and services and unsatisfactory
or faulty performance of its contractors, suppliers, partners or agents could have a material adverse effect on its business.
ZIM engages third-party contractors, partners
and agents to provide services in connection with its business. An important example is its chartering-in of vessels from ship owners,
whereby the ship owner is obligated to provide the vessel’s crew, insurance and maintenance along with the vessel. Another example
is ZIM’s carriers partners whom it relies on for their vessels and service to deliver cargo to its customers, as well as third-party
agencies who serve as its local agents in specific locations. Disruptions caused by third-party contractors, partners and agents could
materially and adversely affect ZIM’s operations and reputation.
Additionally, a work stoppage at any one of
its suppliers, including ZIM’s land transportation suppliers, could materially and adversely affect its operations if an alternative
source of supply were not readily available. Also, ZIM outsources part of its back-office functions to a third-party contractor. The back-office
support center may shut down due to various reasons beyond ZIM’s control, which could have an adverse effect on ZIM’s business.
There can be no assurance that the products delivered and services rendered by ZIM’s third-party contractors and suppliers will
be satisfactory and match the required quality levels. Furthermore, major contractors or suppliers may experience financial or other difficulties,
such as natural disasters, terror attacks, failure of information technology systems or labor stoppages, which could affect their ability
to perform their contractual obligations to ZIM, either on time or at all. Any delay or failure of ZIM’s contractors or suppliers
to perform their contractual obligations to ZIM could have a material adverse effect on ZIM’s business, financial condition, results
of operations and liquidity.
A
shortage of qualified sea and shoreside personnel could have an adverse effect on ZIM’s business and financial condition
ZIM’s success depends, in large part,
upon its ability to attract and retain highly skilled and qualified personnel, particularly seamen and coast workers who deal directly
with activities related to vessel operation and sailing. In crewing its vessels, ZIM requires professional and technically skilled employees
with specialized training who can perform physically demanding work on board its vessels. As the worldwide container ship fleet continues
to grow, the demand for skilled personnel has been increasing, which has led to a shortfall of such personnel. An inability to attract
and retain qualified personnel as needed could materially impair ZIM’s ability to operate, or increase its costs of operations,
which could adversely affect its business, financial condition, results of operations and liquidity. Furthermore, due to the COVID-19
pandemic, the shipping industry as a whole is experiencing difficulties in carrying out crew changes, which could impede ZIM’s ability
to employ qualified personnel.
Risks Related to Operating
ZIM’s Vessel Fleet
ZIM
charters-in most of its fleet, which makes it more sensitive to fluctuations in the charter market, and as a result of its dependency
on the vessel charter market, the costs associated with chartering vessels are unpredictable.
ZIM charters-in most of its fleet. As of
December
31, 2022, of the 150 vessels through which it provides transport services globally, 141 are chartered (including 136 vessels accounted
as right-of-use assets under the accounting guidance of IFRS 16 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 of 45.3% (according to Alphaliner).
Any rise in charter hire rates could adversely affect ZIM’s results of operations.
While there have been fluctuations in the
demand in the container shipping market, during 2021 and the first half of 2022, charter demand was very high for all vessel sizes, leading
to an imbalance in supply and demand and a shortage of vessels available for hire, increased charter rates and longer charter periods
dictated by owners, and ZIM has taken steps to increase its vessel capacity in response. See “Item
4.B—Business Overview—ZIM—ZIM’s
vessel fleet.” Since September 2022, charter hire rates have been normalizing with vessel availability for hire still very
low. According to Clarksons Research, charter hire rates are expected to continue to fall to average or below average historical levels
in 2023 (compared to the highs of 2021 and first half of 2022).
ZIM is a party to a number of other long-term
charter agreements and may enter into additional long-term agreements based on its assessment of current and future market conditions
and trends. As of
December 31, 2022, 80.9% of ZIM’s chartered-in vessels (or 83.1% in terms of TEU capacity) have a remaining charter
period that exceeds one year, and it may be unable to take full advantage of short-term reductions in charter hire rates with respect
to such longer-term charters. In addition, in the future ZIM may substitute a short-term charter of one year or less with a long-term
charter exceeding one year, which could cause its costs to increase quickly compared to competitors with longer-term charters or owned
vessels. To the extent ZIM replaces vessels that are chartered-in under short-term leases with vessels that are chartered-in under long-
term leases or that are owned by ZIM, the principal amount of its long-term contractual obligations would increase. There can be no assurance
that the terms of any such long- term leases will be favorable to ZIM in the long run.
ZIM
may face difficulties in chartering or owning enough vessels in the future, including large vessels, to support its growth strategy due
to the possible shortage of vessel supply in the market.
Charter rates for container and car carrier
vessels are volatile. 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 it, if at all, this may have a material adverse effect on its business, financial condition, results of
operations and liquidity. Furthermore, 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 as, among other factors, larger vessels provide increased capacity and fuel efficiency per carried TEU. As a result,
carriers are encouraged to deploy large vessels, particularly within the more competitive trades. According to Alphaliner, vessels in
excess of 12,500 TEUs represented approximately 69% of the current global orderbook based on TEU capacity as of
December 31, 2022, and
approximately 35% of the global fleet based on TEU capacity will consist of vessels in excess of 12,500 TEUs by
December 31, 2023. Furthermore,
a significant introduction of large vessels, including very large vessels in excess of 18,000 TEUs, into any trade, will enable the transfer
of existing, large vessels to other shipping lines on which smaller vessels typically operate. Such transfer, which is referred to as
“fleet cascading,” may in turn generate similar effects in the smaller trades in which ZIM operates. Other than its strategic
agreement with Seaspan Corporation for the long-term charter of ten 15,000 TEU liquified natural gas (
“LNG”) dual-fuel container
vessels (see “
Item 4.B Business Overview—
Our Businesses—
ZIM—
Strategic
Chartering Agreements”), ZIM does not currently have additional agreements in place to procure or charter-in large container
vessels (in excess of 12,500 TEU), and the continued deployment of larger vessels by its competitors will adversely impact ZIM’s
competitiveness if it is not able to charter-in, acquire or obtain financing for such vessels on attractive terms or at all. This risk
is further exacerbated as a result of ZIM’s difficulties faced in participating in certain alliances and thereby accessing lager
vessels for deployment. Even if ZIM is able to acquire or charter-in larger vessels, it cannot assure you it will be able to achieve utilization
of its vessels necessary to operate such vessels profitably.
Rising
energy and bunker prices (including LNG) may have an adverse effect on ZIM’s results of operations.
Fuel and energy expenses, in particular bunker
expenses, represent a significant portion of ZIM’s operating expenses, accounting for 30.1%, 18.9% and 2.8% of ZIM’s operating
expenses and cost of services for the years ended
December 31, 2022,
2021 and
2020, respectively. Bunker price moves in close interdependence
with crude oil prices, which have historically exhibited significant volatility. 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, the US-China trade war, the Russian-Ukraine conflict and sanctions enacted on seaborne imports of Russian crude oil and petroleum
product, concerns related to the global recession and financial turmoil, rising inflation, interest rates fluctuations, policies of the
Organization of the Petroleum Exporting Countries (OPEC) and other oil producing countries and production cuts, sanctions on Iran by the
US, consumption levels of other transportation industries such as the aviation, rail and car industries, and ongoing political tensions
and acts of terror in key production countries such as Libya, Nigeria and Venezuela. Crude oil prices have decreased significantly from
annual level of $64 per barrel in 2019 to an average price of $42 per barrel in 2020, due in part to decreased demand as a result of the
COVID-19 pandemic and the changing dynamics among OPEC+ members, however, during 2021 crude oil prices have increased to an annual average
of $71 per barrel. The recent military conflict between Russia and Ukraine led to an immediate sharp increase in bunker prices, and bunker
prices may increase even further if this conflict continues. In 2022, the price of crude oil further increased to an average price of
$100 per barrel.
In accordance with its ESG strategy and strategic
long-term charter agreements, ZIM expects 28 LNG dual fuel container vessels to be delivered to ZIM during 2023-2024. In August 2022 ZIM
has announced the signing of a ten-year marine LNG sale and purchase agreement with Shell NA LNG, LLC, or Shell, to supply LNG to ZIM’s
operated ten 15,000 TEU LNG vessels chartered from Seaspan, to be deployed on ZIM’s Container Service Pacific (“ZCP”)
on the Asia-USEC trade. In accordance with the agreement, Shell agreed to sell and deliver, and ZIM agreed to purchase and accept, LNG
in quantities, quality, specifications, and prices as specified in the agreement. The agreement is for a period of ten years from the
date of the first bunkering operation executed by the parties. This agreement may be terminated with immediate effect by either party
in the event of a material breach by the other party that has not been cured within 30 days of written notice thereof. This sale and purchase
agreement is estimated by ZIM to be valued at more than one billion U.S. Dollars for its ten-year term. If this agreement is terminated
(due to a breach of either party), ZIM may not be able to supply ZIM’s 15,000 TEU long termed chartered vessels with enough of LNG
fuel required for their operation, and ZIM will need to shift back to crude oil-based fuels, and alternatively, ZIM may be required to
buy LNG at the then market terms, which could be on worse terms for ZIM compared to the terms of ZIM’s agreement with Shell. Furthermore,
ZIM’s operations may be significantly affected by the supply and demand conditions of the LNG global trade market, and ZIM will
need to rely on other LNG suppliers to supply LNG for ZIM’s other LNG container vessels.
The IMO 2020 Regulations entered into effect
on
January 1, 2020, require all ships to burn fuel with a maximum sulfur content of 0.5%, which is a significant reduction from the previous
threshold of 3.5%. In addition, certain countries around the world require ships to burn fuel with a maximum sulfur content of 0.1% upon
entry to territorial waters. The IMO 2020 Regulation led to increased demand for low sulfur fuel and higher prices for such bunker compared
to the price ZIM would have paid had the IMO 2020 Regulations not been adopted. Most of the vessels chartered by ZIM do not have scrubbers,
which means ZIM is required to purchase low sulfur fuel for its vessels. ZIM’s vessels began operating on 0.5% low sulfur fuel during
the fourth quarter of 2019, and as a result, ZIM implemented a New Bunker Factor (the
“NBF”) surcharge, in December 2019,
intended to offset the additional costs associated with compliance with the IMO 2020 Regulations. However, there is no assurance that
this surcharge will enable ZIM to mitigate the possible increased costs in full or at all. As a result of the IMO 2020 Regulations and
any future regulations with which ZIM must comply, it may incur substantial additional operating costs.
A rise in bunker prices (including LNG) could
have a material adverse effect on ZIM’s business, financial condition, results of operations and liquidity. Historically and in
line with industry practice, ZIM has imposed from time to time surcharges such as the NBF over the base freight rate it charges to customers
in part to minimize its exposure to certain market-related risks, including bunker price adjustments. However, there can be no assurance
that ZIM will be successful in passing on future price increases 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, vessel capacity, pro forma speed, 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, trim optimization, hull and propeller polishing
and sailing rout optimization. Additionally, ZIM may sometimes manages part of its exposure to bunker price fluctuations by entering into
hedging arrangements with reputable counterparties. ZIM’s optimization strategies and hedging activities 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, if taken, will be cost-effective, will provide sufficient protection, if any, against rises in bunker prices or that ZIM’s
counterparties will be able to perform under its hedging arrangements.
As
vessel owners ZIM may incur additional costs and liabilities for the operation of its vessel fleet.
Although ZIM charters most of its fleet, ZIM
currently owns and operates nine vessels, eight of which were purchased during 2021 in several separate transactions, and ZIM may purchase
additional vessels, depending on market terms and conditions and on its operational needs. As a vessel owner, ZIM may incur additional
costs due to maintenance and regulatory requirements. In addition, as vessel owners, ZIM may be exposed to higher risks due to its responsibility
to the crew and operational condition of the vessel. ZIM intends to mitigate these vessel owner liability risks by acquiring adequate
insurance policy, however its insurance policy may not cover all or part of its costs (see also below “Item
3.D Risk Factors—Risks Related to Operating ZIM’s Vessel Fleet—ZIM’s insurance may be insufficient to cover losses
that may occur to its property or result from its operations”).
There
are numerous risks related to the operation of any sailing vessel and ZIM’s inability to successfully respond to such risks could
have a material adverse effect on it.
There are numerous risks related to the operation
of any sailing vessel, including dangers associated with potential marine disasters, mechanical failures, collisions, lost or damaged
cargo, poor weather conditions (including severe weather events resulting from climate change), the content of the load, exceptional load
(including dangerous and hazardous cargo or cargo the transport of which could affect ZIM’s reputation), meeting deadlines, risks
of documentation, maintenance and the quality of fuels and piracy. For example, ZIM incurred expenses of $15.2 million in respect of claims
and demands for lost and damaged cargo, vessels and war risks for the year ended
December 31, 2022. Such claims are typically insured
and ZIM’s deductibles, both individually and in the aggregate, are typically immaterial. In addition, in the past, ZIM’s vessels
have been involved in collisions resulting in loss of life and property as well as weather related events which damaged its cargo. For
example, in October 2021, ZIM Kingston, one of its chartered vessels, experienced a collapse and loss of containers due to bad weather
which also resulted in a fire erupting onboard while approaching the port of Vancouver. Both vessel and cargo suffered damages, however
no personal injuries were involved.
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 it may
not be adequately insured against any of these risks. For more information about ZIM’s insurance coverage, see “Item
3.D Risk Factors—Risks Related to Operating ZIM’s Vessel Fleet—ZIM’s insurance may be insufficient to cover losses
that may occur to ZIM’s property or result from its operations.” For example, acts of piracy have historically affected
oceangoing vessels trading in several regions around the world. Although both the frequency and success of attacks have diminished recently,
potential acts of piracy continue to be a risk to the international container shipping industry that requires vigilance. Additionally,
ZIM’s vessels may be subject to attempts by smugglers to hide drugs and other contraband onboard. If its vessels are found with
contraband, whether with or without the knowledge of any of its crew, ZIM may face governmental or other regulatory claims or penalties
as well as suffer damage to its reputation, which could have an adverse effect on its business, results of operations and financial condition.
ZIM’s
insurance may be insufficient to cover losses that may occur to its property or result from its operations.
The operation of any vessel includes risks
such as mechanical failure, collision, fire, contact with floating objects, property loss, cargo loss or damage and business interruption
due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility
of a marine disaster, including oil spills and other environmental mishaps. There are also liabilities arising from owning and operating
vessels in international trade. ZIM procures insurance for its fleet in relation to risks commonly insured against by operators and vessel
owners, which ZIM believes is adequate. ZIM’s current insurance includes (i) hull and machinery insurance covering damage to ZIM’s
and third-party vessels’ hulls and machinery from, among other things and collisions (ii) war risks insurance covering losses associated
with the outbreak or escalation of hostilities and (iii) protection and indemnity insurance, entered with reputable protection and indemnity,
or P&I, clubs covering, among other things, third-party and crew liabilities such as expenses resulting from the injury or death of
crew members, passengers and other third parties, lost or damaged cargo, third-party claims in excess of a vessel’s insured value
arising from collisions with other vessels, damage to other third-party property including fixed and floating objects, in excess of a
vessel’s insured value and pollution arising from oil or other substances.
While all of its insurers and P&I clubs
are highly reputable, ZIM can give no assurance that it is adequately insured against all risks or that its insurers will pay a particular
claim. Even if its insurance coverage is adequate to cover its losses, ZIM may not be able to obtain a timely replacement vessel or other
equipment in the event of a loss. Under the terms of ZIM’s financing agreements, insurance proceeds are pledged or assigned in favor
of the creditor who financed the respective vessel. In addition, there are restrictions on the use of insurance proceeds ZIM may receive
from claims under its insurance policies. ZIM may also be subject to supplementary calls, or premiums, in amounts based not only on its
own claim records but also the claim records of all other members of the P&I clubs through which ZIM receives indemnity insurance
coverage. There is no cap on ZIM’s liability exposure for such calls or premiums payable to its P&I clubs, even though unexpected
additional premiums are usually at reasonable levels as they are distributed among a large number of ship owners. ZIM’s insurance
policies also contain deductibles, limitations and exclusions which, although ZIM believes are standard in the shipping industry, may
nevertheless increase its costs. While ZIM does not operate any tanker vessels, a catastrophic oil spill or a marine disaster could, under
extreme circumstances, exceed its insurance coverage, which might have a material adverse effect on ZIM’s business, financial condition
and results of operations.
Any uninsured or underinsured loss could harm
ZIM’s business and financial condition. In addition, the insurance may be voidable by the insurers as a result of certain actions,
such as vessels failing to maintain required certification. Further, ZIM does not carry loss of hire insurance. Loss of hire insurance
covers the loss of revenue during extended vessel off-hire periods, such as those that occur during an unscheduled drydocking due to damage
to the vessel from accidents. Any loss of a vessel or any extended period of vessel off-hire, due to an accident or otherwise, could have
an adverse effect on ZIM’s business, financial condition and results of operations.
Maritime
claimants could arrest ZIM’s vessels, which could have a material adverse effect on its business, financial condition and results
of operations.
Crew members, suppliers of goods and services
to a vessel, shippers or receivers of cargo, vessel owners and lenders and other parties may be entitled to a maritime lien against a
vessel for unsatisfied debts, claims or damages, including, in some jurisdictions, for debts incurred by previous owners. In many jurisdictions,
a maritime lienholder may enforce its lien by vessel arrest proceedings. Unless such claims are settled, vessels may be subject to foreclosure
under the relevant jurisdiction’s maritime court regulations. In some jurisdictions, under the “sister ship” theory
of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated”
vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against
one vessel in ZIM’s fleet for claims relating to another of its vessels. The arrest or attachment of one or more of ZIM’s
vessels could interrupt its business or require ZIM to pay or deposit large sums to have the arrest lifted, which could have a material
adverse effect on ZIM’s business, financial condition and results of operations.
Governments,
including that of Israel, could requisition ZIM’s vessels during a period of war or emergency, resulting in loss of earnings.
A government of the jurisdiction where one
or more of ZIM’s vessels are registered, as well as a government of the jurisdiction where the beneficial owner of the vessel is
registered, could requisition for title or seize ZIM’s vessels. Requisition for title occurs when a government takes control of
a vessel and becomes its owner. A government could also requisition ZIM’s vessels for hire. Requisition for hire occurs when a government
takes control of a ship and effectively becomes the charterer at dictated charter rates. Requisitions generally occur during periods of
war or emergency, although governments may elect to requisition vessels in other circumstances. ZIM would expect to be entitled to compensation
in the event of a requisition of one or more of its vessels; however, the amount and timing of payment, if any, would be uncertain and
beyond ZIM’s control. For example, ZIM’s chartered-in and owned vessels, including those that do not sail under the Israeli
flag, may be subject to control by Israeli authorities in order to protect the security of, or bring essential supplies and services to,
the State of Israel. Government requisition of one or more of ZIM’s vessels could have a material adverse effect on its business,
financial condition and results of operations.
Risks Related to Regulation
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 it operates, including those of the State of Israel, the United States, 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 ZIM’s “time-limited” licenses. Furthermore, the U.S. Department
of the Treasury’s Office of Foreign Assets Control, or OFAC, 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 ZIM to fines, penalties
and other sanctions. For additional information, see “Item 4.B—Business Overview—Our
Businesses—ZIM—ZIM’s Regulatory Matters.”
ZIM
is subject to competition and antitrust regulations in the countries where it operates, and has been subject to antitrust investigations
by competition authorities. Moreover, the sharp increase in freight rates and related charges during 2021 and the first half of 2022 has
resulted in increased scrutiny by regulators around the world and ZIM may face antitrust investigations.
ZIM is subject to competition and antitrust
regulations in each of the countries where it operates. In most of the jurisdictions in which ZIM operates, operational partnerships among
shipping companies are generally exempt from the application of antitrust laws, subject to the fulfillment of certain exemption requirements.
However, it is difficult to predict whether existing exemptions or their renewal will be affected in the future. ZIM is a party to numerous
operational partnerships and views 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
it relies on could negatively affect its business and results of operations. For example, Commission Regulation (EC) No 906/2009, or the
Consortia Block Exemption Regulation (“CBER”), exempts certain cooperation agreements in the liner shipping sector (such as
operational cooperation agreements), from the prohibition on anti-competitive agreements contained at Article 101 of the Treaty on the
Functioning of the European Union. This Block Exemption Regulation is due to expire in April 2024. During 2022, the European Union launched
a legal review of the CBER to decide whether to renew, modify or allow the CBER to lapse. The EU competition authority, or the DG Competition,
is expected to publish its conclusions on the future of the CBER following a call for evidence published to industry stakeholders, with
most of the responses received arguing for either modification or non-renewal of the CBER. 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 ZIM’s ability to enter into cooperation
arrangements with other shipping companies and effectively compete with other carriers, which could adversely affect its business, financial
condition and results of operations. In addition, the non-renewal or modification of the existing CBER is expected to adversely affect
the review and renewal processes of similar block exemptions regulations in other jurisdictions, and the uncertainty of the future of
the CBER may contribute to the shortening of block exemption regulation effective periods in other jurisdictions.
The spike in freight rates and related charges
during the previous two years has resulted in increased scrutiny and enforcement actions by governments and regulators around the world,
including U.S. President Biden’s administration and the Federal Maritime Commission (the “FMC”), as well as the ministry
of transportation in China. In the U.S., the Ocean Shipping Reform Act of 2022 (OSRA) signed into law in June 2022 mandates a series of
rulemaking projects by the FMC and requires carriers to immediately implement certain requirements in detention and demurrage invoices,
which may affect ZIM’s ability to effectively collect these fees from ZIM’s customers, heighten the risk of civil litigation
against ZIM and adversely affect its financial results. If ZIM is found to be in violation of the applicable regulation, it could be subject
to various sanctions, including monetary sanctions.
In recent years, a number of liner shipping
companies, including ZIM, have been the subject of antitrust investigations in the U.S., the EU and other jurisdictions into possible
anti-competitive behavior. Although ZIM has taken measures to fully comply with antitrust regulatory requirements and have adopted a comprehensive
antitrust compliance plan, which includes, among others, mandatory periodic employee trainings, ZIM may face investigations from time
to time, and, if it is found to be in violation of the applicable regulation, ZIM could be subject to criminal, civil and monetary sanctions,
as well as related legal proceedings.
ZIM is also subject from time to time to civil
litigation relating, directly or indirectly, to alleged anti-competitive practices and may be subject to additional investigations by
other competition authorities. Particularly, in September 2022 an FMC complaint was filed against ZIM claiming it overcharged detention
and demurrage fees in violation of the FMC’s interpretive Rule on Detention and Demurrage of
May 18, 2020, and is currently in preliminary
stages. These types of claims, actions or investigations could continue to require significant management time and attention and could
result in significant expenses as well as unfavorable outcomes which could have a material adverse effect on ZIM’s business, reputation,
financial condition, results of operations and liquidity. For further information, see “
Item 4.B—Business
Overview—Our Businesses—ZIM— Legal
Proceedings” and Note 27 to ZIM’s audited consolidated financial statements included elsewhere in this annual report.
ZIM
could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws outside of the United
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 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. ZIM’s anti- bribery and anti-corruption plan mandate compliance with these anti-bribery
laws, establishes anti bribery and anti-corruption policies and procedures, imposes mandatory training on its employees and enhances reporting
and investigation procedures. ZIM operates in many parts of the world that are recognized as having governmental and commercial corruption.
ZIM cannot assure you that its internal control policies and procedures will protect it from reckless or criminal acts committed by its
employees or third-party intermediaries. In the event that ZIM believes or has reason to believe that its employees or agents have or
may have violated applicable anti-corruption laws, including the FCPA, ZIM may be required to 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 or other restrictions
which could disrupt ZIM’s business and have a material adverse effect on its business, financial condition, results of operations
or liquidity.
Increased
inspection procedures, tighter import and export controls and new security regulations could increase costs and disrupt ZIM’s business.
International container shipments are subject
to security and customs inspection and related procedures in countries of origin, destination, and certain transshipment points. These
inspection procedures can result in cargo seizures, delays in the loading, offloading, transshipment, or delivery of containers, and the
levying of customs duties, fines or other penalties against ZIM as well as damage its reputation. Changes to existing inspection and security
procedures could impose additional financial and legal obligations on ZIM or its customers and may, in certain cases, render the shipment
of certain types of cargo uneconomical or impractical. Any such changes or developments may have a material adverse effect on ZIM’s
business, financial condition and results of operations.
The operation of its vessels is also affected
by the requirements set forth in the International Ship and Port Facility Security Code, or the ISPS Code. The ISPS Code requires vessels
to develop and maintain a ship security plan that provides security measures to address potential threats to the security of ships or
port facilities. Although each of ZIM’s vessels is ISPS Code-certified, any failure to comply with the ISPS Code or maintain such
certifications may subject ZIM to increased liability and may result in denial of access to, or detention in, certain ports. Furthermore,
compliance with the ISPS Code requires ZIM to incur certain costs. Although such costs have not been material to date, if new or more
stringent regulations relating to the ISPS Code are adopted by the International Maritime Organization (the “IMO”) and the
flag states, these requirements could require significant additional capital expenditures by ZIM or otherwise increase the costs of its
operations.
ZIM
is subject to environmental regulations and failure to comply with these regulations could have a material adverse effect on ZIM’s
business. In addition, ESG regulation and reporting is expected to intensify in the future, which could increase its operational costs.
ZIM’s operations are subject to international
conventions and treaties, national, state and local laws and national and international regulations in force in the jurisdictions in which
its vessels operate or are registered relating to the protection of the environment. Such requirements are subject to ongoing developments
and amendments and relate to, among other things, the storage, handling, emission, transportation and discharge of hazardous and non-hazardous
substances, such as sulfur oxides, nitrogen oxides and the use of low- sulfur fuel or shore power voltage, and the remediation of contamination
and liability for damages to natural resources. ZIM is subject to the International Convention for the Prevention of Pollution from Ships
(or, MARPOL Convention, 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 CERCLA, the U.S. Clean Water
Act (CWA), and National Invasive Species Act (NISA), among others. Compliance with such laws, regulations and standards, where applicable,
may require the installation of costly equipment, make ship modifications or operational changes and may affect the useful lives or the
resale value of ZIM’s vessels.
If ZIM fails to comply with any environmental
requirements applicable to it, it could be exposed to, among other things, significant environmental liability damages, administrative
and civil penalties, criminal charges or sanctions, and could result in the termination or suspension of, and substantial harm to, its
operations and reputation. Specifically, in September 2022 ZIM was approached by a state regulator who indicated that ZIM did not meet
the local environmental regulation and provided an initial informal assessment as to ZIM’s scope of liability, subject to ZIM’s
possible counter arguments. ZIM is currently reviewing the claims and initial informal assessment. Additionally, environmental laws often
impose strict, joint and several liability for remediation of spills and releases of oil and hazardous substances, which could subject
ZIM to liability without regard to whether it was negligent or at fault. Under local, national and foreign laws, as well as international
treaties and conventions, ZIM could incur material liabilities, including remediation costs and natural resource damages, as well as third-party
damages, personal injury and property damage claims in the event there is a release of petroleum or other hazardous substances from its
vessels, or otherwise, in connection with its operations. ZIM is required to satisfy insurance and financial responsibility requirements
for potential petroleum (including marine fuel) spills and other pollution incidents. Although ZIM has arranged insurance to cover certain
environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will
not have a material adverse effect on ZIM’s business, results of operations and financial condition. Violations of, or liabilities
under, environmental requirements can result in substantial penalties, fines and other sanctions, including in certain instances, seizure
or detention of ZIM’s vessels and events of this nature could have a material adverse effect on ZIM’s business, reputation,
financial condition and results of operations.
ZIM may also incur additional compliance costs
relating to existing or future ESG requirements, which have recently intensified and are expected to intensify in the future, and which
could have a material adverse effect on ZIM’s business, results of operations and financial conditions. Such costs include, among
other things: reduction of greenhouse gas emissions and use of
“cleaner” fuels (including LNG), imposition of vessel speed
limits, changes with respect to cargo capacity or the types of cargo that could be carried; management of ballast and bilge waters; maintenance
and inspection; elimination of tin-based paint; and development and implementation of emergency procedures. For example, on
November 1,
2022, new amendments to the MARPOL Annex IV entered into effect and introduced new energy efficiency and CO2 emissions requirements relating
to Existing Ship Energy Index (EEXI) and Operational Carbon Intensity Indicator (CII) for both new and existing vessels. Compliance with
the new regulation involves additional costs and the implementation of optimization strategies such as slow steaming, which may increase
ZIM’s vessels’ voyage transit times. Environmental or other incidents may result in additional regulatory initiatives, statutes
or changes to existing laws that could affect ZIM’s operations, require ZIM to incur additional compliance expenses, lead to decreased
availability of or more costly insurance coverage, and result in ZIM’s denial of access to, or detention in, certain jurisdictional
waters or ports. For further information on the environmental regulations ZIM is subject to and ESG (sustainability), see
“Item
4.B Business Overview—Our Businesses—ZIM—ZIM’s Regulatory Matters—Environmental and other regulations in
the shipping industry.”
Regulations
relating to ballast water discharge may adversely affect ZIM’s results of operation and financial condition.
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 international oil pollution prevention, or IOPP, renewal survey, existing vessels constructed before
September 8, 2017, must comply with the updated D 2 standard on or after
September 8, 2019, but no later than
September 9, 2024. For most
vessels, compliance with the D 2 standard will involve installing on- board systems to treat ballast water and eliminate unwanted organisms
(ballast water management systems). Vessels constructed on or after
September 8, 2017, are required to comply with the D 2 standards.
ZIM is subject to costs of compliance for its owned vessels, which may adversely affect its results of operation and financial condition.
ZIM is also subject to U.S. regulations with
respect to ballast water discharge. Although the 2013 Vessel General Permit (VGP) program and The National Invasive Species Act (NISA)
are currently in effect to regulate ballast discharge, exchange and installation, the Vessel Incidental Discharge Act (VIDA), which was
signed into law on
December 4, 2018, requires that the U.S. Environmental Protection Agency (the
“EPA”) develop national standards
of performance for approximately 30 discharges, similar to those found in the VGP, by December 2020. EPA published a notice of proposed
rulemaking - Vessel Incidental Discharge National Standards of Performance for public comment on
October 26, 2020. The comment period
closed on
November 25, 2020. VIDA requires the U.S. Coast Guard to develop corresponding implementation, compliance and enforcement regulations
regarding ballast water within two years of the EPA’s publication of proposed rulemaking. All provisions of the 2013 VGP will remain
in force and effect until the USCG regulations under VIDA are finalized. Furthermore, ZIM is also subject, and may be subject in the future,
to local or state ballast regulation. For example, on
January 1, 2022, new ballast water management requirements entered into effect in
California. State enacted requirements may include more stringent standards than the proposed requirements and standards set forth by
the EPA and U.S. Coast Guard. Currently, all of ZIM’s vessels deployed in the U.S. trades are equipped with ballast water management
systems. New federal and state regulations could require the installation of, or further improvement of already installed, ballast management
systems, or place new requirements and standards which may cause ZIM to incur substantial costs.
Climate
change and greenhouse gas restrictions may adversely affect its operating results.
Many governmental bodies have adopted, or
are considering the adoption of, international, treaties, national, state and local laws, regulations and frameworks to reduce greenhouse
gas emissions due to the concern about climate change. These measures in various jurisdictions include the adoption of cap and trade regimes,
carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. In November 2016, the Paris Agreement,
which resulted in commitments by 197 countries to reduce their greenhouse gas emissions with firm target reduction goals, came into force
and could result in additional regulation on shipping. The Glasgow Climate Change Conference held between October and November 2021 with
the participation of nearly 200 countries’ leaders reiterated their countries’ commitment to bringing down emissions and finalized
guidelines for the full implementation of the Paris Agreement. In addition, several non-governmental organizations and institutional investors
have undertaken campaigns with respect to climate change, with goals to minimize or eliminate greenhouse gas emissions through a transition
to a low- or zero-net carbon economy.
Compliance with laws, regulations and obligations
relating to climate change, including as a result of such international negotiations, as well as the efforts by non-governmental organizations
and investors, could increase ZIM’s costs related to operating and maintaining its vessels and require it to install new emission
controls, acquire allowances or pay taxes related to its greenhouse gas emissions, or administer and manage a greenhouse gas emissions
program. Revenue generation and strategic growth opportunities may also be adversely affected.
Compliance
with safety and other requirements imposed by classification societies may be very costly and may adversely affect its business.
The hull and machinery of every commercial
vessel must be classed by a classification society. The classification society certifies that the vessel has been built, maintained and
repaired, when necessary, in accordance with the applicable rules and regulations of the classification society. Moreover, every vessel
must comply with all applicable international conventions and the regulations of the vessel’s flag state as verified by a classification
society as well as the regulations of the beneficial owner’s country of registration. Finally, each vessel must successfully undergo
periodic surveys, including annual, intermediate and special surveys, which may result in recommendations or requirements to undertake
certain repairs or upgrades. Currently, all of ZIM’s vessels have the required certifications. However, maintaining class certification
could require ZIM to incur significant costs. If any of ZIM’s owned and certain of its chartered-in vessels does not maintain its
class certification, it might lose its insurance coverage and be unable to trade, and ZIM will be in breach of relevant covenants under
its financing arrangements, in relation to both failing to maintain the class certification as well as having effective insurance. Failure
to maintain the class certification of one or more of its vessels could have, under extreme circumstances, a material adverse effect on
ZIM’s financial condition, results of operations and liquidity.
Changes
in tax laws, tax treaties as well as judgments and estimates used in the determination of tax-related asset (liability) and income (expense)
amounts, could materially adversely affect its business, financial condition and results of operations.
ZIM operates in various jurisdictions and
may be subject to the tax regimes and related obligations in the jurisdictions in which ZIM operates or does business. Changes in tax
laws, bilateral double tax treaties, regulations and interpretations could adversely affect its financial results. The tax rules of the
various jurisdictions in which ZIM operates or conducts business often are complex, involve bilateral double tax treaties and are subject
to varying interpretations. Specifically, on
December 20, 2022, the OECD published an implementation package for Pillar Two model rules,
currently expected to enter into effect in member countries in 2024 and 2025. The Pillar Two rules were introduced to ensure that large
multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate. The current
minimum effective tax rate that was determined under Pillar Two is 15%. While Pillar Two model rules are not intended to be applied to
international shipping income, other sources of ZIM’s income may be affected as a result of Pillar Two entering into effect, and
there is still uncertainty regarding the scope and manner of the mandatory reporting by shipping companies pursuant to these rules. Furthermore,
as the Pillar Two model is expected to enter into effect in 2024 in some countries and in 2025 in others, there is still uncertainty as
to how the Pillar Two model will be applied evenly during this transition period. ZIM is currently monitoring the developments of the
Pillar Two legislation process and are evaluating its potential impact on ZIM’s financial results.
Tax authorities may challenge tax positions
that ZIM takes or historically has taken, may assess taxes where it has not made tax filings, or may audit the tax filings it has made
and assess additional taxes. Such assessments, either individually or in the aggregate, could be substantial and could involve the imposition
of penalties and interest. For such assessments, from time to time, ZIM uses external advisors. In addition, governments could impose
new taxes on ZIM or increase the rates at which it is taxed in the future. The payment of substantial additional taxes, penalties or interest
resulting from tax assessments, or the imposition of any new taxes, could materially and adversely impact its results, financial condition
and liquidity. Additionally, ZIM’s provision for income taxes and reporting of tax-related assets and liabilities require significant
judgments and the use of estimates. Amounts of tax-related assets and liabilities involve judgments and estimates of the timing and probability
of recognition of income, deductions and tax credits. Actual income taxes could vary significantly from estimated amounts due to the future
impacts of, among other things, changes in tax laws, regulations and interpretations, ZIM’s financial condition and results of operations,
as well as the resolution of any audit issues raised by taxing authorities.
Risks Related to ZIM’s
Financial Position and Results
If
ZIM is unable to generate sufficient cash flows from its operations, its liquidity will suffer and it may be unable to satisfy its obligations
and operational needs.
ZIM’s ability to generate cash flow
from operations to cover ZIM’s operational costs and to make payments in respect of its obligations, financial liabilities (mainly
lease liabilities) and operational needs will depend on its future performance, which will be 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 it is unable to generate sufficient cash flow from operations to satisfy its obligations, liabilities and operational needs, ZIM may
need to borrow funds or undertake alternative financing plans, or to reduce or delay capital investments and other costs. It may be difficult
for ZIM to incur additional debt on commercially reasonable terms due to, among other things, ZIM’s financial position and results
of operations and market conditions. ZIM’s inability to generate sufficient cash flows from operations or obtain additional funds
or alternative financing on acceptable terms could have a material adverse effect on its business.
Volatile
market conditions could negatively affect ZIM’s business, financial position, or results of operations and could thereby result
in impairment charges.
As of the end of each of ZIM’s reporting
periods, ZIM examines whether there have been any events or changes in circumstances, such as a deterioration of general economic or market
conditions, which may indicate an impairment. 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.
For each of the years ended
December 31, 2022,
2021 and
2020, ZIM did not recognize an impairment loss in its financial statements. As of
December 31, 2021, and
2020, ZIM concluded
there were no indications for impairment. With respect to the impairment analysis carried out as of
December 31, 2022, see Note 6 to published
ZIM’s audited consolidated financial statements in its annual report. However, ZIM cannot assure that it will not recognize impairment
losses in future years. If an impairment loss is recognized, ZIM’s results of operations will be negatively affected. Should freight
rates decline significantly or ZIM or the shipping industry experience adverse conditions, this may have a material adverse effect on
its business, results of operations and financial condition, which may result in ZIM recording an impairment charge.
Foreign
exchange rate fluctuations and controls could have a material adverse effect on ZIM’s earnings and the strength of its balance sheet.
Since ZIM generates revenues in a number of
geographic regions across the globe, it is exposed to operations and transactions in other currencies. A material portion of ZIM’s
expenses are denominated in local currencies other than the U.S. Dollar. Most of ZIM’s revenues and a significant portion of its
expenses are denominated in the U.S. Dollar, creating a partial natural hedge. To the extent other currencies increase in value relative
to the U.S. Dollar, ZIM’s margins may be adversely affected. Foreign exchange rates may also impact trade between countries as fluctuations
in currencies may impact the value of goods as between two trading countries. Where possible, ZIM endeavors to match its foreign currency
revenues and costs to achieve a natural hedge against foreign exchange and transaction risks, although there can be no assurance that
these measures will be effective in the management of these risks. Consequently, short-term or long-term exchange rate movements or controls
may have a material adverse effect on ZIM’s business, financial condition, results of operations and liquidity. In addition, foreign
exchange controls in countries in which it operates may limit ZIM’s ability to repatriate funds from foreign affiliates or otherwise
convert local currencies into U.S. Dollars.
ZIM’s
operating results may be subject to seasonal fluctuations.
The markets in which ZIM operates have historically
exhibited seasonal variations in demand and, as a result, freight rates have also historically exhibited seasonal variations. This seasonality
can have an adverse effect on its business and results of operations. As global trends that affect the shipping industry have changed
rapidly in recent years, it remains difficult to predict these trends and the extent to which seasonality will be a factor affecting ZIM’s
results of operations in the future. See “Item 4.B Business Overview—Our
Businesses—ZIM—ZIM’s Seasonality.”
Risks Related to ZIM’s
Operations in Israel
ZIM
is incorporated and based in Israel and, therefore, its results may be adversely affected by political, economic and military instability
in Israel.
ZIM is incorporated and its headquarters are
located in Israel and the majority of its key employees, officers and directors are residents of Israel. Additionally, the terms of the
Special State Share require ZIM to maintain its headquarters and to be incorporated in Israel, and to have its chairman, chief executive
officer and a majority of its board members be Israeli. As an Israeli company, ZIM has relatively high exposure, compared to many of its
competitors, to acts of terror, hostile activities including cyber-attacks, security limitations imposed upon Israeli organizations overseas,
possible isolation by various organizations and institutions for political reasons and other limitations (such as restrictions against
entering certain ports). 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.
In particular, the Israeli judicial reform proposal introduced by the Israeli government in January 2023, which, if adopted, will affect
the separation of powers among the three branches of government, has sparked significant backlash both inside and outside of Israel, led
to civil protest and raises economic concerns regarding Israel’ sovereign credit rating, increased interest rates, currency fluctuations,
inflation, securities market volatility and scope of future investments in Israel. If any of the foregoing risks were to materialize,
it may have an adverse effect on ZIM’s business, its results of operations and its ability to raise additional funds. 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 may limit its ability to call on certain ports and therefore could 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, its status as an Israeli company may 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. The State of Israel also faces terrorist attacks against civilian population, including
terrorist activity and acts of violence originating from the West Bank and East Jerusalem. Political uprisings, social unrest and violence
in the Middle East and North Africa, including Israel’s neighbors Egypt and Syria, have affected and continue to affect the political
stability of those countries. This instability has raised concerns regarding security in the region and the potential for armed conflict.
In addition, Israel faces threats from more distant neighbors, in particular, Iran. Iran is also believed to have a strong influence among
parties hostile to Israel in areas that neighbor Israel, such as the Syrian government, Hamas in the Gaza Strip and Hezbollah in Lebanon.
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. For instance, during the 2006 Lebanon War, a military conflict took place in Lebanon. As a result of rocket fire in the city
of Haifa, ZIM closed its headquarters for several days. Although ZIM maintains an emergency plan, such events can have material effects
on its operational activities. Any future deterioration in the security or geopolitical conditions in Israel or the Middle East could
adversely impact ZIM’s business relationships and thereby have a material adverse effect on its business, financial condition, results
of operations or liquidity. If ZIM’s facilities, including its headquarters, become temporarily or permanently disabled by an act
of terrorism or war, it may be necessary for it to develop alternative infrastructure and ZIM may not be able to avoid service interruptions.
Additionally, ZIM’s owned and chartered-in vessels, including those vessels that do not sail under the Israeli flag, may be subject
to control by the authorities of the State of Israel in order to protect the security of, or bring essential supplies and services to,
the State of Israel. Israeli legislation also allows the State of Israel to use ZIM’s vessels in times of emergency. Any of the
aforementioned factors may negatively affect ZIM and its results of operations.
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. The Israeli government
currently provides compensation only for physical property damage caused by terrorist attacks or acts of war, based on the difference
between the asset value before the attack and immediately after the attack or on any cost of repairing the damage, whichever is lower.
Any losses or damages incurred by ZIM could have a material adverse effect on its business. Any armed conflict involving Israel could
adversely affect its business and results and operations.
Further, ZIM’s operations could be disrupted
by the obligations of personnel to perform military service. As of
December 31, 2022, ZIM had approximately 830 employees based in Israel,
certain of whom may be called upon to perform several weeks of annual military reserve duty until they reach the age qualifying them for
an exemption (generally 40 for men who are not officers or do not have specified military professions) and, in certain emergency circumstances,
may be called to immediate and unlimited active duty. ZIM’s operations could be disrupted by the absence of a significant number
of employees related to military service, which could materially adversely affect its business and operations.
General Risk Factors
for ZIM
ZIM
faces cyber-security risks.
ZIM’s business operations rely upon
secure information technology systems for data processing, storage and reporting. As a result, ZIM maintains information security policies
and procedures for managing its information technology systems. Despite security and controls design, implementation and updates, its
information technology systems may be subject to cyber-attacks, including, network, system, application and data breaches. A number of
companies around the world, including in ZIM’s industry, have been the subject of cyber-security attacks in recent years. For example,
one of ZIM’s peers experienced a major cyber-attack on its IT systems in 2017, which impacted such company’s operations in
its transport and logistics businesses and resulted in significant financial loss. In addition, in August 2020, a cruise operator was
a victim to ransomware attack. On
September 28, 2020, another competitor confirmed a ransomware attack that disabled its booking system,
and on
October 1, 2020, the IMO’s public
website and intranet services were subject to a cyberattack. In December 2020, an Israeli
insurance company fell victim to a publicized ransomware attack, resulting in the filing of civil actions against
the company and significant
damage to that company’s reputation. Other Israeli companies are facing cyber-attack campaigns, and it is believed the attackers
may be from hostile countries. Cyber-attacks are becoming increasingly common and more sophisticated, and may be perpetrated by computer
hackers, cyber-terrorists or others engaged in corporate espionage.
Cyber-security attacks could include malicious
software (malware), attempts to gain unauthorized access to data, social media hacks and leaks, ransomware attacks and other electronic
security breaches of ZIM’s information technology systems as well as the information technology systems of its customers and other
service providers that could lead to disruptions in critical systems, unauthorized release, misappropriation, corruption or loss of data
or confidential information, and breach of protected data belonging to third parties. In addition, following the COVID-19 pandemic, ZIM
has reduced its staffing in its offices and increased its reliance on remote access of its employees. ZIM has taken measures to enable
it to face cyber-security threats, including backup and recovery and backup measures, as well as cyber security awareness trainings and
annual company-wide cyber preparedness drills. However, there is no assurance that these measures will be successful in coping with cyber-security
threats, as these develop rapidly, and ZIM may be affected by and become unable to respond to such developments. A cyber-security breach,
whether as a result of malicious, political, competitive or other motives, may result in operational disruptions, information misappropriation
or breach of privacy laws, including the European Union’s General Data Protection Regulation and other similar regulations, which
could result in reputational damage and have a material adverse effect on ZIM’s business, financial condition and results of operation.
ZIM
faces risks relating to its information technology and communication system.
ZIM’s information technology and communication
system supports all of its businesses processes throughout the supply chain, including ZIM’s customer service and marketing teams,
business intelligence analysts, logistics team and financial reporting functions. ZIM’s primary data center is in Europe with a
back-up data center in Israel, and ZIM has indicated that it is preparing a second data center in Europe expected to launch by the end
of 2023. While it has a disaster recovery plan pursuant to which it is able to immediately activate the back-up data center in the event
of a failure at ZIM’s primary data center, if ZIM’s primary data center ceases to be available to its without sufficient advance
notice, ZIM would likely experience delays in its operating activities.
Additionally, ZIM’s information systems
and infrastructure could be physically damaged by events such as fires, terrorist attacks and unauthorized access to ZIM’s servers
and infrastructure, as well as the unauthorized entrance into ZIM’s information systems. Furthermore, ZIM communicates with ZIM’s
customers through an ecommerce platform. ZIM’s ecommerce platform was developed and is run by third-party service providers over
which ZIM has no management control. A potential failure of ZIM’s computer systems or a failure of ZIM’s third-party ecommerce
platform providers to satisfy their contractual service level commitments to ZIM may have a material adverse effect on ZIM’s business,
financial condition and results of operation. ZIM’s efforts to modernize and digitize ZIM’s operations and communications
with ZIM’s customers further increase ZIM’s dependency on information technology systems, which exacerbates the risks ZIM
could face if these systems malfunction.
ZIM
is subject to data privacy laws, including the European Union’s General Data Protection Regulation, and any failure by ZIM to comply
could result in proceedings or actions against it and subject ZIM to significant fines, penalties, judgments and negative publicity.
ZIM is subject to numerous data privacy laws,
including Israeli privacy laws and the European Union’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. ZIM has also been certified as compliant with ISO27001 in Israel (information security
management standard) and ISO27701(extension to the information security management standard).
The EU data protection regime expands the
scope of the EU data protection law to all companies processing data of EEA individuals, imposes a stringent data protection compliance
regime, including 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. Although ZIM is generally a business that serves other businesses (B2B), it still processes and obtains certain personal
information relating to individuals, and any failure by ZIM to comply with the GDPR or other data privacy laws where applicable could
result in proceedings or actions against it, which could subject ZIM to significant fines, penalties, judgments and negative publicity.
Labor
shortages or disruptions could have an adverse effect on ZIM’s business and reputation.
ZIM employs, directly and indirectly, approximately
6,530 employees around the globe (including
contract workers). ZIM, its
subsidiaries, and the independent agencies with which it has agreements
could experience strikes, industrial unrest or work stoppages. Several ZIM’s employees are members of unions. In recent years, ZIM
has experienced labor interruptions as a result of disagreements between management and unionized employees and has entered into collective
bargaining agreements addressing certain of these concerns. If such disagreements arise and are not resolved in a timely and cost-effective
manner, such labor conflicts could have a material adverse effect on its business and reputation. Disputes with ZIM’s unionized
employees may result in work stoppage, strikes and time-consuming litigation. ZIM’s collective bargaining agreements include termination
procedures which affect its managerial flexibility with re-organization procedures and termination procedures. In addition, its collective
bargaining agreements affect ZIM’s financial liabilities towards employees, including because of pension liabilities or other compensation
terms.
ZIM
incurs increased costs as a result of operating as a public company, and its management team, which has limited experience in managing
and operating a company that is publicly traded in the U.S., will be required to devote substantial time to new compliance initiatives.
As a public company whose ordinary shares
have been listed in the United States since January 2021, ZIM incurs accounting, legal and other expenses that it did not incur as a private
company, including costs associated with ZIM’s reporting requirements under the Exchange Act. It also incurs costs associated with
corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or
the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NYSE, and provisions of Israeli corporate laws applicable to public
companies. These rules and regulations have increased ZIM’s legal and financial compliance costs, introduced new costs such as investor
relations and stock exchange listing fees, and make some activities more time-consuming and costly. In addition, ZIM’s senior management
and other personnel must divert attention from operational and other business matters to devote substantial time to these public company
requirements. ZIM’s current management team has limited experience managing and operating a company that is publicly traded in the
United States. Failure to comply or adequately comply with any laws, rules or regulations applicable to ZIM’s business may result
in fines or regulatory actions, which may adversely affect ZIM’s business, results of operation or financial condition and could
result in delays in achieving or maintaining an active and liquid trading market for its ordinary shares.
Changes in the laws and regulations affecting
public companies could result in increased costs to ZIM as it responds to such changes. These laws and regulations could make it more
difficult or more costly for ZIM to obtain certain types of insurance, including director and officer liability insurance, and it may
be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage,
including increased deductibles. The impact of these requirements could also make it more difficult for ZIM to attract and retain qualified
persons to serve on its board of directors, its board committees or as executive officers. ZIM cannot predict or estimate the amount or
timing of additional costs ZIM may incur in order to comply with such requirements. Any of these effects could adversely affect ZIM’s
business, financial condition and results of operations.
The
State of Israel holds a Special State Share in ZIM, which imposes certain restrictions on ZIM’s operations and gives Israel veto
power over transfers of certain assets and shares above certain thresholds, and may have an anti- takeover effect.
The State of Israel holds a Special State
Share in ZIM, which imposes certain limitations on its operating and managing activities and could negatively affect its business and
results of ZIM’s operations. These limitations include, among other things, transferability restrictions on ZIM’s share capital,
restrictions on its ability to enter into certain merger transactions or undergo certain reorganizations and restrictions on the composition
of its board of directors and the nationality of its chief executive officer, among others.
Because the Special State Share restricts
the ability of a shareholder to gain control of ZIM, the existence of the Special State Share may have an anti-takeover effect and therefore
depress the price of its ordinary shares or otherwise negatively affect its business and results of operations. In addition, the terms
of the Special State Share dictate that ZIM maintains a minimum fleet of 11 wholly-owned seaworthy vessels.
Currently, as a result of waivers received
from the State of Israel, ZIM owns fewer vessels than the minimum fleet requirement. However, if it acquires and owns additional vessels
in the future, these vessels would be subject to the minimum fleet requirements and conditions of the Special State Share, and if ZIM
would want to dispose of such vessels, it would need to obtain consent from the State of Israel. For further information on the Special
State Share, see “Item 4.B—Business Overview—Our
Business—ZIM’s Special State Share.”
ZIM’s
dividend policy is subject to change at the discretion of its board of directors and there is no assurance that its board of directors
will declare dividends in accordance with this policy.
ZIM’s board of directors has adopted
a dividend policy, which was recently amended in August 2022, to distribute a dividend to its shareholders on a quarterly basis at a rate
of 30% of the net quarterly income of each of the first three fiscal quarters of the year, while the cumulative annual dividend amount
to be distributed by ZIM (including the interim dividends paid during the first three fiscal quarters of the year) will total 30-50% of
the annual net income, all subject to its board of directors’ absolute discretion at the time of any such distribution, and the
satisfaction of the applicable relevant tests under the Israeli Companies law at the time of these distributions. During 2022, ZIM paid
cash dividends of approximately $2.04 billion, $342 million, $570 million and $354 million, or a total of $3.30 billion on
April 4, 2022,
June 8, 2022,
September 8, 2022, and
December 7, 2022, respectively. During 2021, ZIM paid a special cash dividend of approximately $237
million, or $2.00 per ordinary share and a cash dividend of approximately $299 million, or $2.50 per ordinary share. On
March 13, 2023,
ZIM’s board of directors declared a cash dividend of approximately $769 million, or $6.40 per ordinary share, resulting in a cumulative
annual dividend amount of approximately 44% of 2022 net income, to be paid on
April 3, 2023, to holders of the ordinary shares as of
March
24, 2023.
Any dividends must be declared by ZIM’s
board of directors, which will take into account various factors including ZIM’s profits, ZIM’s investment plan, ZIM’s
financial position and additional factors it deems appropriate. While ZIM initially intends to distribute 30 - 50% of its annual net income,
the actual payout ratio could be anywhere from 0% to 50% of ZIM’s net income, and may fluctuate depending on ZIM’s cash flow
needs and such other factors. There can be no assurance that dividends will be declared in accordance with ZIM’s board’s policy
or at all, and ZIM’s board of directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends,
to reduce the amount of dividends paid, to pay dividends on an ad-hoc basis or to take other actions, which could include share buybacks,
instead of or in addition to the declaration of dividends. Accordingly, ZIM expects that the amount of any cash dividends ZIM distributes
will vary between distributions as a result of such factors. ZIM has not adopted a separate written dividend policy to reflect ZIM’s
board’s policy.
ZIM’s ability to pay dividends is limited
by Israeli law, which permits the distribution of dividends only out of distributable profits and only if there is no reasonable concern
that such distribution will prevent ZIM from meeting its existing and future obligations when they become due.
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 of 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.
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 60% 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 by 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 60%
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 pay dividends or make other distributions.
We have paid significant dividends in 2022
and prior years but there is no assurance as to the level of future dividends or whether we will pay dividends at all. Our dividends have
generally been funded by dividends from
subsidiaries and associated companies and sales of interests in our businesses. Distributions
from
subsidiaries and associated companies may be lower in the future and there is no assurance that we will receive any dividends, which
would impact our ability to pay dividends. Even if we do have sufficient funds, we may choose to use our cash for purposes other than
dividends, including investment in existing or new businesses. Therefore there is no assurance that Kenon shareholders will receive any
dividends in the future or as to the amount of any such dividends.
Any dividends are also subject to legal
limitations. 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 stand-alone accounts (which are
based upon the Singapore Financial Reporting Standards (the “SFRS”). We may incur losses and we may not have sufficient distributable
income that can 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.
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. We have completed capital reduction exercises in connection
with some prior distributions, but there is no assurance that we will be able to complete further capital reductions in the future.
If we do not 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.
Any
dividend payments or other cash distributions in respect of 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 every year between
2018 and 2022, we have made cash distributions to our shareholders. Although a significant percentage of our shareholders hold their shares
through the TASE, each of these distributions was denominated in U.S. Dollars. Shareholders whose principal currency is not the U.S. Dollar
are 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 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 are
exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act and are not 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. 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 United States, 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 United States
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
United States or Israel, as may be 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. Therefore, 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 not be automatically enforceable
in Singapore. Additionally, there is doubt as to whether a Singapore court would 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 an undertaking, it may
still 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 companies incorporated or, as the case may be, registered 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, but 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 2001 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.
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 Companies Act 1967, or 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 (ii) the 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 (the “AGM”) of shareholders held in 2022 (the “2022 AGM”),
our shareholders granted the board of directors authority (effective until the conclusion of the annual general meeting of shareholders
to be held in 2023, or the 2023 AGM, or the expiration of the period by which the 2023 AGM is required by law to be held, whichever is
earlier) 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 2022 AGM and shareholders will be asked to renew this authority at the 2023 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 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
It
is likely that we were classified as a passive foreign investment company (
“PFIC”) for U.S. federal income tax purposes for
the taxable year ended
December 31, 2022 and could continue to be for foreseeable future taxable years, which could result in adverse
U.S. federal income tax consequences to U.S. holders of our ordinary shares.
A non-U.S. corporation, such as
our company,
will be classified as 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 a taxable year) is attributable
to assets that produce 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 earnings 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. For example, in February 2021, ZIM completed its initial public offering, which reduced our equity
interest from 32% to approximately 28%. In addition, between September and November 2021, Kenon sold ZIM shares reducing its equity interest
in ZIM to approximately 26%. In March 2022, Kenon sold additional ZIM shares further reducing its equity interest in ZIM to approximately
20.7%. As a result of this sale of ZIM shares, we are no longer able to treat our proportionate share of ZIM’s businesses and earnings
as directly owned for purposes of determining whether we are a PFIC, for the taxable year ended
December 31, 2022 and foreseeable future
taxable years.
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. Moreover, 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, the investment in Qoros by the Majority Shareholder in Qoros in 2018 (which reduced our equity interest in Qoros
to 24%), the sale of half of our remaining interest in Qoros to the Majority Shareholder in Qoros in April 2020 (which reduced our equity
interest in Qoros to 12%) and the sale of all of our remaining interest in Qoros to the Majority Shareholder in Qoros in April 2021 (which
will eliminate our equity interest in Qoros) each may increase the value of our assets that produce, or are held for the production of,
passive income and/or our passive income.
Based upon, among other things, the valuation
of our assets and the composition of our income and assets taking into account such additional sale of ZIM shares, we believe we were
likely a PFIC for U.S. federal income tax purposes for the taxable year ended
December 31, 2022. However, the reduction in our equity
interest in ZIM to below 25% limits our ability to treat our proportionate share of ZIM’s businesses and earnings as directly owned,
which could increase the value of our assets that produce, or are held for the production of, passive income and/or our passive income.
Based upon, among other things, the valuation of our assets and the composition of our income and assets taking into account such sale
of ZIM shares, we anticipate that we will likely be treated as a PFIC for U.S. federal income tax purposes for the taxable year ending
December 31, 2023 and could continue to be for foreseeable future taxable years. 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 such year.
If we are classified as a PFIC for any taxable
year during which a U.S. Holder (as defined below) holds an ordinary share, the U.S. federal income tax consequences to a U.S. Holder
of the ownership, and disposition of our ordinary shares will depend on whether or not such U.S. Holder makes a “qualified electing
fund” or “QEF” election (the “QEF Election”) or makes a mark-to-market election (the “Mark-to-Market
Election”) with respect to our ordinary shares. We will endeavor to provide U.S. Holders with a PFIC annual information statement
for our 2022 taxable year in order to enable U.S. Holders to make a QEF Election. However, there is no assurance that we will have timely
knowledge of our status as a PFIC in the future or of the required information to be provided. We have not determined if we will provide
U.S. Holders such information for any subsequent taxable year. For further information on such U.S. tax implications, see “Item
10.E Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”
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.
We were incorporated in March 2014 under
the Singapore Companies Act 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:
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an approximately 55% interest in OPC, an owner, developer and operator of power generation facilities
in the Israeli and US power market; |
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an approximately 20.7% interest in ZIM, a large provider of global container shipping services; and
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a 12% interest in Qoros, a China-based automotive company. |
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 addition, in connection with our Spin-off
from IC, we held a 100% interest in IC Power, which in turn held 100% of (i) OPC and (ii) Inkia, which owned and operated power generation
and distribution businesses in Latin America and the Caribbean, the Inkia Business. In August 2017, OPC conducted an IPO and listed on
the TASE, and as a result of this IPO, together with subsequent equity offerings by OPC, our holdings have been reduced to approximately
55%. Subsequently, in December 2017, Inkia sold the Inkia Business. In January 2021, an entity which is 70%-owned by OPC acquired CPV.
At the time of our Spin-off from IC, we
held a 50% interest in Qoros, with Chery holding the remaining 50% interest. In 2018, the Majority Shareholder invested approximately
$1 billion to acquire control of Qoros, reducing our stake to 24%, and in 2020, we completed the sale of an additional 12% to the Majority
Shareholder. In April 2021, we entered into an agreement to sell our remaining 12% interest in Qoros to the Majority Shareholder. However,
the Majority Shareholder has failed to make required payments under this agreement. In the fourth quarter of 2021, Quantum initiated arbitral
proceedings against the Majority Shareholder and Baoneng Group, as well as other litigation proceedings against these parties. The proceedings
are ongoing.
The legal and commercial name of
the Company
is Kenon Holdings Ltd. Our principal place of business is located at 1 Temasek Avenue #37-02B, Millenia Tower, Singapore 039192. Our telephone
number at our principal place of business is + 65 6351 1780. Our 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 the NYSE
and the TASE under the symbol “KEN.”
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.
We are a holding company established in connection with a Spin-off of our businesses
from IC to promote the growth and development of our primary businesses.
We have implemented the strategy we established in connection with the Spin-off, and
our businesses and our holdings have substantially evolved, while we have realized significant value for our shareholders.
We have made significant distributions to shareholders, totaling over $2 billion in
cash and listed securities, since our initial listing in 2015. For example, in 2015, we distributed substantially all of our interest
in Tower. In addition, since 2018, we have distributed total cash of $1.8 billion, reflecting significant distributions to shareholders
from the proceeds of the sale of the Inkia Business, proceeds from the sale of our interest in Qoros (including amounts repaid by Qoros
in respect of shareholder loans), proceeds from the sale of a portion of our stake in ZIM, as well as from dividends received from ZIM.
We have also made significant investments in our businesses, including investments of
approximately $200 million in OPC between October 2020 and July 2022, supporting its growth strategy, including Kenon’s participation
in OPC’s $217 million equity raise in October 2020 to finance part of the consideration for OPC’s acquisition of CPV. In addition,
we have monetized and distributed a substantial amount of our businesses, such as the sale of the Inkia Business in 2017, a significant
portion of our holdings in Qoros, and the distribution of the Tower shares.
Our primary businesses today, OPC and ZIM, have each become public companies which have
grown to substantial market capitalizations. OPC initially listed on TASE in August 2017 with a market capitalization of $350 million,
which has grown to a market capitalization of approximately $1.8 billion as of
March 23, 2023. ZIM has also grown substantially, with
Kenon’s 32% stake acquired for $200 million in a financial restructuring in 2014 growing to a market capitalization of almost $2.8
billion as of
March 23, 2023, despite dividend distributions of more than $4.2 billion between January 2021 and
December 31, 2022.
Since our Spin-off over eight years ago, our businesses and our holdings have substantially
evolved and unlocked substantial shareholder value, with Kenon demonstrating a track record of achieving strong shareholder returns. We
are now considering various ways to further maximize value for our shareholders.
We believe that in the current market environment, there are attractive investment opportunities
to generate positive shareholder returns. As a company with a strong financial position, no material third-party debt and a history of
successfully operating businesses, we believe we are well-positioned to take advantage of such opportunities, which may include investments
or acquisitions in new businesses. We expect that such acquisitions or other investments, if any, would be in established industries,
would be substantial and that we would be actively involved in the operations and promoting the growth and development of such businesses.
In addition, we do not expect that any such acquisitions or other investments would be in start-up companies or focused on emerging markets.
In addition to new investments in new businesses, we have made significant investments
and may make further investments in OPC, in which Kenon holds a 55% stake. OPC remains a growth business with projects under development
and OPC’s strategy contemplates continued development of projects and potentially acquisitions in Israel, the U.S, and elsewhere.
The U.S. market presents significant opportunities in areas such as renewable energy and carbon capture projects, particularly in light
of the Inflation Reduction Act (the “IRA”), and OPC’s subsidiary CPV is actively pursuing these opportunities. OPC’s
growth strategy could require significant equity investments at the OPC level, which may present opportunities for Kenon to participate
in such capital raises.
We may fund any such acquisition or investments in new or existing businesses through
cash on hand, sales of interests in other businesses or by raising new financing.
Kenon currently holds 20.7% of ZIM, as compared to 32% at the time of the Spin-off,
and remains the largest shareholder in ZIM. ZIM has experienced significant value appreciation and paid substantial dividends under Kenon’s
ownership. Kenon has sold a portion of its interest in ZIM in 2022 at attractive price levels while retaining a significant interest in
ZIM, and Kenon continues to evaluate its interest in ZIM.
In addition, Kenon will continue to consider the return of capital to shareholders,
based on market conditions, capital requirements, potential investment opportunities and other relevant considerations. For example, on
March 30, 2023, Kenon declared a dividend of $150 million and announced a plan to use up to $50 million to repurchase shares. Together
with these amounts, and assuming completion of the plan to repurchase shares, Kenon will have returned over $2.2 billion in cash and listed
securities to shareholders since the Spin-off in 2015.
Our Businesses
Set forth below is a description of our businesses.
OPC
OPC, which accounted for 100% of our revenues
in the year ended
December 31, 2022, is an owner, developer and operator of power generation facilities located in Israel and, since its
acquisition of CPV, in the United States. Since fourth quarter of 2022, OPC has the following three operating segments:
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Israel
in which OPC is engaged in the initiation, development, construction and operation of power plants using natural gas and renewable energy
in Israel and supply of electricity to private customers and to the System Operator. The total capacity of OPC’s active or under-construction
projects in Israel is approximately 1,203 MW. OPC manages its activities through OPC Israel, in which OPC holds 80%, with the remaining
20% held by Veridis; |
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Renewable
Energy in the U.S. in which OPC (through the CPV Group) is engaged in the
initiation, development, construction and operation of power plants using renewable energy in the United States. CPV’s share and
generation capacity in the active renewable energy power plants is approximately 152 MW in wind energy power plants and approximately
228 MW in two solar projects under construction; and |
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Energy
Transition in the U.S. in which OPC (through the CPV Group) is engaged mainly
in the holding interest (usually minority interests) in operating power plants and power plants under construction operating using natural
gas at high efficiency, which the CPV Group initiated and constructed, which are part of the Energy Transition - the process of switching
to low-emission energy generation. CPV’s share and its generation capacity in active gas-fired and advanced combined cycle power
plants stands at 1,290 MW out of 4,045 MW (five power plants), and approximately 126 MW out of a total capacity of approximately 1,258
MW under construction. |
In addition, OPC (through CPV) has additional
operations (U.S. Other) in the United States that are complementary to electricity generation activity of the CPV Group. These additional
operations include development of electricity and energy generation projects integrating carbon capturing capabilities, under various
development stages; the provision of assets and energy management services to power plants in the U.S., which it holds, and which are
owned by third parties and a retail operation to sell electricity to commercial and industrial customers. This activity complements the
electricity generation activity through the CPV Group.
Set out below is OPC’s holdings and
operations structure as of
March 19, 2023:
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OPC entered into a transaction for the acquisition of the Kiryat Gat Power Plant through OPC Power Plants.
As of March 19, 2023, this transaction has not yet been completed. |
Set out below is CPV’s holdings and
operations structure as of
March 19, 2023:
OPC’s facilities and primary development
projects are set forth below.
Operations in Israel
In Israel, OPC is engaged in the generation
and supply of energy (electricity, steam and charging services for electric vehicles), mainly to private customers and to the System Operator,
and in the development, construction and operation in Israel of power plants and energy generation facilities powered using natural gas
and renewable energy. OPC’s operations in Israel are held and operated by OPC Israel, which is 80% owned by OPC.
Set forth below is a description of OPC Israel’s
power generating plants and development projects.
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OPC-Rotem,
a wholly-owned subsidiary of OPC Israel, 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. |
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OPC-Hadera,
a wholly-owned subsidiary of OPC Israel, operates a power plant using cogeneration technology with an installed capacity of 144 MW in
Hadera which reached its COD on July 1, 2020 and owns the Hadera Energy Center, which consists of boilers and a steam turbine. The Hadera
Energy Center currently serves as back-up for the OPC-Hadera power plant’s supply of steam and its turbine is not currently operating
and is not expected to operate with generation of more than 16MW. |
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Tzomet,
a wholly-owned subsidiary of OPC Israel, is developing a natural gas-fired open-cycle power station in Israel with capacity of approximately
396 MW. OPC expects that the Tzomet plant will reach its COD in the first half of 2023 and that the estimated total cost of completing
the Tzomet plant will be approximately NIS 1.4 billion (approximately $0.4 billion) (excluding NIS 200 million, which is the tax assessment
on the land). As of December 31, 2022, OPC had invested approximately NIS1.2 billion (approximately $341 million) in the project (not
including amounts relating to milestones provided in the Tzomet power plant construction agreement that have been partially completed).
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Energy
generation facilities on the premises of consumers. OPC has entered
into agreements with several consumers for the installation and operation of generation facilities on the premises of consumers using
gas-powered electricity generation installation, photovoltaic (solar) installations and setting up electricity storage installations for
aggregate capacity of approximately 110 MW, as well as arrangements for the sale and supply of energy to consumers. Once completed, OPC
will sell electricity from the generation facilities to the consumers for a period of approximately 15-20 years from the COD of the generation
facilities. The total amount of OPC’s investment will depend on the number of arrangements entered into and is expected to be an
average of NIS 4 million for each installed MW. |
|
• |
Sorek
Generation Facility. In May 2020, Sorek (a special-purpose company wholly-owned
by OPC) signed an agreement with SMS IDE Ltd., which won a tender from the State of Israel for the construction, operation, maintenance
and transfer of a seawater desalination facility on the Sorek B site (the “Desalination Facility”), whereby Sorek is to supply
equipment, construct, operate, and maintain a natural gas-powered energy generation facility on Sorek B site, with a production capacity
of 87 MW (the “Sorek 2 Generation Facility”), and supply the energy required for the Sorek B Desalination Facility for a period
of 25 years from the Desalination Facility’s commercial operation date. At the end of this 25-year period, ownership of the Sorek
2 Generation Facility will be transferred to the State of Israel. OPC estimates that construction of the plant will be completed in the
second half of 2023. |
|
• |
Kiryat Gat Power Plant. In June 2022, OPC, through a subsidiary,
entered into a purchase agreement to acquire a combined-cycle power plant with installed capacity of 75 MW located in the Kiryat Gat area
of Israel. The plant began commercial operation in November 2019. Consideration for the acquisition is approximately NIS 870 million (approximately
$248 million), subject to further adjustments for cash balances and working capital. |
OPC also owns a 51% interest in Gnrgy, which
operates in the field of charging electric vehicles (e-mobility) and the installation of charging stations for electric vehicles.
OPC Strategy
OPC’s vision is to become a major player
in the global effort to promote the energy transition (the generation that will transition to low carbon emission energy generation),
by providing a set of efficient, continuous, reliable, and renewable energy solutions, based on high professional standards, fairness,
transparency, reliability, technological innovation, environmental commitment, in partnership with, and with a commitment to all stakeholders,
specifically the customers, employees, communities, investors and credit providers, while achieving the operational and organizational
excellence targets. In addition, OPC is working to expand its activity and develop projects in the energy industry both in Israel and
in the United States, by developing and acquiring projects to generate electricity using diverse technologies that support the energy
transition, renewable energies, carbon capture projects, and enhancing the inherent synergy of its energy generation and supply activities.
Reorganization of Operations in Israel
On
January 9, 2023, OPC completed the restructuring
of its operations in Israel (the
“Reorganization”), including a share exchange and investment transaction with Veridis, such
that as OPC’s activity in Israel is run through the subsidiary OPC Israel, in which OPC and Veridis have an 80% and 20% stake, respectively.
Prior to that the Reorganization, Veridis held a 20% interest in OPC-Rotem and OPC held the remaining 80% and OPC held a 100% interest
in its other
subsidiaries in Israel (other than Gnrgy, in which it owns a 51% interest). As part of the Reorganization, OPC formed a new
subsidiary, OPC Israel, to hold and operate all of OPC’s business activities in the energy and electricity generation and supply
sectors in Israel. Also pursuant to the Reorganization, OPC transferred to OPC Israel, among other things, its 80% interest in Rotem,
its 51% interest in Gnrgy, as well other operations in Israel including OPC-Hadera, Tzomet, Sorek, energy generation facilities on consumers’
premises and virtual electricity supply activities. Veridis transferred its 20% interests in OPC-Rotem and Rotem 2 to OPC Israel. In addition,
Veridis invested approximately $128 million (approximately NIS 452 million ) in cash in OPC Israel (after adjustments to the original
transaction amount which totaled NIS 425 million (approximately $125 million)), of which NIS 400 million (approximately $118 million)
was used by OPC-Rotem to repay a portion of the shareholders’ loans provided to OPC-Rotem in 2021 by OPC and Veridis.
OPC and Veridis entered into a shareholders’
agreement to govern the relationship between OPC and Veridis in OPC Israel. The agreement includes restrictions on the transfer of OPC
Israel shares including a right of first refusal by OPC in connection with a transfer of Veridis’ holdings in OPC Israel, right
to tag along and drag along rights in the event of certain sales by OPC of its holdings in OPC Israel and director appointment rights
at OPC Israel, which shall have up to seven directors, up to five of whom will be appointed by OPC and up to two will be appointed by
Veridis. The shareholders’ agreement will also provide that certain actions will require a special majority (of 87.5% in a shareholders
meeting, and the consent of at least one director representing Veridis in the Board of Directors), so long as Veridis’ stake does
not fall below a threshold set in the shareholders’ agreement.
Operations in the United States
OPC has operated in the United States since
January 2021, when an entity in which OPC indirectly holds a 70% interest, acquired CPV from Global Infrastructure Management, LLC. The
consideration for the acquisition was $648 million in cash, subject to post-closing adjustments. Additional consideration was paid in
the form of a $95 million vendor loan in respect of CPV’s 10% equity in the Three Rivers project, which loan has since been repaid.
CPV is engaged in the development, construction
and management of renewable energy and natural gas-fired power plants in the United States. CPV was founded in 1999 and since the date
of its establishment it has initiated and constructed power plants having an aggregate capacity of approximately 15 gigawatts (GW),
of which approximately 5 GW consists of wind energy and another approximately 10 GW consists of conventional, natural gas-fired power
plants. CPV holds ownership interests in active power plants it developed and constructed over the past years (both conventional, natural
gas-fired and renewable energy), as well as in a backlog of renewable energy projects, carbon capture projects and gas-fired power plants
in various development stages with a total capacity of approximately 8,000 MW. CPV’s proportionate ownership interest is approximately
1,290 MW out of 4,045 MW (5 power plants) in conventional, gas powered plants, and 152 MW in the wind energy’s power plant.
In addition, CPV’s proportionate share and production capacity in projects that are currently under construction is as follows:
in a natural gas-fired power plant, CPV’s share is approximately 126 MW out of a total capacity of approximately 1,258 MW under
construction and 228 MW in two solar energy projects in construction stages.
In light of the development and expansion
of CPV Group’s renewable energy activities, since 2022, CPV has organized its primary operating activities into (i) electricity
generation through renewable energy (the “Renewable Energy”) and (ii) electricity and energy generation through conventional,
gas-fired power plants. In addition, CPV has additional activities, including development of carbon capture power generation projects,
provision of asset and energy management services and retail power supply to commercial and industrial customers (ancillary to the generation
activity). Set forth below is an overview of CPV’s main operating activities in the United States.
Renewable Energy
– OPC is engaged in the development, construction and management of renewable energy power plants (both solar and wind) in
the United States through CPV Group. The CPV Group’s share of an operational power plant operated using wind energy is approximately
152 MW and its share in two solar energy projects under construction is 228 MW. CPV Group manages and develops Renewable Energy activity
via primarily CPV Renewable Power LP which was established specifically for that purpose. In January 2023, CPV, through a 100% owned subsidiary,
entered into an agreement to acquire four operating wind-powered electricity power plants in Maine, United States, with an aggregate capacity
of approximately 81 MW. The acquisition is subject to conditions, which are outstanding as of March 19, 2023. The closing is expected
in April, 2023.
Conventional
Energy – OPC is engaged in development, construction and management
of power plants powered by conventional energy (natural gas) in the United States through the CPV Group, and holds rights in operational
gas-fired power plants and gas-fired power plants under construction, which the CPV Group developed and built, with a total capacity of
4,045 MW (the CPV Group’s share is 1,290 MW). The operational power plants and the power plants under construction are held through
subsidiaries and associates. The CPV Group’s conventional gas-fired activity is managed by CPV Power Holdings.
CPV
Additional Activities – Furthermore, the CPV Group is engaged in the
development of carbon capturing electricity generation projects and also provides assets and energy management services to power plants
in the United States owned by CPV and third parties. Additionally in early 2023, CPV Group launched a retail energy platform (the “CPV
Retail Energy”) which will operate as a retail electricity provider for commercial and industrial customers in the PJM market.
CPV Group Strategy
The CPV Group’s strategy focuses on
promoting energy transition in the United States on three levels:
Expanding the development of renewable energy
projects by: leveraging of the proven experience of the CPV Group’s regional development platforms and expertise by developing and
constructing new renewable projects; examining acquisition of development or operating renewable opportunities; and examining investments
in the development and construction of battery storage projects.
Reducing carbon emissions in electricity generation
by: developing or acquiring existing conventional generation development or operating projects with the potential of adding carbon capturing
and storage, or using hydrogen instead of natural gas in order to significantly reduce emissions while maintaining grid reliability and
continued operation of the CPV Group’s new and efficient natural gas power plants to supply electricity, and purposes of balancing
the production in renewable energy while developing plans to further reduce their carbon emissions.
Vertical integration of the CPV Group’s
businesses to drive innovation and efficiency by: growing retail electric sales to commercial and industrial customers interested in reducing
their carbon footprint by supplying from the CPV Group’s projects or the market and developing and implementing ESG goals consistent
with the CPV Group’s business strategy to drive alignment between financial goals and company values.
Overview
of OPC’s Operations
Israel
The following table sets forth summary operational
information regarding OPC’s main operations in Israel (held and operated through OPC Israel):
Israel – Active Power Plants
Power plant/ energy generation facilities |
|
|
|
Method of presentation
in the financial statements
|
|
|
|
Type of project / technology |
|
Year of commercial operation |
|
Rotem |
|
466 |
|
Consolidated |
|
Mishor Rotem |
|
Natural gas, combined cycle |
|
2013 |
|
Hadera(2)
|
|
144 |
|
Consolidated |
|
Hadera |
|
Natural–gas – cogeneration |
|
2020 |
__________________________________________
| (1) |
As stipulated in the relevant generation license |
| (2) |
Hadera holds the Hadera Energy Center (boilers and turbines located at the premises of Infinya), which serves as back-up for steam
generated by the Hadera power plant. Since the end of 2020, the turbine at the Hadera Energy Center is not operating. |
Virtual Supply
OPC has entered into agreements with several
consumers for the installation and operation of generation facilities (natural gas) on the premises of consumers, as well as arrangements
for the sale and supply of energy to consumers. Once completed, OPC will sell electricity from the generation facilities to the consumers
for a period of approximately 15-20 years from the COD of the generation facilities. OPC Israel has entered into virtual supply
contracts
with customers for the supply of 110 MW to customers.
Israel – Projects under Development
and Construction
Power plants / energy generation facilities |
|
|
|
|
|
|
|
|
|
Expected commercial operation date |
|
|
|
Total expected construction cost (in NIS million) |
|
|
|
Tzomet |
|
Under construction |
|
396 |
|
Plugot Intersection |
|
Conventional, open-cycle |
|
First half of 2023 |
|
System Operator |
|
1,400(2)
|
|
1,200(3)
|
|
Sorek 2 |
|
Under construction |
|
87 |
|
On the premises of the Sorek B seawater desalination facility |
|
Cogeneration |
|
Second half of 2023 |
|
Onsite consumers and the System Operator |
|
200 |
|
81 |
|
Energy generation facilities on the consumers’ premises |
|
various stages of development/construction |
|
–Projects with an aggregate capacity of approx. 110 MW. The Company intends to
expand projects to an aggregate capacity of at least approx. 120 MW. |
|
On consumers’ premises across Israel |
|
Conventional, renewable energy (solar) and storage |
|
As from the first half of 2023, gradually |
|
Onsite consumers also including Group customers |
|
An average of about 4 per MW |
|
119
|
__________________________________________
| (1) |
As stipulated in the relevant generation license. |
| (2) |
The estimate of the costs does not consider account half of the assessment issued by Israel Land Authority (ILA) in January 2021.
The initial fee assessment was approximately NIS 200 million (not including VAT) (approximately $64 million) in respect of capitalization
fees. OPC filed a legal appeal of the final assessment. |
| (3) |
Not including amounts relating to milestones provided in the Sorek power plant
construction agreement that were partially completed. |
Israel – Main details about projects
under development and construction in Israel
Power plant/ energy generation facilities |
|
|
|
|
|
|
|
|
|
Hadera 2 |
|
Under development |
|
Hadera, adjacent to the Hadera power plant |
|
Conventional with storage capability |
|
On December 27, 2021, the National Infrastructure Committee
decided to submit National Infrastructure Plan 20B for government approval under Section 76C (9) of the Planning and Building Law, 1965
(hereinafter – the “Planning and Building Law”). For further information, including regarding the petition to the High
Court of Justice that was filed against the decision of the National Infrastructure Committee and others (including Hadera 2). On June
28, 2022, a judgment was rendered which rejected the petition in limine. In December 2022, a renewable option agreement was signed with
Infinya Ltd., for a 5-year period, to lease the land for the project. |
|
Rotem 2 |
|
Under development |
|
Mishor Rotem, adjacent to the Rotem power plant |
|
Under review, following the National Infrastructure Committee’s decision.
|
|
On December 27, 2021, the National Infrastructure Committee resolved to dismiss National Infrastructure
Plan 94 advanced by Rotem 2, however it called on a developer to assess the option of realizing other technologies at the site. |
OPC sells energy in Israel through PPAs. The
weighted average remaining life of OPC’s PPAs based on firm capacity, as of
March 19, 2023, is approximately 7 years for OPC-Rotem
and 10.5 years for OPC-Hadera (subject to the option for early termination or extension), including a 25-year PPA with Infinya. The IEC
PPA (as defined below), which extends for a 20-year term from COD of OPC-Rotem, provides OPC-Rotem with the option to allocate and sell
the generated electricity of the power station directly to private customers. OPC-Rotem has exercised this option and sells all of its
energy and capacity directly to private customers (i.e., customers other than the IEC). OPC-Rotem and OPC-Hadera have approximately 60
private customers, with whom they entered into PPAs. For further information on the IEC PPA, see
“Item
4.B Business Overview—Our Businesses—OPC’s Description of Operations—Regulatory,
Environmental and Compliance Matters—Israel—OPC-Rotem’s Regulatory Framework.”
United States
The following table sets forth summary operational
information regarding OPC’s United States operations (active projects), through its 70% ownership of CPV:
|
|
|
|
|
|
|
|
|
|
|
Year of
commercial
operation |
|
Conventional Energy Projects
|
|
Fairview
|
|
Pennsylvania |
|
25% |
|
Conventional gas-fired, Combined cycle |
|
1,050 |
|
2019 |
|
Towantic
|
|
Connecticut |
|
26% |
|
Conventional gas-fired (dual fuel / two fuels), Combined cycle |
|
805 |
|
2018 |
|
Maryland
|
|
Maryland |
|
25% |
|
Conventional gas-fired, combined cycle |
|
745 |
|
2017 |
|
Shore
|
|
New Jersey |
|
37.53% |
|
Conventional gas-fired, Combined cycle |
|
725 |
|
2016 |
|
Valley
|
|
New York |
|
50% |
|
Conventional gas-fired, dual-fuel, Combined cycle |
|
720 |
|
2018 |
|
Renewable Energy Projects |
|
Keenan II
|
|
Oklahoma |
|
100%(1)
|
|
Wind |
|
152 |
|
2010 |
______________________________________
| (1) |
In April 2021, CPV acquired the remaining 30% interest in this project and, therefore, has 100% ownership interest. |
The power plants in which CPV has an interest
generally sell their output on the spot market. CPV has in place hedging arrangements as described below.
Industry Overview
Overview
of Israeli Electricity Generation Industry
Electricity generation and supply in Israel
In general, the Israeli electricity market
is divided into four sectors: the (i) generation sector, (ii) transmission sector (transmitting electricity from generation facilities
to switching stations and substations through the electricity transmission grid), (iii) distribution sector (transmitting electricity
from substations to consumers through the distribution grid including high voltage and low voltage lines), and the supply sector (sale
of electricity to private customers). All of the actions provided in the Electricity Sector Law shall be carried out pursuant to a license
are subject to other restrictions. As of
December 31, 2021, the installed electricity production capacity in Israel (of the IEC and independent
producers), was 17,850 MW excluding renewable energies, and 3,656 MW of renewable energies. According to publications of the EA, the expected
annual rate of increase in demand for electricity is 3.3%.
The Israeli electricity market includes a
number of key players: the EA, the IEC, Noga, the Ministry of Energy and Infrastructures (the “Ministry of Energy”), independent
electricity producers and suppliers and electricity consumers.
The Ministry of Energy is in charge of the
energy and natural resources markets of Israel, including electricity, fuel, cooking gas, natural gas, energy conservation, oil and gas
exploration, etc. The Ministry of Energy regulates the public and private entities involved in these fields and seeks to ensure an appropriate
response to the market’s changing energy and infrastructure needs, while regulating the market, protecting the consumer and protecting
the environment. In addition, the Minister of Energy has powers under the Electricity Sector Law, including regarding licenses and policy
setting on matters regulated under the Law. The EA reports to the Ministry of Energy and operates in accordance with its policy. The EA
has the power to issue licenses in accordance with the Electricity Sector Law, to supervise license holders, to set tariffs and criteria
for the level and quality of service required from an “essential service provider” license holder. Accordingly, the EA supervises
both the IEC and System Operator as well as independent electricity producers and suppliers. According to the Electricity Sector Law,
the EA is authorized to determine the electricity tariffs in the market (including the generation component) based, among other things,
on the IEC’s costs that are recognized by the EA.
IEC supplies electricity to most of the customers
in Israel in accordance with licenses granted to it under the Electricity Sector Law, and transmits and distributes almost all of the
electricity in Israel. In general, IEC is responsible for the installation and reading of the electricity meters of electricity consumers
and generators and for transfer of the information to Noga and suppliers in accordance with the decisions of the EA. As of
November 1,
2021, Noga commenced full operation, including responsibility for the System Operation Unit, planning and development, statistics and
markets, and the power authority. Through various units, Noga is in charge of the planning of the transmission system, including, among
other things, drawing up a development plan for the transmission and generation segments, setting criteria for the development of the
electricity system, conducting forecasts, engineering and statutory planning of the transmission system, and conducting connection surveys
to generation facilities, current operation of the transmission system. Pursuant to the Electricity Sector Law, the IEC and Noga are defined
as an
“essential service provider” and as such, they are subject to the criteria and tariffs set by the EA.
As of 2021, independent power producers (including
OPC-Rotem and OPC-Hadera), including those using renewable energy, active in Israel have an aggregate generation capacity of 9,887 MW,
constituting 46% of the total installed generation capacity in Israel. At the end of 2025 (the end of the IEC Reform), the market share
of the independent electricity producers (including OPC-Rotem and OPC-Hadera), including renewable energies, is expected to amount to
approximately 69% of the total installed capacity in the sector.
The generation component and changes in IEC’s
costs
In accordance with the Electricity Sector
Law, the EA determines the tariffs, including the rate of the IEC electricity generation component, in accordance with the costs principle
and the other considerations provided for in the Electricity Sector Law, as applied by the EA. Within this, the generation component is
based, inter alia, on the IEC’s fuel costs, comprising mainly of the IEC’s gas and coal costs, the costs of purchasing electricity
from independent producers, the IEC’s capital costs, and the EA’s policy on classification of costs to either the generation
component and the IEC’s system costs or the recognition of the said costs of IEC. The generation component may also change based
on IEC’s other expenses and revenues and may also be affected by other factors, such as, sale of power plants as part of the IEC
Reform.
Under the agreements with the private customers, OPC charges its customers the demand
side management tariff (the
“TAOZ”), net of the generation component discount. As of
March 19, 2023, since the electricity
price in the undertakings between OPC-Rotem and OPC-Hadera (and of the generation facilities and the Kiryat Gat Power Plant, subject to
the completion of its acquisition) and their customers is impacted directly by the generation component (such that a decline in the generation
component would generally decrease the profitability and vice versa) and the generation component is the linkage base for the natural
gas price in accordance with the gas supply agreements of OPC in Israel (subject to a minimum price), OPC is exposed to changes in the
generation component, including, among other things, changes in the generation costs and the energy acquisition costs of IEC, including
the price of coal and IEC’s gas cost. In addition, OPC is exposed to changes in the methodology for determining the generation component
and recognizing IEC costs by the EA. It should be noted that in general an increase in the generation component has a positive effect
on OPC’s results.
The summer on-peak (August) high voltage tariff
for 2022 indicates that the generation component in 2022 accounted for about 88% of TAOZ. In addition, the TAOZ includes system costs
at the rate of 7% and public utilities at the rate of about 5%.
On
February 1, 2022, the annual update of
the electricity tariffs of the EA for 2022 entered into effect, according to which the generation component, which declined at the rate
of about 13.6%, and was NIS 0.2869 per kWh as of the date.
On
May 1, 2022, a further revision of the
electricity tariff for 2022 came into effect, as a result of the reduction in the excise duty in respect of the use of coal, following
the excise tax on fuel order issued by the Ministry of Finance and signed in April 2022 as part of the government’s plan to tackle
the increase in cost of living. The generation component after the reduction amounted to NIS 0.2764 per kWh, which was a decrease of approximately
3.7% in relation to the tariff set as of
February 1, 2022, as stated above.
A further update to the electricity tariff
for the remaining months of 2022 came into effect on
August 1, 2022, whereby the generation component stood at NIS 0.314 per kWh, which
constituted a 13.6% increase compared to the tariff set in May 2022, and a 9.4% increase compared to the tariff set in February 2022.
A hearing published by the EA on
July 11,
2022 stated that the reason for the update to the tariff is the global energy crisis which was worsened due to the Russian invasion of
Ukraine, and which triggered significant increase in energy and electricity prices in many countries across the world. The crisis led
to a sharp increase in the coal prices compared to the price on the basis of which the tariff was updated at the beginning of the year,
and it, together with an increase in the NIS to U.S. Dollar exchange rate and the CPI, made it necessary to update the recognized cost
and the electricity tariffs.
Such increase in the generation component
had a positive effect on OPC’s profitability in 2022 compared to 2021.
On
January 1, 2023, an annual update of the
tariff for 2023 came into effect for the IEC’s electricity consumers. In accordance with the explanatory notes to the resolution,
the high cost of coal was the main reason for the increase in electricity tariffs in 2022, and is expected to cause high costs in 2023
as well. In accordance with the update, the generation component stood at NIS 0.312 per kWh, a 0.6% decrease compared to the generation
component that applied in the last few months of 2022.
On
February 1, 2023, the EA resolution to
revise the costs recognized to the IEC and Noga and the tariffs paid by electricity consumers came into effect. This came into effect
after the Ministry of Finance signed, on
January 23, 2023, orders that extend the reduction in the purchase tax and excise tax rates applicable
to coal, such that the reduction shall be in effect through the end of 2023 . Pursuant to the resolution, a further update to the generation
component for 2023 came into effect, whereby the generation component stands at NIS 0.3081 per kWh, approximately 1.2% decrease compared
to the tariff set on
January 1, 2023.
In addition, at the beginning of March 2023, a
hearing was published in connection with the revision of the costs recognized to the IEC and the tariffs paid by electricity consumers,
following the 30% decline in coal prices compared to the price on which the latest tariff revision was based, and increase in other costs.
The tariff will be reduced by approximately 1% from the tariff set in February 2023.
Updates in the demand hour clusters
On
August 28, 2022, the EA also published
a resolution amending the demand hour clusters in order to, according to the publication, adjust the structure of the TAOZ, such that
it integrates a significant portion of solar energy and storage. According to the published resolution, the revision of the demand hour
clusters is expected to drive a shift in demand to the afternoon, when increased levels of renewable energies are generated, at the expense
of demand during peak hours in the evening. The EA expects to achieve such change in demand by, among other things, increasing the tariff
during peak demand, and implementing the following key revisions: (i) changing peak hours from the afternoon to the evening; (ii) increasing
the number of months during which peak time applies in the summer to from two months to four months; (iii) increasing the difference between
peak time and off-peak time; (iv) defining a maximum of two clusters for each day of the year (without the mid-peak cluster). Changing
the hour categories in accordance with the decision is expected to increase the tariffs paid by the household consumers and decrease the
tariffs paid by TAOZ tariff consumers.
In accordance with the resolution, the revised
tariff structure came into force with the revision of the tariff for consumers for 2023. The resolution also stipulates that in view of
the frequent changes in the sector and the need to reflect the appropriate sectoral cost, the hour clusters shall be updated more frequently,
in accordance with actual changes.
Simultaneously with the publication of the
resolution on the demand hour cluster revision, the EA published a resolution on the execution of changes to a number of regulations of
generation facilities that are affected by the change in the tariff structure (including the regulation of cogeneration facilities). In
December 2022, a decision was passed not to effect changes regarding cogeneration facilities.
Following the resolution, OPC is taking steps
to adjust its sales mix in Israel, to the extent possible, to the revised structure of the demand hour clusters. The revision of the demand
hour clusters is expected to have a negative effect on OPC’s results since, generally, the consumption profile of OPC’s customers,
who are mostly industrial and commercial customers, have low level of consumption fluctuations during the day. In addition, a change of
the demand hour clusters changes the breakdown of OPC’s revenues and profitability in Israel from quarter to quarter, such that
the third quarter (summer) is higher than the other quarters.
The IEC Reform and development of the private
electricity market in Israel
The private electricity generation market
in Israel has been growing in recent years. Entrance of the private electricity producers 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). The market share of independent
producers in the generation and supply segments will continue to grow in coming years, inter alia, as a result of removing old IEC power
plants and construction of power plants by independent producers (using natural gas and renewable energies), and as a result of the IEC
Reform, which includes the sale of five power plants and their transfer from the IEC to independent producers, and imposed limitations
on IEC with respect to construction of new power plants, as well as a result of steps to open the supply segment to competition, including
providing licenses to suppliers without generation means and the resolution regarding smart meters installation rules.
The following table presents data on the share
of independent electricity producers and the IEC in the electricity market, as well as renewable energy production in 2020 and 2021, as
published by the EA.
| |
|
|
|
|
|
|
| |
|
|
|
|
% of Total Installed Capacity in the Market |
|
|
|
|
|
% of Total Installed Capacity in the Market |
|
|
IEC
|
|
|
11,615 |
|
|
|
58 |
% |
|
|
11,615 |
|
|
|
54
|
%
|
|
Private electricity producers (without renewable energy)
|
|
|
5,780 |
|
|
|
29 |
% |
|
|
6,231 |
|
|
|
29
|
%
|
|
Renewable energy (private electricity producers)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in the market
|
|
|
19,944 |
|
|
|
100 |
% |
|
|
21,502 |
|
|
|
100 |
% |
| |
|
Energy produced (thousands of MWh) |
|
|
% of total energy produced in Israel |
|
|
Energy produced (thousands of MWh) |
|
|
% of total energy produced in Israel |
|
|
IEC
|
|
|
44,333 |
|
|
|
61 |
% |
|
|
38,223 |
|
|
|
52
|
%
|
|
Private electricity producers (without renewable energy)
|
|
|
24,308 |
|
|
|
33 |
% |
|
|
30,077 |
|
|
|
41
|
%
|
|
Renewable energy (private electricity producers)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in the market
|
|
|
72,791 |
|
|
|
100 |
% |
|
|
73,974 |
|
|
|
100 |
% |
Pursuant to the IEC Reform, an 8-year plan
was formed, under which the IEC will be required, among other things, to sell certain generation sites (including Eshkol Power Plant,
(the “Eshkol”)), and the system operation activities will be spun off from the IEC and executed by a separate government company.
Accordingly, Noga started operating as an entity separate to the IEC in November 2021.
In July 2022, OPC was informed by the IEC
that it passed the preliminary screening stage of the tender for the sale of Eshkol. In December 2022, the EA published a resolution regarding
the eligibility of the bidders in the tender for the sale of the Eshkol to receive an electricity generation license. Under the resolution,
OPC complies with the requirements, and is eligible to obtain a generation license in the Eshkol tender. The tender for the sale is expected
to take place in 2023.
Forecast of potential growth in natural gas
in the Israeli electricity market
The expected additional installed capacity
required in the Israel power generation market (generated by natural gas) is based on the following assumptions:
| |
|
|
New installed (gas fired) capacity with gas by 2030
|
1,400-4,000 |
|
Sale of IEC sites that have not yet been sold in accordance with
sector reform (Eshkol and Redding) |
2,111 |
|
Total additional potential independent capacity in natural gas
by 2030 |
3,511-6,111 |
Virtual supply - Opening of the supply segment
to suppliers without means of generation and to household consumers
In February 2021, the EA reached a resolution
to regulate virtual supply license, which allows suppliers who do not have means of production to purchase energy from the System Operator
to sell to their customers (the “Virtual Supply”). Suppliers who did not have means of production had been restricted by certain
a quota set by the EA. In July 2021, OPC was awarded a virtual supply license. The license was also awarded to Gnrgy. In September 2021,
OPC began entering into virtual supply agreements with customers at a total capacity of 110 MW. OPC also entered into a virtual supply
agreement with Noga.
On
January 24, 2022, the EA increased the
supply quota for suppliers without production means by an additional 1000 MW, in two equal batches of 500 MW (on April 24 2022 and July
24 2022). In March 2022, the EA removed all quotas that were set for virtual supply, and amended the tariff for acquisition of electricity
from the System Operator.
Overview
of United States Electricity Generation Industry
Overview
The electricity market in the United States,
in which CPV operates, is the largest private electricity market in the world with installed capacity of approximately 1,250 gigawatts
of generation facilities. The generation mix has changed significantly over the last several years. In 2016, natural gas overtook coal
as the primary fuel source for electricity production in the United States, after coal comprised over 50% of the electricity supply since
the 1980s. These changes have been driven by federal and state environmental policies, as well as the relative cost of the fuel sources
and the advancement in technologies. These factors also have greatly contributed to the growth in renewable technologies over the last
several years.
The wholesale electric marketplace in the
United States operates within the framework of several FERC-approved regional or state market operators, including RTO or ISO. RTO/ISOs
are responsible for the day-to-day operation of the transmission system, the administration of the wholesale markets in the regions in
which they operate, and for the long-term transmission planning and resource adequacy functions. In most cases the ISO’s and RTO’s
powers are concentrated under a single entity. The RTOs and ISOs are supervised by FERC, except for ERCOT (the Texas electricity market).
In addition to FERC, other state regulators regulate the sale and transmission of electricity, within each state, and the RTOs/ISOs, which
are the key players in the wholesale electricity markets in the United States, in which the CPV Group operates, include other electricity
producers and local utility companies, that serve both wholesale and retail customers. Most of the other electricity producers (especially
producers that joined recently), and local electricity companies operating in these wholesale markets, are privately owned entities; however,
those market players include a number of publicly held cooperatives, government utility companies and federal system administrators.
Each of the ISOs and RTOs operates energy
markets and related services, and buyers and sellers can submit in those markets bids to sell or supply electricity and related services,
such as capacity services, frequency stabilization, backup, etc. Some of the ISOs and RTOs also operate capacity markets. ISOs and RTOs
operating in advanced markets use a demand-based electricity selling system, and a marginal price set by electricity producers to meet
the regional consumption needs. In large parts of the United States, the electricity management system has a more traditional structure
where the local electric utility company is in charge of load management and the production mix. The CPV Group operates mainly in advanced
markets managed by ISOs or RTOs.
In addition to revenues from the sale of energy,
related services and availability, manufacturers of renewable energy and manufacturers of low-carbon energies benefit from government
mechanisms and incentives. Both U.S. federal and state governments offer incentives to suppliers in order to meet the renewable energy
targets. A number of states require the local electric utility company to acquire a certain quantity of Renewable Energy Credits (RECs)
in accordance with the total consumption of their consumers. In addition, there are federal tax incentives in connection with production
of and investment in renewable energies and other low-carbon technologies, which also constitute a financial incentive to develop specific
production technologies. Furthermore, each state has in place environmental protection regulations, which may provide incentives and encourage
the closure of existing production facilities that use fossil fuels.
While each of the ISOs and RTOs has the same
function on the federal level, there are significant differences between markets in terms of their structure and activity; those differences
may affect the execution and the economic feasibility of new projects, and promote or delay investments in new projects.
The CPV Group operates mainly in advanced
markets managed by ISOs or RTOs.
Market Developments
The increasing demand for renewable energy
led to an unprecedented increase in interconnection applications by projects, and to an increase in interconnection survey applications
by solar projects. These demands may affect the planning functions of ISOs or RTOs and utility and electric distribution companies, and
lead to delays in connection approvals; the demand may also affect the process and pace of promoting the CPV Group’s projects under
development. In addition, projects under construction and development are affected by disruptions or delays in supply chains. Maple Hill,
Rogue’s Wind and Stagecoach signed PPAs and capacity agreements, as well as Solar Renewable Energy Credits (“SREC”s),
which include provisions relating to delays in commercial operation. If the delays are longer than certain periods, the other parties
to the agreements may terminate the agreements, and the CPV Group’s for liability compensation shall be limited to the collateral
provided under the agreements. The cumulative amount of collaterals provided in connection with renewable energy development projects
is an aggregate sum of approximately $32 million and were provided due to various needs and purposes in the execution stages.
The transition in the United States to renewable
energy and low-carbon emission generation was accelerating in recent years. Hydroelectric generation has been a mainstay of the industry
from its early days, and certain parts of the country have a significant resource base thereto. During the past decade there has been
a significant decrease in the use of coal, mainly due to introduction of carbon capture power plants but coal still constitutes more than
20% of the total electricity generation in the United States. In recent years, there has been a significant increase in the capacity of
power plants powered by wind and solar energy. A key factor driving the increase in renewable technologies are state policies supporting
the decarbonization of the economy which includes energy, transportation, and heating. Twenty two states, including Maryland, New York,
New Jersey, Connecticut and Illinois, states in which the CPV Group operates, have enacted mandatory generation targets using renewable
energy to support state demand, and others have policy targets aimed at reducing CO2
emissions over time. Plans implemented by states for renewable energy development require local utility companies to acquire a certain
rate of electricity from renewable sources through plans commonly referred to as RECs, which are tradable on a number of exchanges throughout
the country.
Federal regulations require the reporting
of greenhouse gas emissions under the federal Clean Air Act (
“CAA”). Federal regulations also impose limits on CO
2
emissions from new (commenced construction after
January 8, 2014) or reconstructed (commenced reconstruction after
June 8, 2014) combined-cycle
power plants. States may also impose additional regulations or limitations on such emissions. For example, CPV’s conventional, natural
gas-fired power plants in Connecticut, New York, New Jersey and Maryland are subject to the Regional Greenhouse Gas Initiative (
“RGGI”),
which requires CPV’s natural gas-fired plants to obtain, either through auctions or trading, greenhouse gas emission allowances
to offset each facility’s emission of CO
2. Pennsylvania
may also adopt the RGGI regulation pending the outcome of legal proceedings challenging its implementation. Under RGGI, an independent
market monitor provides oversight of the auctions for CO
2 allowances,
as well as activity on the secondary market, to ensure integrity of, and confidence in, the market. In 2022, the price of carbon dioxide
allowances averaged $13.49 per allowance in the four quarterly RGGI auctions.
In addition, federal and state tax policies
have incentivized investment in certain renewable technologies through Production Tax Credits (the “PTC”), which provide a
tax benefit for every kWh generated during a ten-year period and through Investment Tax Credits (the “ITC”), which provide
tax benefits based upon the amount of investment made in a project.
In 2022, the IRA was signed into law by President
Biden. Among other things, this law awards significant tax benefits to renewable energies and technologies aimed at reducing carbon emissions.
One of the IRA’s key objective is to increase the production of electricity using renewable energies and to increase regulatory
stability in this sector. For more discussions on IRA, see “Item 4.B Business Overview—Our
Businesses—OPC—OPC’s Description of Operations—Regulatory, Environmental and Compliance Matters—United States—The
Inflation Reduction Act of 2022.”
For discussions on the PJM market, see “Item
4.B Business Overview—Our Businesses—OPC—OPC’s Description of Operations—Regulatory, Environmental and Compliance
Matters—United States—The PJM market.”
OPC’s Description
of Operations
OPC operates power generation plants in Israel,
and with the acquisition of CPV in January 2021, in the United States. In particular, since fourth quarter of 2022, OPC has the following
three operating segments (which constitute reportable segments in OPC’s financial statements):
|
• |
Operations
in Israel: OPC manages its activities through OPC Israel, in which OPC holds
80%, with the remaining 20% held by Veridis. The total capacity of OPC’s active or under-construction projects in Israel is approximately
1,203 MW; |
|
• |
Renewable
Energy in the U.S. in which OPC (through the CPV Group) is engaged in the
initiation, development, construction and operation of power plants using renewable energy in the United States. CPV’s share and
generation capacity in the active renewable energy power plants is approximately 152 MW in wind energy power plants and approximately
228 MW in two solar projects under construction; and |
|
• |
Conventional
Energy in the U.S. in which OPC (through the CPV Group) is engaged mainly
in the holding rights (usually minority rights) in active power plants and power plants under construction operating using natural gas
at high efficiency, which the CPV Group initiated and constructed, which are part of the Energy Transition - the process of switching
to low-emission energy generation. CPV’s share and its generation capacity in active gas-fired and advanced combined cycle power
plants stands at 1,290 MW out of 4,045 MW (five power plants), and approximately 126 MW out of a total capacity of approximately 1,258
MW under construction. |
In addition, OPC (through CPV) has additional
operations (U.S. Other) in the United States that are complementary to electricity generation activity of the CPV Group. These additional
operations include development of electricity and energy generation projects integrating carbon capturing capabilities, under various
development stages; the provision of assets and energy management services to power plants in the U.S., which it holds, and which are
owned by third parties and a retail operation to sell electricity to commercial and industrial customers; this activity complements the
electricity generation activity through the CPV Group.
OPC’s facilities and primary development
projects are set forth below.
Israel
OPC’s operations in Israel include power
generation plants that operate on natural gas and diesel. As of
December 31, 2022, OPC’s installed capacity was up to 610 MW. OPC’s
operations in Israel consist of two power plants in operation: OPC-Rotem and OPC-Hadera, and one plant under construction, Tzomet. OPC
Israel has a 100% interest in each of OPC-Rotem, OPC-Hadera and Tzomet and OPC has an 80% interest in OPC Israel.
OPC-Rotem
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 backups.
OPC-Hadera
OPC’s second power plant, OPC-Hadera
operates a cogeneration power station in Israel with capacity of approximately 144 MW, which reached its COD on
July 1, 2020 and owns
the Hadera Energy Center, which consists of boilers and a steam turbine. The Hadera Energy Center currently serves as backup for the OPC-Hadera
power plant’s supply of steam. At the end of April 2022, OPC-Hadera’s steam turbine was shut down for maintenance purposes,
where in the course of the work, repair work was also performed in the gas turbines. Due to additional repairs required, the shutdown
period was extended and the steam turbine returned to service in December 2022.
Tzomet
OPC’s third power plant is Tzomet, which
is developing a natural gas-fired open-cycle power station in Israel with capacity of approximately 396 MW. The Tzomet plant will be a
“peaking” facility and all capacity will be sold to the IEC. In April 2019, the EA granted Tzomet a conditional license for
a 66-month term (which can be extended, subject to conditions) for the construction of a 396 MW conventional open-cycle power plant. In
February 2023, the EA updated Tzomet’s license extending the 36-month period stated above by a further six months. Tzomet’s
conditional license remains subject to conditions set forth under the conditional license, including construction of the plant, as well
as for the receipt of a permanent generation license upon expiration of the conditional license. If Tzomet is unable to meet such conditions
this could result in a delay or inability to complete the project. In 2020, construction of the Tzomet power plant commenced. OPC expects
that the Tzomet plant will reach its COD in the first half of 2023 and that the total cost of completing the Tzomet plant will be approximately
NIS 1.4 billion (approximately $0.4 billion) (excluding NIS 200 million, i.e. the tax assessment received with respect to the land). As
of
December 31, 2022, OPC had invested approximately NIS 1.2 billion (approximately $341 million) in the project.
OPC has participated in the past and will
consider participating in future tenders, including the IEC tenders. However, there is no certainty that OPC will participate in such
tenders or that it will be successful.
Construction
of energy generation facilities on the premises of consumers
OPC has entered into agreements with several
consumers the installation and operation of generation facilities (natural gas) on the premises of consumers for capacity of approximately
110 MW, as well as arrangements for the sale and supply of energy to consumers. Upon completion, OPC will sell electricity from the generation
facilities to the consumers for a period of approximately 15-20 years from the COD of the generation facilities. The planned COD dates
are in accordance with the conditions provided in the agreements, and not later than 48 months from the execution date of the relevant
agreement. The total amount of OPC’s investment depends on the number of arrangements entered into and is expected to be an average
of NIS 4 million (approximately $1 million) for every installed MW. OPC has also entered into construction agreements and agreements for
supply of motors for the generation facilities with a total capacity of approximately 120 MW. As of
December 31, 2022, OPC’s investment
in such generation facilities amounted to approximately NIS 119 million (approximately $34 million).
Sorek
In May 2020, OPC, through a wholly-owned subsidiary,
won a build-operate-transfer tender with the State of Israel for the construction, operation and maintenance of a seawater desalination
plant, in an agreement which states that OPC will construct, operate and maintain a natural gas-fired cogeneration power plant with a
capacity of up to 87MW at the premises of the desalination plant, and sell electricity to the desalination plant for a period of 25 years,
following which ownership of the power plant will be transferred to the State of Israel. OPC has committed to construct the plant within
24 months from the approval date of the national infrastructure plan (which was approved in November 2021). OPC is currently in the process
of entering into an equipment supply agreement, a construction agreement and a maintenance agreement, which will be subject to approval
by the Seawater Desalination Authority. OPC estimates that the construction period for the plant will end in the second half of 2023.
Excess capacity not used by the desalination plant is expected to be sold to the System Operator.
Gnrgy
In 2021, OPC expanded its business into management
of energy for electric vehicles by acquiring a 51% interest in Gnrgy, a company engaged in electric vehicles charging (e-mobility) and
the installation of charging stations for electric vehicles in Israel. In July 2021, the EA granted virtual supply license to Gnrgy. OPC’s
holdings in Gnrgy were transferred to OPC Israel.
Kiryat Gat
In June 2022, OPC, through a subsidiary, entered
into a purchase agreement to acquire a combined-cycle power plant with installed capacity of 75 MW located in the Kiryat Gat area of Israel.
The plant began commercial operation in November 2019. Consideration for the acquisition is approximately NIS 870 million (approximately
$248 million), subject to further adjustments for cash balances and working capital. The consideration, as adjusted, is required to be
paid on the completion date of the acquisition, except for NIS 300 million (approximately $86 million) of the consideration, which is
required to be paid on
December 31, 2023. OPC is negotiating an agreement with a financial institution to finance a portion of the purchase
in the amount of approximately NIS 450 million (approximately $128 million), and expects to fund the remaining purchase price with its
own resources.
The following table sets forth summary operational
information for OPC’s operating plants in Israel as of and for the year ended
December 31, 2022:
|
|
|
|
|
|
Net
energy
generated
(GWh)(1)
|
|
|
Availability
factor
(%)(2)
|
|
|
OPC-Rotem
|
|
|
466 |
|
|
|
3,285 |
|
|
|
90.5 |
% |
|
OPC-Hadera
|
|
|
|
|
|
|
|
|
|
|
73.6 |
% |
|
OPC Total
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________________________
| (1) |
The nextnet generation is the gross production capacity during the year, less energy consumed by the power plant for its own use.
|
| (2) |
The availability factor is the period during which the power plant was available for electricity generation, including scheduled
and non-scheduled maintenance work. |
The following table sets forth summary operational
information for OPC’s operating plants in Israel as of and for the year ended
December 31, 2021:
|
|
|
|
|
|
Net
energy
generated
(GWh) |
|
|
|
|
|
OPC-Rotem
|
|
|
466 |
|
|
|
3,726 |
|
|
|
98.88 |
% |
|
OPC-Hadera
|
|
|
|
|
|
|
|
|
|
|
84 |
% |
|
OPC Total
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summaries provide a description
of OPC’s businesses in Israel.
OPC-Rotem
OPC Israel (owned by OPC (80%) and Veridis (20%)) has a 100%
stake in OPC-Rotem. 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).
Gas
Supply Agreements
The power plants owned by OPC in Israel use
natural gas as their primary fuel, with diesel fuel and fuel oil as backup.
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. OPC-Rotem had 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. This agreement was amended in 2019, reducing the minimum consumption
to 40%, extending the time period when the option can be exercised, and increasing certain gas consumption commitments of OPC-Rotem until
the end of the Karish gas reservoir commissioning (at which time gas supply from Energean is expected to be available). The amendment
was intended to allow a reduction in the quantity of gas purchased under the agreement with Tamar Group and increase in the quantity purchased
under the terms of the agreement with Energean (described below) with the purpose of decreasing the overall gas price of OPC. The amendment
was also expected to increase OPC-Rotem’s cumulative annual take or pay obligations. Commencing in March 2020, OPC-Rotem was required
to purchase minimum amounts of gas pursuant to the agreement, the take or pay obligation. In May 2022, OPC-Rotem exercised the option
to reduce some of the quantities purchased under the Tamar agreement, and served Tamar with the notice regarding the reduction of quantities,
which will take place at the end of a 12-month period. OPC-Rotem expects that subject to the commencement of the commercial operations
of Energean, and at the end of the notice period regarding the reduction of the quantities under OPC-Rotem’s agreement with Tamar
(12 months), the quantity and purchase cost of natural gas from the Tamar Group will decline materially.
In December 2017, OPC-Rotem signed an agreement
for the purchase of natural gas with Energean (the “OPC-Rotem Energean Agreement”). Pursuant to this agreement, OPC-Rotem
has 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. In
2019, the agreement between OPC-Rotem and Energean was amended to increase the daily and annual gas consumption from Energean, while keeping
the same total contractual gas quantity. The supply period was shortened from fifteen years to ten years (and shorter if the total contractual
quantity is supplied earlier). In May 2022, a further amendment to the OPC-Rotem Energean Agreement was executed which set out, among
other things, arrangements pertaining to bringing forward the reduction of the quantities of gas purchased under OPC-Rotem natural gas
agreement with the Tamar Group and as well the arrangements in connection with pay or take undertakings. Also in May 2022, OPC-Rotem delivered
to Tamar its reduction notices for the reduction of quantities that will come into effect at the end of the period set in OPC-Rotem agreements
with the Tamar Group (12 months). In August 2022, OPC-Rotem notified Energean regarding the increase of the contractual gas quantity under
the original terms and conditions of the OPC-Rotem Energean Agreement, which increases the take or pay commitment under the agreements.
In 2020-2021, Energean notified OPC-Rotem
of the delay in the supply of gas from the Karish Tanin Reservoir, contending that COVID-19 related force majeure events have delayed
the commercial operation of the Karish Tanin Reservoir. On
October 26, 2022, Energean announced that it commenced flowing the first gas
from the Karish Tanin Reservoir, with the commercial operation of the Karish Tanin Reservoir expected to take place within six months
of the announcement. In addition, Energean has notified OPC that the test run period of the reservoir has started, during which OPC was
being supplied an insignificant quantity of natural gas from Energean. During 2022, OPC-Rotem was paid NIS 9 million (approximately $3
million) in respect of the delay in the supply of gas from the Karish Tanin Reservoir.
In November 2022, OPC-Rotem served Energean
with a notice of the exercise of the option to acquire an additional immaterial quantity, as set out in the amendment to the agreement
with Energean.
In January 2023, Energean announced that the
commissioning process is expected to be completed in February 2023. Energean informed OPC-Rotem of the completion of the commissioning
process for the purposes of the OPC-Rotem agreement on
March 25, 2023 and of the commercial operation on
March 26, 2023. Upon commercial
operation of the Karish Tanin Reservoir, and at the end of the period of reduction of quantities under the Tamar Agreements, OPC-Rotem
is expected to start acquiring a substantial portion of the gas also from Energean, and thereby cut its gas acquisition cost. OPC is currently
in touch with Energean in connection with its notices to OPC-Rotem.
Electricity
Sales
OPC-Rotem has a PPA with IEC, the government-owned
electricity generation, transmission and distribution company in Israel, or the IEC PPA (which will be assigned by IEC to the System Operator).
The term of the IEC PPA is for 20 years after the power station’s 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, subject to certain restrictions set in the agreement):
(i) provide the entire net available capacity of its power station to IEC or (ii) carve out energy and capacity for direct sales to private
consumers. OPC-Rotem has allocated the entire capacity of the plant to private consumers since COD. As of
December 31, 2022, OPC-Rotem
supplies energy to dozens of private customers according to PPAs. OPC manages sales of electricity from the OPC-Rotem power plant in a
manner that is intended to permit flexibility in the sale of electricity to its customers (for example by means of suspending from time
to time the sale of the electricity). 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.
Maintenance
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. The next regular maintenance work that is scheduled to take place in
2024 (spring), during which the plant’s operations are expected to be suspended for approximately 15 days.
OPC-Hadera
OPC Israel owns 100% of OPC-Hadera, which
operates a cogeneration power plant in Israel with capacity of approximately 144 MW and owns the Hadera Energy Center, which consists
of boilers and a steam turbine. The Hadera Energy Center currently serves as back-up for the OPC-Hadera power plant’s supply of
steam and its turbine is not currently operating and is not expected to operate with generation of more than 16MW. The cogeneration power
plant reached its COD on
July 1, 2020. In June 2020, the EA granted a permanent license to the OPC-Hadera power plant for generation of
electricity using cogeneration technology having installed capacity of 144 MW and a supply license. The generation license is for a period
of 20 years, as is the supply license so long as a valid generation license is held (the generation license may be extended by an additional
10 years). At the end of April 2022, OPC-Hadera’s steam turbine was shut down for maintenance purposes, where in the course of the
work, repair work was also performed in the gas turbines. Due to additional required repairs, the shutdown period was extended and the
steam turbine returned to service in December 2022. During the time in which maintenance work was under way in the steam turbines, OPC-Hadera
operated partially and OPC continued selling electricity to its customers. However, OPC purchased electricity from a third party in order
to meet the demand during the shutdown. In addition, maintenance work is expected to take place in October 2023 in one of the power plant’s
gas turbines expected to last two weeks.
OPC-Hadera leases from Infinya the land on
which the power generation plant is located for a period of 24 years and 11 months from December 2018.
In January 2016, OPC-Hadera entered into an
EPC
contract with an EPC contractor, IDOM, for the design, engineering, procurement and construction of the cogeneration power plant (as
well as amendments to the agreement that were subsequently signed). The total consideration, following amendments made to the agreement
in 2018, was estimated at NIS 639 million (approximately $185 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.
On
July 1, 2020, the commercial operation
date of the Hadera power plant commenced after a delay in the completion of construction as a result of, among other things, components
replaced or repaired. The reimbursements from the insurance policies and/or compensation from the construction contractor have not been
received (except for amounts unilaterally offset by OPC against payments to the construction contractor in respect of the delay in operation,
and non-compliance with the power plant’s performance). There is no certainty that OPC will be reimbursed and/or compensated for
the full amount of its direct and indirect damages, and OPC-Hadera had filed an arbitration proceeding against the contractor. In November
2021, OPC-Hadera submitted a response and a counter request to the arbitrator. During 2022, the parties held negotiations in an attempt
to formulate a compromise. There is no certainty regarding the continuation of such negotiations. No compensation has been received from
the construction contractor in respect of the delay in the commercial operation of OPC-Hadera and non-compliance with the performance
criteria outlined in the construction agreement (except for amounts totaling $14 million, which were unilaterally offset by OPC from payments
to the construction contractor, which the construction contractor has disputed). There is no certainty that OPC-Hadera will be able to
receive reimbursements and/or compensation in respect of the full amount of its claims. In July 2022, in accordance with the parties’
request and taking into consideration the maintenance work in the steam turbine, the arbitration proceeding was suspended. In January
2023, the arbitration proceeding was renewed at the request of OPC-Hadera’s construction contractor, and a hearing was scheduled
for June 2024. The submission of a statement of defense and a statement of counterclaim on behalf of OPC was set for June 2023. The construction
contractor contacted the arbitrators, requesting to amend its pleadings and add a claim regarding its entitlement to receive a final acceptance
certificate in connection with the power plant by virtue of the construction agreement.
Sales
of Electricity and Steam
OPC-Hadera’s power plant supplies the
electricity and steam needs of Infinya’s facility and provides electricity to private customers in Israel. It also sells electricity
to the IEC. The power plant operates using natural gas as its energy source, and diesel oil and crude oil as backups. In order to benefit
from the fixed arrangements for cogeneration electricity producers, each generation unit in a power plant must meet the minimum energy
utilization conditions set forth in the Cogeneration Regulations, and if it does not meet them, other tariff arrangements will apply,
which are inferior to the tariff arrangements applicable to cogeneration producers. OPC-Hadera is entitled, if it complies with the terms
and conditions of the regulations arrangements, to sell to the Systems Operator up to 50% of the electrical energy generated during on-peak
and mid-peak hours, based on annual calculation, and up to 35 MW during off-peak hours based on an annual calculation, for a period of
up to 18 years from the permanent license issue date, and at a tariff, the formula for calculation of which is fixed in advance and includes
linkage mechanisms for the various parameters, including OPC-Hadera’s gas price (including taxes, the CPI and the exchange rate
of the USD). Following the demand hours clusters revision resolution, which updated the demand hours clusters, the mid-peak demand hour
cluster was canceled, and the off-peak hours were expanded in a way that might reduce the System Operator’s purchase obligation
from OPC-Hadera. Notwithstanding the foregoing, the EA decided not to make changes regarding producers that use gas to generate electricity.
OPC-Hadera has entered into a PPA with Infinya
for supply of all of Infinya’s electricity and steam needs for a period of 25 years. The agreement provides a minimum quantity of
steam to be purchased by Infinya (take or pay), which will be subject to adjustment. The Hadera Energy Center currently serves as back-up
for the OPC-Hadera power plant’s supply of the steam.
In addition to this agreement, OPC-Hadera
has entered into PPAs with additional private customers. These agreements are essentially similar to OPC-Rotem’s PPAs and include
early termination and/or extension provisions (as the case may be).
Gas
Supply Agreements
In 2012, Infinya entered into an agreement
with the Tamar Group for the supply of natural gas, which has been assigned to OPC-Hadera. This 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 obligation, 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 conditions. In June 2022, OPC-Hadera exercised the option to reduce
the quantities as stated above, which came into effect in March 2023.
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 from January 2019
on the date on which OPC-Hadera consumes the entire contractual capacity. Both 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 will be supplied on an interruptible basis, and the Tamar Group
shall not be responsible for failures in the requested gas supply levels. The 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, OPC-Hadera will be subject to a take or pay obligation.
OPC-Hadera also has the option to sell gas surplus to other customers, including related parties, subject to limitations. In 2019, this
agreement was amended reducing the minimum consumption to 30%, extending the time period when the option can be exercised, and increasing
certain gas consumption commitments of OPC-Hadera until the end of the Karish gas reservoir commissioning (at which time gas supply from
Energean is expected to be available). The amendment was intended to allow a reduction in the quantity of gas purchased under the agreement
with Tamar Group and increase in the quantity purchased under the terms of the agreement with Energean (as described below) with the purpose
of decreasing the overall gas price of OPC. OPC-Hadera exercised an early termination right in June 2022 and informed Tamar Group of such
early termination which will come into force after 12 months and is expected to terminate in
June 30, 2023.
In December 2017, OPC-Hadera signed an agreement
for the purchase of natural gas with Energean (the “OPC-Hadera Energean Agreement” and together with the OPC-Rotem Energean
Agreement, the “Energean Agreements”). Pursuant to this agreement, OPC-Hadera has 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. In 2019, this agreement was amended to increase the daily and
annual gas consumption from Energean, while keeping the same total contractual gas quantity. The supply period was shortened from fifteen
years to ten years (unless the total contractual quantity is supplied earlier). In May 2022, a further amendment to the OPC-Hadera Energean
Agreement was signed which set out, among other things, arrangements pertaining to bringing forward the reduction of the quantities of
gas purchased under OPC-Hadera’s natural gas agreement with the Tamar Group and as well the arrangements in connection with pay
or take undertakings, waiver of assertions and claims in relation to the period prior to the amendment; the amendment also revises the
circumstances and defers the dates on which the parties may terminate the OPC-Hadera Energean Agreement early due to a deferral of the
Karish Tanin Reservoir COD. In June 2022, OPC-Hadera delivered its reduction notice for the reduction of quantities that came into effect
in March 2023 as set in OPC-Hadera’s respective agreements with the Tamar Group. In August 2022, OPC-Hadera informed Energean regarding
the increase of the contractual gas quantity under the original terms and conditions of the OPC-Hadera Energean Agreement, which increases
the take or pay commitment under the agreements.
In 2020-2021, Energean notified OPC-Hadera
of the delay in the supply of gas from the Karish Tanin Reservoir, contending that COVID-19 related force majeure events have delayed
the commercial operation of the Karish Tanin Reservoir. On
October 26, 2022, Energean announced that it commenced flowing the first gas
from the Karish Tanin Reservoir with the commercial operation of the Karish Tanin Reservoir expected within six months from the announcement.
In addition, Energean notified OPC that the test run period of the reservoir has started, during which OPC was being supplied an insignificant
quantity of natural gas from Energean. During 2022, OPC-Hadera was paid NIS 7 million (approximately $2 million) in respect of the delay
in the supply of gas from the Karish Tanin Reservoir. For further information on OPC-Hadera’s gas supply agreements, see “
Item
4.B Business Overview—Our Businesses—OPC—OPC’s Description of Operations—
OPC’s
Raw Materials and Suppliers.”
In
January 2023, Energean announced that the commissioning process is expected to be completed in February 2023. Energean informed OPC Hadera
of the completion of the commissioning process for the purposes of the OPC-Hadera gas supply agreement on February 28, 2023. Upon commercial
operation of the Karish Tanin Reservoir, and at the end of the period of reduction of quantities under the Tamar Agreements, OPC-Hadera
is expected to start acquiring a substantial portion of the gas from Energean, and thereby cut its gas acquisition costs. OPC is currently
in touch with Energean in connection with its notices to OPC-Hadera.
OPC-Hadera had entered into an agreement with
an unrelated third party for the sale of surplus quantities of gas to be supplied to it under the agreement between Energean and OPC-Hadera.
As from January 2022, the agreement was cancelled.
In June 2016, OPC-Hadera entered into a maintenance
agreement with General Electric International Ltd., or GEI, and GE Global Parts & Products GmbH, or 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
plant for a period commencing on the date of commercial operation until the earlier of: (i) the date on which all of the covered units
(as defined in the service agreement) have reached the end-date of their performance and (ii) 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
OPC Israel owns 100% of the shares of Tzomet,
which is developing a natural gas-fired open-cycle power station in Israel with capacity of approximately 396 MW. Tzomet was acquired
for consideration of approximately $31 million.
In February 2020, financial closing for the
Tzomet project was met and in 2020, the construction of the Tzomet power plant commenced. OPC expects that the Tzomet plant will reach
its COD in the first half of 2023 and that the total cost of completing the Tzomet plant will be approximately NIS 1.4 billion (approximately
$0.4 billion) (excluding NIS 200 million, the amount of assessment issued by Israel Lands Authority in 2021, not including the VAT). As
of
December 31, 2022, OPC had invested approximately NIS 1.2 billion (approximately $341 million) in the project.
Sales
of Electricity
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. Therefore, 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 January 2020, Tzomet entered into a PPA
with IEC, the government-owned electricity generation, transmission and distribution company in Israel, or the Tzomet PPA. The term of
the Tzomet PPA is for 20 years after the power station’s COD. According to the terms of the Tzomet PPA, (i) Tzomet will sell energy
and available capacity to IEC and IEC will provide Tzomet infrastructure and management services for the electricity system, including
back-up services, (ii) all of the Tzomet plant’s capacity will be sold pursuant to a fixed availability arrangement, which will
require compliance with criteria set out in relevant regulation, (iii) the plant will be operated pursuant to the System Operator’s
directives and the System Operator will be permitted to disconnect supply of electricity to the grid if Tzomet does not comply with certain
safety conditions and (iv) Tzomet will be required to comply with certain availability and credibility requirements set out in its license
and relevant regulation, and pay penalties for any non-compliance. Once the Tzomet plant reaches its COD, its entire capacity will be
allocated to the System Operator pursuant to the terms of the Tzomet PPA.
Under the establishment of the System Operator
as part of the IEC Reform, in October 2020, Tzomet received notice that its PPA with the IEC has been re-assigned to Noga.
Gas
Supply Agreement
In December 2019, Tzomet entered into an agreement
with INGL for the transmission of natural gas to the Tzomet power plant. The agreement is subject to cancellation under certain conditions.
OPC provided a corporate guarantee in connection with Tzomet’s obligations under the agreement. In January 2021, INGL revised and
increased the total connection fee to NIS 32 million (approximately $10 million). According to the agreement, the expected commencement
of the transmission is 25-29 months from December 2019. As of March 2023, the piping of natural gas to Tzomet started, and the gas is
undergoing acceptance tests.
Maintenance
Agreement
In December 2019, Tzomet entered into a long-term
maintenance agreement with PW Power Systems LLC (“PW”). Pursuant to the agreement, PW will provide maintenance treatments
to the Tzomet plant generators, turbines, and additional equipment for a period of 20-years commencing on the date of commercial operation
of the Tzomet plant.
Tzomet has 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 NIS 1.1 billion (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. In March
2020, Tzomet issued a notice to commence to the contractor under the agreement and the agreement was further amended to extend the period
for completion of construction by three months. Based on the expected date for the Tzomet power plant to connect to the electrical grid
according to a survey and due to the continuation of COVID-19 restrictions and the supply chain delays, OPC expects the power plant to
be completed in the first half of 2023.
Construction
of energy generation facilities on the premises of consumer
OPC has entered into agreements with several
consumers (including consumers that were successful in the EA’s tender) for the installation and operation of generation facilities
on the premises of consumers using gas-powered electricity generation installation, photovoltaic (solar) installations and setting up
electricity storage installations for capacity of approximately 110 MW, as well as arrangements for the sale and supply of energy to consumers.
OPC intends to sign, build and operate agreements for all the above-mentioned technologies, representing a total capacity of at least
120 MW (including solar energy and storage). Upon completion, OPC will sell electricity from the generation facilities to the consumers
for a period of approximately 15-20 years from the COD of the generation facilities. The planned COD dates are in accordance with the
conditions provided in the agreements, and no later than 48 months from the date of the agreement. The total amount of OPC’s investment
depends on the number of arrangements entered into and is expected to be an average of NIS 4 million (approximately $1 million) for every
installed MW.
The arrangements with customers that have
been entered into and those expected to be entered into provide for reduced tariffs for customers reflecting lower use of the infrastructure,
and capacity payments to OPC. OPC has also signed construction agreements and agreements covering the supply of motors for the generation
facilities, with a total capacity of approximately 60 MW. Some PPAs with OPC-Rotem and OPC-Hadera have been extended in connection with
such arrangements. OPC intends to take action to sign construction and operation agreements with additional consumers (including customers
of the group). OPC has entered into a framework agreement to order motors for the generation facilities.
Gnrgy
In April 2021, OPC acquired a 51% interest
in Gnrgy for NIS 67 million (approximately $22 million). Gnrgy (which is now held via OPC Israel) was established in Israel in 2008 and
operates in the field of charging electric vehicles (e-mobility) and the installation of charging stations for electric vehicles. The
acquisition is part of OPC’s strategy to expand into new areas of energy production and the provision of advanced energy solutions
to its customers including energy supply and the management of energy for electric vehicles. The majority of the purchase price was earmarked
for funding of Gnrgy’s business plan including repayment of existing related party debts. Gnrgy’s founder retained the remaining
interests in Gnrgy and enter into a shareholders’ agreement with OPC, which would among other things give OPC an option to acquire
a 100% interest in Gnrgy.
Acquisition
of Kiryat Gat Power Plant
In June 2022, OPC, through a subsidiary, entered into a purchase agreement with Dor
Alon Energy in Israel (1988) Ltd. and Dor Alon Gas Power Plants Limited Partnership (together, the “Dor Alon”) for the purchase
by OPC of a partnership which owns the Kiryat Gat Power Plant, which began commercial operation in November 2019. The consideration under
the purchase agreement is approximately NIS 870 million (approximately $248 million), subject to further adjustments for cash balances
and working capital.
The consideration, as adjusted, is required to be paid on the completion date of the
acquisition, except for NIS 300 million (approximately $86 million) of the consideration, which is required to be paid on
December 31,
2023.
The completion of the acquisition remains subject to conditions set forth in the purchase
agreement, including regulatory approvals and third-party consents.
OPC is negotiating an agreement with a financial institution to finance a portion of
the purchase in the amount of approximately NIS 450 million (approximately $128 million) which, subject to signing, will be used for partial
repayment of the consideration. OPC Israel expects to fund the remaining purchase price with its own resources.
Tariff
approval - the power plant has a tariff approval awarded by the EA, which
defines the capacity tariffs to which the Kiryat Gat Power Plant is entitled from the System Operator. The capacity payment is capped.
The power plant works under a “limited capacity” regulation, in accordance with the regulation for cogeneration producers
that do not meet the terms of the cogeneration. Under the regulation, the power plant is allowed to sell the electricity-to-electricity
consumers, and to provide the remaining generation capability to the System Operator as capacity, under an annual capacity limit.
Long-term
operation and management agreement with Siemens - as part of the operation
agreement, Siemens undertook to provide the Gat Partnership1
full operating and maintenance services in the Kiryat Gat Power Plant for up to 20 years from the commercial operation date. Siemens undertook
that the Kiryat Gat Power Plant shall operate at a minimum annual capacity; it also undertook to meet minimum performance requirements
as set in the operation and maintenance agreement. After the commercial operation of the power plant, a dispute has arisen between the
parties regarding the Gat Partnership’s right to receive a discount in the quarterly payment to Siemens, in accordance with the
provisions of the agreement. The parties are conducting an arbitration proceeding regarding this issue; no decision has been rendered
as part of this proceeding, and there is no certainty as to its results.
Natural
gas supply agreement with the Tamar - agreement for the purchase of natural
gas from the partners in the Tamar. The supply agreement sets conditions for the purchase of a minimum quantity of gas and other arrangements.
In 2016, the parties signed an addendum to the supply agreement, whereby the term of the agreement was extended to 18 years from the first
supply date (with an option to extend by further two years, subject to the terms set out in the addendum). In March 2020, the supply agreement
became a continuous agreement, as part of which Tamar undertakes to sell to the Gat Partnership the required quantity, and the Gat Partnership
undertakes to purchase a minimum annual quantity, and alternatively - to pay for the quantity it has undertaken to purchase even if it
had not actually purchased it (take or pay). In March 2021, and in accordance with the terms of the supply agreement, the Gat Partnership
reduced the minimum annual quantity purchased from the Tamar partnership and started purchasing gas needed for the Kiryat Gat Power Plant
from the gas reservoirs and in the secondary market under “spot” agreements.
Agreement
with Dorad Energy Ltd. (the “Dorad”) - The Kiryat Gat Power
Plant entered into an agreement, under which the entire generation capacity of the Kiryat Gat Power Plant is sold to Dorad, which operates
as the electricity supplier, and is in charge of all activities relating to the supply and sale of electricity involving end customers
and IEC, in consideration for capacity and energy payments to the Gat Partnership. The agreement is expected to be terminated on the transaction
completion date, and its termination is a condition for the completion of the transaction.
1 Alon Energy Centers Limited
Partnership (of which OPC acquired all rights, in connection with the acquisition of Kiryat Gat Power Plant) holds directly 99% of
the
limited partners’ rights to the capital of Alon Energy Centers-Gat Limited Partnership (the “Gat Partnership
”),
and 100% of the issued and paid-up share capital of Alon Energy Centers - Management (2012) Ltd., which directly holds 1% of the capital
rights in the Gat Partnership. The Gat Partnership holds the Kiryat Gat Power Plant.
Subject to the completion of the transaction,
the Dorad agreement will be terminated (as stated above), and
the Company intends to act as the power plant’s electricity generator.
Agreements
with customers - before entering into engagement with Dorad, the Gat Partnership
signed energy supply agreements with a number of private customers. In accordance with the Dorad agreement, the supply services to those
customers are carried out by Dorad, and upon the expiry of the Dorad agreement, and subject to the completion of the said transaction,
the Gat Partnership (or any other Group company that serves as the supplier, as will be decided), is supposed to act as the supplier of
those customers.
Financing
agreement - the Gat Partnership entered into a financing agreement with
Mizrahi Tefahot Bank Ltd. and other entities for the provision of credit for financing the construction and operation of the power plant
(the “Senior Debt”). On December 27, 2022, OPC was informed that the Senior Debt was repaid in full, and consequently the
consideration in the purchase transaction will be adjusted.
Additional
details – Kiryat Gat Power Plant’s revenues from sale of energy
are linked to the generation component; therefore, its profitability is affected by changes in the generation component (revenues from
provision of capacity are linked to the CPI). The power plant’s operating expenses include the costs of natural gas, fixed and variable
expenses to the operation contractor, and general and administrative expenses.
United
States
OPC’s operations in the United States
consist of the operations of CPV, which was acquired in January 2021 by an entity in which OPC indirectly holds a 70% interest (not including
profit participation for employees of CPV).
CPV is engaged in the development, construction
and management of renewable energy and natural gas-fired power plants in the United States. CPV was founded in 1999 and since the date
of its establishment it has initiated and constructed power plants having an aggregate capacity of approximately 15 GW, of which
approximately 5 GW consists of wind energy and another approximately 10 GW consists of conventional, natural gas-fired power plants.
CPV holds rights in active power plants it developed and constructed over the past years (both conventional, natural gas-fired and renewable
energy), as well as in a backlog of renewable energy projects, carbon capture projects and gas-fired power plants in various development
stages, with total capacity of approximately 8,000 MW. CPV’s proportionate ownership interest is approximately 1,290 MW out of 4,045
MW (5 power plants), and 152 MW in wind energy. In addition, the share of CPV and its production capacity in projects that are currently
under construction is as follows: (i) in a natural gas-fired power plant, the share of CPV is approximately 126 MW out of a total capacity
of 1,258 MW under construction and (ii) 228 MW in two solar energy projects in construction stages.
CPV provides asset management services and
energy management services to power plants using different technologies for projects it developed and for third parties. CPV provides
asset management services for power plants with an overall capacity of approximately 5,870 MW (including 100 MW attributed to Maple Hill
project which is currently under construction) and energy management services for power plants with a total capacity of approximately
5,493 MW.
In January 2023, CPV, through a 100% owned
subsidiary, announced acquisition of four operating wind-powered electricity power plants in Maine, United States, with an aggregate total
capacity of approximately 81 MW. The plants operate in the ISO-NE market in the United States.
In light of the development and expansion
of CPV Group’s renewable energy activity. CPV’s operating areas include (i) Renewable Energy, including electricity generation
through renewable energy and (ii) Energy Transition, including electricity and energy generation and supply in the US through holding
development and construction of natural gas power plants in the US. CPV has additional activities, including development of carbon capture
generation projects, asset management activity and retail power supply to commercial and industrial customers (ancillary to the generation
activity).
Electricity generation and supply using conventional
technologies
The table below sets forth an overview of
CPV’s power plants that were in commercial operation as of
December 31, 2022.
|
|
|
|
|
|
|
|
|
Year of
commercial
operation |
|
Type of
project/
technology / client |
|
|
|
|
|
Conventional Energy |
|
CPV Fairview, LLC (“Fairview”) |
|
Pennsylvania |
|
1,050 |
|
25% |
|
2019 |
|
Gas-fired, combined cycle |
|
PJM
MAAC |
|
Capacity payments from PJM, regardless of the actual quantity
generated, based on the price determined in an annual tender for the year of operation three years in advance. The capacity price is known
up to May 2025. The capacity price determined for the 2022/2023 capacity year is $95.79 per MW/day in the zone in which the project is
located. The capacity price determined for both the 2023/2024 and 2024/2025 capacity years is USD 49.49 per MW/day in the zone in which
the project is located.
The sale of electricity on the PJM market is organized, supervised
and administered by PJM to ensure the supply of electricity in accordance with bids of the electricity producers.
The gas for the project is acquired on the market on the basis
of market prices in (at) the purchase points.
From time to time the project may enter into agreements to hedge
the energy and gas prices for some or all of the capacity using a range of tools and products in order to reduce the level of uncertainty
of the margin between the price of electricity received on the PJM and the price paid for the gas. |
|
CPV
Towantic, LLC (“Towantic”) |
|
Connecticut |
|
805 |
|
26% |
|
2018 |
|
Gas-fired (with dual fuel), Combined cycle |
|
ISO-NE
CT |
|
Capacity payments from ISO-NE, without reference to the actual
quantity generated, are based on the price determined in the tender. The project participated in a capacity tender for the first time
in June 2018 to May 2019 based on a price of $9.55 per kW/month and it exercised the possibility to determine (fix) the tariff for seven
years in respect of 725 MW linked to the Utilities Inputs Index.
For 2023-2024, there is a possibility to sell an additional 45 MW.
The capacity price set for the 2025/2026 and 2026/2027 capacity years is $2.59 per kW/month in the area in which the project is located.
Afterwards, capacity prices will be based on an annual tender for the activity year three years in advance.
The sale of electricity on the organized ISO-NE market, which
is supervised and administered by ISO-NE to ensure the supply of electricity in accordance with the bids of the electricity producers.
The gas for the project is purchased on the market on the basis
of market prices in (at) the purchase point.
From time to time, the project may enter into agreements to hedge
the energy and gas prices for some or all of the capacity using a range of tools and products in order to reduce the level of uncertainty
of the margin between the electricity price received on the ISO-NE and the price paid for the gas. |
|
|
|
|
|
|
|
|
|
Year of
commercial
operation |
|
Type of
project/
technology / client |
|
|
|
|
|
Conventional Energy |
|
CPV
Maryland, LLC (“Maryland”) |
|
Maryland |
|
745 |
|
25% |
|
2017 |
|
Gas-fired, Combined cycle |
|
PJM
SW
MAAC |
|
Capacity payments from PJM, regardless of the actual quantity
generated, based on the price determined in an annual tender for the year of operation three years in advance. The capacity price is known
up to May 2025. The capacity price determined for the 2022/2023 capacity year is $95.79 per MW/day in the zone in which the project is
located. The capacity price determined for the 2023/2024 and 2024/2025 capacity years is $49.49 per MW/day in the zone in which the project
is located.
The sale of electricity on the PJM market is organized, supervised
and administered by PJM to ensure the supply of electricity in accordance with the bids of the electricity producers.
The gas for the project is acquired based on market on the basis
of market prices at the purchase point.
From time to time, the project may enter into agreements to hedge
the energy and gas prices for some or all of the capacity using a range of tools and products in order to reduce the uncertainty of the
margin between the electricity price received on the PJM and the price paid for the gas. |
|
CPV
Shore Holdings, LLC (“Shore”) |
|
New
Jersey |
|
725 |
|
37.53% |
|
2016 |
|
Gas-fired, Combined cycle |
|
PJM EMAAC |
|
Capacity payments from PJM, regardless of the actual quantity
generated, based on the price determined in an annual tender for the year of operation three years in advance. The capacity price is known
up to May 2025. The capacity price determined for the 2022/2023 capacity year is $97.86 per MW/day in the zone in which the project is
located. The capacity price determined for the 2023/2024 capacity year is $49.49 per MW/day in the zone in which the project is located.
The capacity price determined for the 2024/2025 capacity year is USD 54.95 per MW/day in the zone in which the project is located.
The sale of electricity on the PJM market is organized, supervised
and administered by PJM to ensure the supply of electricity in accordance with the bids of the electricity producers.
The gas for the project is acquired based on the market prices
at the purchase point.
From time to time, the project may enter into agreements to hedge
the energy and gas prices for some or all of the capacity using a range of tools and products to reduce the uncertainty of the margin
between the price received on PJM and the price paid for the gas. |
|
CPV
Valley Holdings, LLC (“Valley”) |
|
New York |
|
720 |
|
50% |
|
2018 |
|
Gas-fired, Combined cycle |
|
NYISO
Zone G |
|
Capacity payments to NYISO, based on the price set in the seasonal,
monthly, and spot capacity tenders, with variable monthly capacity prices;
The sale of electricity on the NYISO market is organized, supervised
and administered by NYISO to ensure supply of the electricity in accordance with the bids of the electricity producers.
The gas for the project is acquired on the market on the basis
of market prices in (at) the purchase points.
From time to time, the project may enter into agreements to hedge
the energy and gas prices using range of tools and products in order to reduce the uncertainty of the margin between the price of electricity
received on the NYISO and the price paid for the gas. |
|
|
|
|
|
|
|
|
|
Year of
commercial
operation |
|
Type of
project/
technology / client |
|
|
|
|
|
Renewable
Energy Projects(3) |
|
CPV
Keenan II Renewable Energy Company, LLC (“Keenan
II”) |
|
Oklahoma |
|
152 |
|
100%(2)
|
|
2010 |
|
Wind |
|
SPP
(Long-term PPA) |
|
The project entered into a PPA with a utility company for the electricity generated up to 2030. |
________________________________________
| (1) |
Sale of electricity in the organized PJM market is supervised and administered by PJM to ensure supply of the electricity in accordance
with price offers of the electricity generators. Sale of electricity in the organized NYISO market is supervised and administered by NYISO
to manage the supply of the electricity in accordance with price offers of the electricity generators. |
| (2) |
On April 7, 2021, CPV signed and completed the acquisition of 30% of the rights in Keenan II from its tax equity partner. |
| (3) |
In January 2023, CPV (through a wholly and indirectly owned entity) entered into an agreement for the acquisition of all rights (100%)
in four active power plants for the generation of electricity through wind energy, with a total aggregate total capacity of approximately
81 MW, located in the State of Maine (United States) (the “Projects” and the “Mountain Wind Transaction,” as applicable).
The Projects’ commercial operation started between 2008 and 2017, and are in the ISO-NE market. The Projects sell all the electricity
and RECs under separate PPAs for the next 13 to 19 years, with most of the capacity being sold under contracts with a term for the next
15 years. The consummation of the Mountain Wind Transaction is subject to certain conditions precedent, including, among others, receipt
of regulatory approvals in the United States. With respect one of the required consents, in February 2023 the waiting period under the
applicable United States antitrust laws, the Hart-Scott-Rodino Act (the “HSR”), lapsed and therefore the Mountain Wind Transaction
was cleared for closing for HSR purposes. The consideration for the Mountain Wind Transaction is $172 million, and subject to the adjustments
and the other terms and conditions in the acquisition agreement. CPV intends to finance approximately 40% of the consideration in the
transaction using external financing which terms are currently under negotiations and which is expected to include senior debt in project
finance including collaterals of the Projects and the equity rights in the Projects, all subject to certain conditions that have not yet
been finalized. |
The table below sets forth an overview of
the generation capacity of CPV’s plants in commercial operation for 2021 and 2022.
| |
|
|
|
|
|
|
| |
|
Net Electricity
generation
(GWh)(1)
|
|
|
|
|
|
Actual Availability Percentage (%) |
|
|
Net Electricity
generation (GWh)(1)
|
|
|
|
|
|
Actual Availability Percentage (%) |
|
|
Conventional Energy Projects |
|
|
Fairview(4)
|
|
|
7,899 |
|
|
|
88.5 |
% |
|
|
91.6 |
% |
|
|
7,607 |
|
|
|
85.5 |
% |
|
|
87.3 |
% |
|
Towantic
|
|
|
5,556 |
|
|
|
77.3 |
% |
|
|
91.2 |
% |
|
|
4,960 |
|
|
|
69.0 |
% |
|
|
83.5 |
% |
|
Maryland
|
|
|
3,796 |
|
|
|
58.6 |
% |
|
|
84.8 |
% |
|
|
3,779 |
|
|
|
58.1 |
% |
|
|
90.9 |
% |
|
Shore
|
|
|
3,654 |
|
|
|
57.6 |
% |
|
|
93.6 |
% |
|
|
4,422 |
|
|
|
69.7 |
% |
|
|
96.0 |
% |
|
Valley
|
|
|
4,334 |
|
|
|
71.8 |
% |
|
|
78.3 |
% |
|
|
4,831 |
|
|
|
80.1 |
% |
|
|
88.6 |
% |
|
Renewable Energy Projects |
|
|
Keenan II
|
|
|
530 |
|
|
|
39.8 |
% |
|
|
93.7 |
% |
|
|
286 |
|
|
|
21.5 |
% |
|
|
92.3 |
% |
_________________________________________
| (1) |
The net generation is the gross generation during the year less the electricity consumed for the self-use of the power plants.
|
| (2) |
The actual generation percentage is the electricity produced by the power plants relative to the maximum generation capacity during
the year and is affected by unplanned outages or maintenance in the power plants which are conducted in regular time intervals. Major
planned maintenance normally takes 30 – 40 days and reduces the power plants’ scope of production and capacity until maintenance
is completed. |
| (3) |
The actual generation percentage is the electricity produced by the power plants relative to the maximum amount of generation capacity
during the year and is affected by ordinary course maintenance activities at the power plants which are scheduled at fixed intervals.
Such maintenance activities typically last for approximately 30–40 days and reduce the power plants’ generation and availability
until such maintenance has been completed. In January 2023, there was an unplanned maintenance in one of the power plants for approximately
13 days to repair a malfunction which was fixed. In 2023, Fairview, Shore, and Valley, are each expected to undertake material planned
maintenance. |
| (4) |
The availability of Fairview’s production and capacity compared to 2021 was mainly affected by an unplanned maintenance. Maryland
availability was affected mainly by weather conditions and extensions of the spring and fall planned maintenance. Towantic was out of
order for a total of approximately 50 days during 2022 for planned and unplanned maintenance. Shore benefited from stronger market conditions
which led to an increase in production and availability. Keenan absorbed curtailments in generation. |
Projects under Construction
The table below sets forth an overview of
CPV’s projects under construction.
|
|
|
|
|
|
|
|
|
Year of
construction
start |
|
Projected
date of
commercial
operation
|
|
Type of
project/
technology |
|
Manner of
sale of
capacity/
electricity
|
|
Expected
construction
cost for 100%
of the project
|
|
Conventional Energy Projects
|
|
CPV
Three
Rivers LLC (“Three Rivers”)
|
|
Illinois |
|
1,258 |
|
10%(1) |
|
2020 |
|
Second half 2023 |
|
Natural gas, combined cycle |
|
Three Rivers participated in tenders for capacity in the PJM
Market for the 2023/2024 year.
Capacity payments from PJM regardless of the actual quantity
of generated electricity, based on the price determined in an annual tender for the year of operation three years in advance. The capacity
price is determined up to May 2025.
The capacity price determined for the 2023/2024 capacity is $34.13
per MW/day in the zone in which the project is located. The capacity price determined for the 2024/2025 capacity year is $28.92 per MW/day
in the zone in which the project is located.
The sale of electricity on the PJM market is organized, supervised
and administered by PJM to ensure the supply of electricity in accordance with the bids of the electricity producers.
The gas for the project will also be purchased on the market
on the basis of market prices at the purchase points gas metrics. |
|
Approximately $1.3 billion |
|
|
|
|
|
|
|
|
|
Year of
construction
start |
|
Projected
date of
commercial
operation
|
|
Type of
project/
technology |
|
Manner of
sale of
capacity/
electricity
|
|
Expected
construction
cost for 100%
of the project
|
|
Renewable Energy Projects |
|
CPV
Maple Hill
Solar LLC (“Maple Hill”)
|
|
Pennsylvania |
|
126 MWdc (Approximately 100 Mwac) |
|
100%(3) |
|
Q2 2021 |
|
Second half 2023(2)
|
|
Solar |
|
The capacity payments from the PJM market, regardless of the
actual quantities generated, based on the price set in an annual tender for the year of operation three years in advance. The capacity
price is known up to May 2025. The capacity price determined for the 2022/2023 capacity year is $95.79 per MW/day in the zone in which
the project is located. The capacity price determined for both 2023/2024 and 2024/2025 capacity years is $49.49 per MW/day in the zone
in which the project located.
Sale of 100% of the project’s SREC to a global energy company
by 2026. CPV Group provided collateral to secure its obligations in the agreement, which include making certain payments to the other
party if certain milestones (including commencement of activity) in the project are not completed according to a specific schedule.
Sale of 48% of the electricity generated by the facility in accordance
with virtual PPA.
The remaining electricity is sold on the PJM market, which is
organized, supervised and administered by PJM to ensure the supply of electricity in accordance with the bids of the electricity producers.
|
|
Approximately $0.2 billion |
|
|
|
|
|
|
|
|
|
Year of
construction
start |
|
Projected
date of
commercial
operation
|
|
Type of
project/
technology |
|
Manner of
sale of
capacity/
electricity
|
|
Expected
construction
cost for 100%
of the project
|
Renewable Energy Projects
|
CPV Stagecoach Solar, LLC (“Stagecoach”)(4)
|
|
Georgia |
|
100 MW |
|
100% |
|
Q2 2022 |
|
First half 2024 |
|
Solar |
|
The project entered into a power supply agreement (PPA) with
a utility company for the supply of all the electricity to be produced for a period of up to 30 years from the project’s commercial
operation date, at market prices.
Sale to a global company of 100% of the project’s SRECs,
as well as a hedge covering the entire electricity price of the quantity that shall be produced and sold to the utility company, at a
fixed price, for a period of 20 years from the date of commercial operation of the project |
|
Approximately $127 million(5)
|
_________________________________________________
| (1) |
Reflects completion of the sale of 7.5% of CPV’s interest in the Three Rivers Project on February 3, 2021. |
| (2) |
In light of suspension of the investigation started by the U.S. Department of Commerce, the project’s original panel supplier
will not continue to supply the panels, the CPV Group made the adjustments to the project, as stated below, by means of utilization of
the Group’s framework agreement for acquisition of panels from March 2022. The CPV Group is taking the required steps in order to
implement replacement of the panel supplier. About 24 megawatts was supplied to the site by the original panel supplier. The balance of
the solar panels, in the scope of about 102 megawatts is expected to be supplied under the framework agreement for acquisition of panels
during 2023, and subject to execution of the adaptation and installation work of the panels on the project’s site. In light of the
postponement of the connection date, the project is expected to reach commercial operation in the second half of 2023. The CPV Group is
in contact with the parties involved with the project in order to update the agreements with them (if necessary) so as to reflect therein
the said change. In April 2022, the project received a connection agreement with PJM and the connection is expected to be made in the
second quarter of 2023. Maple Hill’s expected commercial operation date may be delayed even beyond what is stated above, including
as a result of regulatory issues, changes pertaining to market terms in connection with raw materials (such as availability of solar panels)
and supply chains, or technical delays (including adjusting and assembling equipment for the project) or the completion of the process
of connecting Maple Hill to the grid by PJM. Delays may affect Maple Hill’s ability to meet certain schedule obligations with counterparties
and may result in liquidated damages payments. |
| (3) |
In 2022, CPV signed a term sheet with a “tax equity partner” for an investment of approximately $45 million in the project;
the agreement is subject to completion of negotiations and the signing of binding agreements and ongoing considerations with respect regulatory
and legislative developments (including but not limited to the IRA). The parties are currently discussing an update to the term sheet,
including an increase of the investment to approximately $52 million. |
| (4) |
In May 2022, a Work Commencement Order for the construction work was issued to the project’s construction contractor, with
solar technology having a capacity of approximately 100 megawatts in the State of Georgia (U.S.) – SREC market. On that date, among
other things, a construction agreement (EPC) was signed with the project’s construction contractor. The total cost of the investment
in the project is estimated at about $127 million (including development fees to the CPV Group in the estimated amount at about $20 million),
and the project’s commercial operation date, subject to completion of the construction work is expected to take place in the first
half of 2024. The project signed an agreement for sale of electricity (PPA) with a local utility company for sale of the electricity generated
for a period that could reach up to 30 years from the project’s commercial operation date, at market prices. At the same time, the
project contracted with a global company for sale of 100% of the project’s SRECs, RECs, and a full hedge of the electricity price
of the quantity that will be generated and sold to the utility company, at a fixed price for 20 years from the project’s commercial
operation date. The CPV Group has provided guarantees, in the cumulative amount of about $10 million, for purposes of assuring the project’s
liabilities (including with respect to the dates relating to the project). The CPV Group continues to analyze the impact of the IRA on
the project and the worthwhileness of the choice of the ITC or PTC benefit, as well as the project’s entitlement to a tax benefit.
|
| (5) |
Including estimated development fees of approximately $20 million. The CPV Group is currently in discussions with a potential tax
equity partner for the project. |
Projects under Development
In addition to the projects summarized above,
CPV has a number of conventional, gas-fired projects with an aggregate capacity of approximately 1,250 MW, carbon capture power generation
projects with an aggregate capacity of approximately 3,300 MW, and renewable energy projects (solar and wind energy technologies) in various
development stages, with an aggregate capacity of approximately 3,250 MW (2,739 Mwac). The development stages for each project include,
among other things, the following processes: securing of the rights in the project’s lands; licensing processes; completion of receipt
of approvals, regulatory planning processes and public hearing; environmental surveys; engineering tests; testing, insurance and ensuring
of interconnection to the relevant transmission grids (including filing a request for connection agreement); signing of agreements with
relevant investors or lenders with relevant investors or lenders and relevant suppliers (construction contractor, equipment and turbines
contractors) and entering into a hedge agreement and PPAs, and RECs (based on the type of project) (the stated milestones may include
providing collaterals and taking obligations in connection with the advancement of the projects).
Carbon Capture Projects
CPV is developing two power plants with reduced
emissions that are powered by natural gas based on use of advanced carbon capturing technologies – one in West Virginia and the
second in Texas, and is working towards increasing the development projects backlog in this area, including by acquisitions or initiation
of suitable projects. The projects are expected to capture at least up to 95% of the carbon emitted in the sites, and they will have gas
turbines capable of transitioning to hydrogen. CPV believes the projects are located in areas where the burying of carbon is expected
to be geologically and economically feasible.
The cost of construction of projects of such
magnitude is estimated at a range of $2,000 to $2,500 per kilowatt. Should the projects be executed, they are expected to be eligible
for tax benefits as set out in the law. The building of the project, similarly to the project in Texas, is subject, among other things,
to the completion of various development processes (including, among others, environmental, technological, and land development-related),
licensing procedures, financing and receipt of the required relevant approvals, as well as the approval by OPC and CPV management bodies.
There is no certainty that these projects
under development will be completed as anticipated or at all, due to various factors, including factors not under CPV’s control,
and their development is subject to, among other things, completion of the development processes, signing agreements, assurance of financing
and receipt of various approvals and permits. Given the nature of CPV’s development projects, there is less certainty of completion
of any particular development project as compared to OPC’s historic development projects. Rogue’s Wind project, which is in
the advanced development stage, is included in the table above.
Benefits
under the IRA: The IRA extends and expands the production tax credit available
for carbon dioxide sequestration and/or use. For electricity generating facilities that install carbon capture technologies with the capacity
to capture 75% or more or baseline carbon dioxide production, this production tax credit is available for the first 12 years after placement
in service if the applicable electricity generation facility captures at least 18,750 metric tons of carbon dioxide per annum. The base
credit amount is $17/metric ton of carbon dioxide that is captured and sequestered and $12/metric ton of carbon dioxide that is injected
for enhanced oil recovery (EOR) or utilized in another production process. Like the ITC and PTC for renewable energy, the carbon capture
PTC can be increased if the project meets relevant wage and apprenticeship requirements. The maximum credit for sequestered carbon dioxide
is $85/metric ton and the maximum credit for EOR and other beneficial re-use is $60/metric ton. In addition, the tax credit is eligible
for direct pay for up to the first five years for carbon capture equipment placed in service after December 31, 2022.
In relation to projects that are under development
by the CPV Group, the IRA is expected to have a positive effect on benefits available under the law in respect of using carbon capturing
technologies. The full effects of the IRA have not yet been clarified, and are expected to be clarified when detailed arrangements are
formulated.
The table below sets forth additional details
regarding the CPV project of which the construction has not commenced.
|
|
|
|
|
|
|
|
|
Projected
Year of
construction
start
|
|
Projected
date of
commercial
operation
|
|
Type of
project/
technology |
|
Activity
area
and electricity
region
|
|
Manner of
sale of
capacity/
electricity
|
|
Expected
construction
cost
($
millions)
|
|
CPV Rogue’s Wind, LLC (“Rogue’s Wind”)
|
|
Pennsylvania |
|
Approx.
114
MW |
|
100%(1)
|
|
Second half of
2023 |
|
Second half of
2025(2)
|
|
Wind |
|
PJM MAAC |
|
In April 2021, signed PPA agreement for 10 years with a clean energy company. PPA may be adjusted to updated
factors of the project |
|
Approximately $257 |
____________________________________
| (1) |
Upon consummation of an agreement with a “tax partner” CPV will have 100% of Class B rights. Class A rights are held
by Tax Equity investors, who have excess tax benefits and dividend rights until a certain return (Tax Flip) is achieved. |
| (2) |
The expected date of operation for Rogue’s Wind may be delayed due to delays in connection with PJM’s interconnection
process, including construction works or upgrade works (as of March 19, 2023, the project was issued with interconnection agreement).
Delays may affect Rogue Wind’s ability to meet certain schedule obligations with counterparties and may result in liquidated damages
payments. |
One of the solar projects that is in the advanced
development stages, with a total capacity of about 170 megawatts, received a connection agreement to the grid from PJM and is expected
to sign a long-term PPA agreement for 90% of the energy and SRECs. The cost of the said project is expected to be between $250 million
and $290 million, about 45% of which is expected to be financed by a tax partner. In addition, customary collaterals with a cumulative
value of about $17 million are expected to be provided for purposes of the agreement covering connection to the network (grid) and the
PPA in addition to additional development expenses in the project. Completion of the project is expected to take place in March 2023 and
commercial operation in PJM is expected to be reached in the second half of 2025.
Management of Projects
CPV provides general asset management services
to power plants in the US using renewable energy and natural gas-fired energy, at a total volume, as of
December 31, 2022, of 5,870 MW
(4,585 MW for projects in which it has rights, and 1,285 MW for projects for third parties), by way of entering into asset management
agreements. In addition to providing general asset management services, CPV also provides specific energy management services, for a total
volume, as of
December 31, 2022, of 5,493 MW (4,683 MW for projects in which it has rights, and 810 MW for projects for third parties),
by way of entering into energy management agreements. Both categories of management agreements are usually for short to medium terms.
As of March 2023, the average period of all
asset management agreements (in projects in which the CPV Group has rights and in projects of third parties) is approximately 6 years,
and the remaining average period of management agreements in projects in which the CPV Group has rights is approximately 7 years (all
subject to the provisions of the relevant agreements regarding the option of early termination of the agreements or options for renewal
for additional periods, as the case may be), and the remaining average period of all energy management agreements (in projects in which
the CPV Group has rights and in projects of third parties) is approximately 4 years, and the remaining average period of all energy management
agreements in projects in which the CPV Group has rights is also approximately 4 years (and in any case, the asset management agreements
and the energy management agreements are subject to the provisions of the relevant agreements in connection with early termination or
renewal for additional periods). The asset management services and the energy management services are provided in exchange for a fixed
annual payment, an incentive-based payment and reimbursement of certain expenses, including expenses relating to construction management
services (work hours of the construction workers, expenses and expenses incurred by third parties). The asset management services include,
inter alia: project management and general compliance with regulations; supervision of the project’s operation; management of the
project’s debt and credit; management of agreements undertaken, licenses and contractual obligations; management of budgets and
financial matters; project insurance, etc., and the energy management services include more specific RTO/ISO-facing functions which include,
inter alia: testing consulting re: RTO/ISO standards, communications with RTOs and ISOs, RTO/ISO project coordination; and the preparation
of periodic required regulatory reports.
Customers of asset management services are
primarily funds managed by private equity, and institutional and strategic investors that are in the business of investing, owning and
divesting generation assets. Asset management and energy management services are primarily marketed through word-of-mouth marketing and
inbound inquiries. CPV projects that sell their electricity and capacity to wholesale markets abide by the regulations applicable to the
sale of products to those markets administered by the RTO/ISOs. Long-term PPAs and hedging agreements are marketed directly by CPV’s
internal development team, which used a range of methods to connect with potential customers.
Retail Power Supply to Commercial and Industrial
Consumers
In early 2023, CPV Group launched a retail
energy platform, CPV Retail Energy, which will serve as a retail electric provider for commercial and industrial customers in states within
the PJM market (an ancillary activity to the production activity of the CPV Group). CPV Retail Energy relies on CPV’s decarbonization
efforts and commitment to ESG by helping businesses meet their sustainability goals through renewable and low carbon dispatchable energy
solutions.
Description of CPV projects
CPV projects predominantly sell capacity and
electricity in the PJM, NYISO and IO-NE wholesale markets. Keenan (consolidated company) is a party to a long term PPA with a utility
company with respect to the entire revenue source of the project. Projects that are in development are expected to sell their energy,
capacity and renewable energy credits in either the wholesale market or directly to customers through long-term purchase agreements.
Generally, each of the natural gas-fired project
companies in the CPV Group entered into an agreement with all other owners of rights to the project (if any), for the establishment of
a limited liability company. The agreement sets forth each partner’s rights and obligations with respect to the applicable project
(each, an “LLC Agreement”). Each LLC Agreement contains standard provisions for agreements of this type restricting the transfer
of rights, including terms and conditions for permissible transfers, minimum equity percentage transfer requirements and rights of first
offer. CPV is often obliged to maintain at least a minimum ten percent equity ownership in a project company for up to five years after
closing of construction financing. Each project company is governed by a board of directors selected by the partners. Certain material
decisions typically require unanimous approval by all partners, including, inter alia, declaring insolvency, liquidation, sale of assets
or merger, entering into or amending material agreements, taking on debt, initiating or settling litigation, engaging critical service
providers, approving the annual budget or making expenditures exceeding the budget, and adopting hedging strategies and risk management
policies.
All active natural gas-fired projects trade
and participate in the sale of capacity, electricity and ancillary services in their respective ISO or RTO. Typically, CPV’s project
companies conduct daily projections and planning for the next operating day. After making preparations in terms of purchasing adequate
natural gas to support the expected electricity generation activity, as needed, bids are submitted to the Day-Ahead market. In addition,
adjustments are made throughout the day for the actual operating day (the Real-Time market), which include purchases and sales of natural
gas and optimizing generation output based on the Real-Time market price. In order to account for dynamic changes, natural gas projects
enter into hedging agreements that are designed to set a fixed margin and reduce the impact of fluctuations in gas and electricity prices.
CPV enters into interconnection agreements
at the project level with transmission providers or electric utilities to establish substations, necessary electrical interconnection,
system upgrades associated transmission services for the project’s commercial operations. In addition, CPV enters into natural gas
interconnection agreements for its natural gas projects that provide for the design, construction, ownership, operation and management
of natural gas pipelines to supply the project facility’s demand.
At the developmental stage, CPV’s project
companies typically enter into third-party agreements with various experts for the provision of certain specialized services. Examples
of such agreements include, but are not limited to: (i) consulting agreements with environmental firms for land survey and tests, data
collection, records analysis, conduct permit application work, permit reviews and other support services to engage with permitting agencies
or participation in meetings with stakeholders and public officials, (ii) service agreements with engineering firms to support engineering
reviews in the areas of civil, mechanical and electrical, and preparation of drawings to support permit and applications, and (iii) consulting
agreements with market consultants to support analysis related to power supply and demand and natural gas supply and demand.
The project companies typically enter into
various intercompany agreements with other entities within CPV for the provision of general and project-level services. These intercompany
agreements include asset management agreements and energy management agreements.
Set forth below is a discussion of the key
contracts for each of CPV’s project companies that are active or under construction.
Fairview
Fairview is party to the following agreements.
|
• |
Gas
Supply: a
base contract for purchase and transmission of natural gas which provides for supply of natural
gas at a quantity of up to 180,000 MMBtu per day at a price that is linked to market prices as provided in the agreement. Pursuant to
the agreement, the gas supplier is responsible for transport of natural gas to the designated supply point and is permitted to transport
ethane in lieu of natural gas up to a rate of 25% of the agreed supply quantity. The agreement is valid up to May 31, 2025. In relation
to storm Elliot, the gas supplier raised a claim relating to disruptions transporting natural gas. Fairview has agreed to settle for an
amount that is immaterial to the CPV Group. |
|
• |
Maintenance:
a services agreement (CSA) with its original equipment manufacturer, for the supply of spare parts
and maintenance services for the combustion turbines. The CSA agreement went into effect on December 27, 2016 (the “Effective
Date”) and ends on the earlier of: (i) 25 years from the Effective Date; or (ii) when specific milestones are reached
on the basis of usage and wear and tear. Fairview pays a fixed and a variable amount commencing from the date of the commercial operation.
Fairview has paid an average of approximately $9 million each year over the past two years. |
|
• |
Operation:
an agreement for operation and maintenance of the facility. The period of the agreement is three
years from the completion date of construction of the facility. The agreement includes an extension/renewal clause for a period of one
year, unless one of the parties gives notice of termination of the agreement in accordance with its provisions. Fairview has paid an average
of approximately $5 million each year over the past two years. |
|
• |
Hedging:
a hedge agreement on electricity margins of the Revenue Put Option (“RPO”). The
RPO is intended to provide CPV a minimum margin for the term of the agreement. Calculation of the amount for the minimum margin is determined
for each contractual year, with the actual netting dates taking place every three months in respect of the respective partial amount and
an annual adjustment is made to calculate the total annual margin for the year. The RPO has an annual exercise price that covers an exercise
period of a fiscal year. To calculate the gross margin pursuant to the agreement, specific parameters are taken into account, such as
utilization, heat rate, the expected generation levels, forward prices for electricity and gas, gas transmission costs and other specific
project costs. The RPO ends on May 31, 2025. |
|
• |
Management:
A CPV entity served as the asset manager for Fairview until September 2022. In accordance with an inter-company management agreement,
one of the other investors in the project replaced the said entity on behalf of CPV, in accordance with the terms of the agreement. This
other investor of the project assumed the role of asset manager for Fairview starting at October 1, 2022 and the CPV entity will provide
certain limited scope services to the other investor on behalf of Fairview. |
Towantic
Towantic is party to the following agreements:
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Gas
Supply & Transmission: |
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an agreement for the guaranteed gas transmission of 2,500 MMBtu
per day, at the AFT 1 Tariff. The initial agreement term ended on March 31, 2022 and has been extended through March 31, 2025. The agreement
renews automatically for periods of one year each time, unless one of the parties terminates the agreement. |
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an agreement for the supply of gas, pursuant to which up to 115,000
MMBtu per day will be supplied at a price linked to market prices. The supply period ends on March 31, 2023. On November 30, 2022, Towantic
entered into a new natural gas supply arrangements. The agreement provides it with a maximum of 125,000 MMBtus/day of firm natural gas.
The agreement has an initial term, which will commence on April 1, 2023 and end on March 31, 2025. |
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Maintenance:
a services agreement (CSA) with its original equipment manufacturer, for the provision of maintenance
services for the combustion turbines. In consideration for the maintenance services, Towantic pays a fixed and a variable amount as of
the date stipulated in the agreement. The agreement term is 20 years. Towantic has paid an average of approximately $8 million each
year over the past two years. |
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Operation:
an agreement for operation and maintenance of the facility. The consideration includes a fixed
and variable amount, a performance-based bonus, and reimbursement for employment expenses, including payroll costs and taxes, subcontractor
costs and other costs. In July 2021, the agreement was extended and the agreement term spans from 2022 to 2024. The agreement includes
an extension/renewal clause for a period of one year, unless one of the parties gives a termination notice in accordance with that provided
in the agreement. Towantic has paid an average of approximately $5 million each year over the past two years. |
Maryland
Maryland is party to the following agreements:
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Gas
Supply: an agreement for the supply of firm natural gas, pursuant to which up to 132,000
MMBtu per day will be supplied at a price linked to market prices. The agreement ends on October 31, 2022 and at September 7, 2022,
Maryland extended it through October 31, 2024. |
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Gas
Transmission: a natural gas transmission agreement for guaranteed capacity of up to 132,000
MMBtu/d. The agreement term is 20 years from May 31, 2016, with an option for Maryland to extend it by an additional 5 years.
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Maintenance:
a services agreement with its original equipment manufacturer. Maryland may acquire additional
services under the agreement, as needed. The payments under the agreement consist of minimum annual fixed payments, variable quarterly
payments based on operating parameters of the defined equipment, and fixed quarterly management fees. Aside from the minimum annual payment,
the remaining payments increase by 2.5% every year. The agreement ends on the earlier of: (i) the date on which the equipment reaches
a defined milestone; or (ii) 25 years from the signing date, on August 8, 2014. Maryland has paid an average of approximately $6
million each year over the past two years. |
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Operation:
an agreement for operation and maintenance of the facility. The consideration includes fixed annual
management fees, a performance-based bonus, and reimbursement of employment expenses, payroll costs and taxes, subcontractor costs and
other costs. In March 2021, the agreement was extended to continue until July 23, 2028 and may be renewed for one-year periods, unless
one of the parties gives a termination notice in accordance with the notice obligations provided in the agreement. Maryland has paid an
average of approximately $4 million each year over the past two years. |
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Hedging:
a hedge agreement on electricity margins of the RPO type. The RPO is intended to provide CPV a
minimum margin for the duration of the agreement term. Calculation of the amount for the minimum margin is determined for each contractual
year, with the actual netting dates taking place every three months with respect to the respective partial amount and an annual adjustment
is made to calculate the total annual margin, which includes each year for the RPO an annual exercise price covering the exercise period
of a fiscal year. To calculate the minimum gross margin, specific parameters are taken into account, such as utilization, heat rate, the
expected generation levels, forward prices for electricity and gas, gas transport costs and other specific project costs. The RPO term
ended on February 28, 2022. |
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Engineering,
Procurement and Construction Agreement. Maryland signed an Engineering, Procurement and Construction Agreement dated October 31,
2022, for the construction of a Black Start facility in the event of grid power outages around the Maryland’s site. Total contract
cost is approximately $30 million to be paid in accordance with a progress payment schedule incorporated into the agreement. Most of the
consideration is financed through a financing agreement entered into by Maryland. |
Shore
Shore is party to the following agreements:
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Gas
Supply: an agreement for supply of natural gas. Pursuant to the agreement, the gas supplier
supplies 120,000 MMBtu of gas per day at a price linked to the market price. The agreement term is until October 31, 2022 and on
August 31, 2022, OPC Maryland extended it through October 31, 2023. The agreement is renewable for one-year periods subsequent to October
31, 2023. |
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Gas
Transmission: two agreements with interstate pipeline companies for the use of 2 different
pipeline systems, one of which was already operational and the second of which became operational in late 2021. Pursuant to the agreements,
natural gas connection and transmission services are provided to Shore by means of a pipeline the start of which is an existing interstate
pipe and allows for gas to reach the facility’s connection point. Shore paid a down payment to one of the pipeline companies for
said services. The period of the gas transmission agreements are 15 years (until April 2030) for one interconnection, with an option
to extend the agreement twice by ten years and 20 years (until September 2041) for the other interconnection, with an option to extend
annually. |
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Maintenance:
an amended services agreement with its original equipment manufacturer in December, 2017. Shore
may acquire additional services under the agreement, as needed. The consideration consists of a fixed minimum annual payment, variable
quarterly payments based on operating parameters of the defined equipment, and quarterly management fees. In addition to the minimum annual
payment, the remaining payments increase by 2.5% every year. The agreement ends on the earlier of: (i) the date on which the equipment
reaches a defined milestone; or (ii) 20 years from the signing date. Shore has paid an average of approximately $5 million each year
over the past two years. |
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Operation:
an agreement for operation of the facility. The consideration includes fixed annual management
fees, a performance-based bonus and reimbursement of employment expenses, including, payroll and taxes, subcontractor costs and other
costs as provided in the agreement. The agreement is valid until July 2023 and includes an extension/renewal clause for a period of one
year, unless one of the parties gives a termination notice in accordance with that provided in the agreement. Shore has paid an average
of approximately $4 million each year over the past two years. |
Valley
Valley is party to the following agreements:
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Gas
Supply: an agreement for the supply of natural gas of up to 127,200 MMBtu of natural gas
per day at a price linked to the market price. Pursuant to the agreement, the supplier is responsible for transmission of natural gas
to the designated supply point. In 2021, the agreement was extended until October 31, 2025. |
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Gas
Transmission: an agreement with an interstate pipeline company for the licensing, construction,
operating and maintenance of a pipeline and measurement and regulating facilities, from the interstate pipeline system for transmission
of natural gas up to the facility. The supplier provides 127,200 MMBtu per day of firm natural gas delivery at an agreed price during
a period ending March 31, 2033, with an option to extend by up to three periods of five-year additional periods. Valley signed an
additional agreement for provision of transmission services (firm) of 35,000 MMBtu per day, for a period of 15 years ending on March 31,
2033, which can deliver gas from a different location into the firm transportation agreement referenced above. |
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Maintenance:
an agreement with its original equipment manufacturer, for maintenance services for the fire turbines.
The consideration includes fixed and variable amounts from the initial activation date of the turbines. The agreement period is the earlier
of: (i) 132,800 equivalent base load hours; or (ii) 29 years from June 9, 2015. Valley has paid an average of approximately
$6 million each year over the past two years. |
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Operation:
an operation and maintenance agreement with one of the partners in the project. The consideration
includes fixed annual management fees, an operation bonus, and reimbursement of certain costs set out in the agreement. The period of
the agreement is five years from the completion date of construction of the facility, and the agreement may be renewed for an additional
three-year periods unless there is a written notice of termination at least 6 months prior to a renewal date. Valley has paid an average
of approximately $5 million each year over the past two years. |
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Hedging:
a hedge agreement on electricity margins of the RPO type. The RPO is intended to provide CPV a
minimum margin for the duration of the agreement term. Calculation of the amount for the minimum margin is determined for each contractual
year, with the actual netting dates taking place every three months with respect to the respective partial amount and an annual adjustment
is made to calculate the total annual margin, which includes each year for the RPO an annual exercise price covering the exercise period
or a fiscal year. To calculate the minimum gross margin, specific parameters are taken into account, such as utilization, heat rate, the
expected generation levels, forward prices for electricity and gas, gas transport costs and other specific project costs. The RPO ends
on May 31, 2023. |
Keenan II
Keenan II is party to the following agreements:
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Equity
Purchase Agreement: an agreement for the purchase of the 100% of the outstanding equity
interests in Keenan. As a result of the acquisition in April 2021, CPV holds all of the rights to Keenan. |
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PPA:
a wind power energy agreement for sale of renewable energy. Pursuant to the terms and conditions
of the agreement, the acquirer is to receive all of the electricity generated by the wind farm, credits, certificates, similar rights
or other environmental allotments. The consideration includes a fixed payment. The period of the agreement is 20 years, ending in
2030. The acquirer is permitted, under certain circumstances, to extend the agreement for another five-year period, and to acquire an
option to purchase the project at the end of the agreement period at its fair market value, as defined in the agreement and pursuant to
the terms and conditions stipulated therein. |
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Operation:
a master services agreement and an operations agreement with its original equipment manufacturer
for the operation, maintenance and repair of the facility. The consideration includes fixed annual fees, performance-based bonus and reimbursement
of expenses. The agreement expire in February 2031. Keenan II has paid an average of approximately $5 million each year over the past
2 years. |
Three Rivers
Three Rivers is party to the following agreements:
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Gas
Supply: two agreements for the supply of natural gas. The agreements supply 139,500 MMBtu
in natural gas per day to the facility, from the operation date of the facility for a period of five years, and a reduced quantity of
25,000 MMBtu per day from the fifth year of operation of the facility and up to the tenth year. The price of natural gas delivered under
these agreements is linked to the day-ahead electricity prices in the PJM market. The agreements include an obligation to purchase such
fixed volume of natural gas, with a right to resell surplus gas. |
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GSPA.
Three Rivers entered into a Base Contract for Sale and Purchase of Natural Gas (GSPA) on December 15, 2022. The GSPA requires the supplier
to provide gas supply of up to 200,000 MMBtu/day at a price indexed to market. The agreement had an initial term until January 31, 2023.
The agreement is automatically renewed month-to-month unless one of the parties terminates by notification no less than 5 business days
prior to the last day of the month. |
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Gas
Interconnection: two connection agreements for transmission of gas, where each of them
is sufficient for the full demand of the facility. |
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One agreement is an interconnection agreement with an interstate pipeline company for transmission of
natural gas. The agreement sets forth the responsibility of the parties in connection with the design, construction, ownership, operation
and management of a pipeline as well as the connection and pressure equipment. Based on the agreement, Three Rivers will bear the costs
of all the facilities. |
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The second agreement is an additional interconnection agreement with an interstate pipeline company for
transmission of natural gas. As part of the agreement, the counterparty is responsible for the design and construction to connect to the
existing pipeline. The counterparty to the agreement will remain the owner of these facilities and will operate them, and Three Rivers
will bear the development and construction costs. |
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Gas
Transmission: an agreement for transmission of gas with an interstate pipeline company
and its Canadian affiliate, for firm transmission of natural gas from Alberta, Canada to the facility. The agreements include capacity
of 36.2 MMcf per day, at agreed prices. The agreement term is 11 years from the signing date of the agreement on November 1, 2020;
the counterparty may extend the agreement for an additional year by means of prior notice of 12 months. |
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Equipment:
an agreement for acquisition of equipment for the purchase of power generation equipment and ancillary
services, with an international company specializing in design and manufacture of equipment, including that required for an electricity
generation facility. The equipment includes two units, with each consisting of the following main components: a gas or combustion turbine;
a steam generator for heat recovery; a steam turbine; a generator; a continuous control system for emissions and additional related equipment.
The equipment supplier is responsible for supply and installation in accordance with that stipulated in the agreement. In addition, the
supplier is to provide technical consulting services to Three Rivers in order to support the installation process, commissioning, inspections
and operation of the equipment. Pursuant to the terms and conditions of the agreement, Three Rivers will pay the third party in installments
based on reaching milestones. |
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EPC:
an EPC agreement with an international engineering, acquisition and construction contractor. Pursuant
to the agreement, the contractor will design and construct the required components of the facility, to integrate all the equipment required
for the power plant. |
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Maintenance:
a services agreement with its original equipment manufacturer, for maintenance services for the combustion turbines. The consideration
includes a fixed and a variable payment as from the commercial operation commencement date. The agreement term is from August 21, 2020
until the earlier of: (i) 25 years from August 21, 2020; or (ii) when specific milestones are reached on the basis of use and
wear and tear. |
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Operation:
an agreement for operation and maintenance of the facility to begin once the facility is well
into its construction period. The consideration includes fixed annual management fees, a performance-based bonus, and reimbursement of
employment expenses, payroll costs and taxes, subcontractor costs and other costs. The agreement period will commence during the construction
period, and will continue for approximately 3 years from the construction completion date of the facility. |
Maple Hill (under construction)
Maple Hill is party to the following agreements:
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Tax
Equity Partner. CPV signed a term sheet with a “tax equity partner” for an
investment of approximately $45 million in the project; as of this date, the agreement is subject to completion of negotiations and the
signing of binding agreements. The tax equity partner is expected to benefit from most of the tax benefits for the project, mainly ITC
and depreciation expenses for tax purposes, as well as participation in a proportionate share to be agreed on in the distributable cash
flow. The right to participate in some of the free cash flow is valid until reaching the investment period of the tax equity partner as
set out in the agreement. After reaching the period, the tax equity partner’s share in the profit and cash flow shall be reduced
to a minimum rate. The parties are currently discussing updates to the term sheet as a result of the IRA, including an increase in the
investment amount to approximately $52 million. Since CPV has not yet signed a final agreement, there is no certainty that such an agreement
will be signed or that its terms and conditions, including the scope of the investment, will be in accordance with the aforesaid (if it
is signed). |
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Solar
Panels. An agreement for the purchase of solar panels with an international supplier and
the agreement was amended twice in the second half of 2021. The consideration included the payment of a fixed price (as amended) for the
purchase of the solar modules, plus the cost of transportation to the plant. On August 30, 2022, Maple Hill terminated the agreement.
As of the termination date, Maple Hill had paid the supplier $9.8 million for the 24 MW of panels received. There was no early termination
fee related to this contract. On March 10, 2022, the CPV Group entered into a master agreement for the purchase of solar panels with a
total capacity of 530 MW for a maximum total consideration of $187 million. Pursuant to the agreement, the solar panels will be supplied
in accordance with orders to be placed with the supplier by the CPV Group in 2023-2024. As of March 19, 2023, the CPV Group has started
receiving deliveries of the solar panel, some of which are currently undergoing tests to evaluate compliance. |
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Maintenance.
An operating and maintenance agreement with a third-party service provider for services related
to the ongoing operation and maintenance of the Maple Hill solar power generation facility. The agreement has an initial term of three
years, commencing on May 11, 2021 and ending on December 31st
following the third anniversary of the date that the service provider actually begins providing services and can be renewed for 2 one-year
terms unless one of the parties provides notice on non-renewal in accordance with the agreement. The consideration to be paid by Maple
Hill is a fixed fee paid in monthly installments paid over the term of the agreement. |
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Transformer.
An agreement for the purchase of a transformer with an international supplier. The consideration
includes payment of a fixed price for the purchase of the transformer, supply, and installation. |
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Construction.
An EPC agreement with an international contractor. Pursuant to the agreement, the contractor will
plan and construct the required components for the power plant in order to integrate all the required equipment into the power plant.
The total consideration to be paid to the contractor is a fixed fee which shall be paid according to a milestone schedule. The construction
agreement and the equipment purchase agreement constitute a substantial portion of the cost of the project. |
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SREC.
An agreement with an international energy company for the sale of 100% of the SRECs generated
in the project through 2026 to an international energy company. CPV provided collateral for its obligations under the agreement, which
include making certain payments to the other party if certain milestones (including commencement of activity) in the project are not completed
according to a specific schedule. |
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Virtual
PPA. An agreement with a third party for the sale of 48% of the total generated electricity,
where the electricity price calculation is performed based on financial netting between the parties for 10 years from the commercial date
of operation. In accordance with the agreement, a net calculation will be made of the difference between the variable price that Maple
Hill receives from the system operator and which is published (the spot price) and the fixed price set with a third party. As a security
for the payment and performance of its obligations (which includes achieving certain project milestones, including commencement of operation
by a specific date), Maple Hill granted the third party a security interest in a bank deposit account. CPV provided collateral for its
obligations under the agreement which include making certain payments to the counterparty if certain project milestones (including commencement
of operations) are not completed pursuant to a specified schedule. The agreement includes an option to transition to a physical PPA with
a fixed price on fulfillment of certain terms and conditions, which have yet to be met. The agreement is subject to preconditions, which
to the date of approval of the financial reports were not completed yet. The agreement was amended in late 2022, to extend the guaranteed
commercial operation date of the project to the current, expected commercial operation date. |
Stagecoach (under construction)
Stagecoach is party to the following agreements:
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Energy
Sale Agreement (non-firm). In March 2022, Stagecoach entered into an agreement to sell 100% of non-firm energy to a utility company.
The utility company is to receive all of the energy and ancillary services produced by Stagecoach. The agreement excludes tax attributes
arising from the ownership of the solar project and any environmental attributes generated by the Stagecoach. The consideration is based
on the hourly avoided energy rate for each hour of generation up to a maximum energy output as defined in the agreement. The agreement
is for a period of 30 years from the commercial operation date of Stagecoach. |
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Agreement
to sell renewable solar energy credits. In April 2022, Stagecoach entered into an agreement with a global company to sell 100%
of the renewable solar energy credits produced by the solar project, along with a full hedge of the electricity price of the energy that
will be generated and sold under the agreement with the utility company mentioned above, at a fixed price for 20 years from the commercial
operation date. |
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EPC.
In May 2022, Stagecoach signed an EPC agreement with an international contractor. Pursuant to the agreement, the contractor is to design,
engineer, procure, install, construct, test, and commission the solar project on a turnkey, guaranteed-completion-date basis. The total
consideration to be paid to the contractor is a fixed amount payable under a milestone schedule. |
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Operation
and Maintenance Agreement. In August 2022, Stagecoach entered into an operating and maintenance agreement with a third-party service
provider to provide services during the mobilization and operational period of the Stagecoach solar facility. The agreement is for an
initial 3-year term starting on August 1, 2022 and ending on December 31 of the third year from the date on which the service provider
actually started rendering operational period services. The term of the agreement may be renewed for a maximum of two one-year renewals,
unless one of the parties delivers a notice of non-renewal in accordance with the terms of the agreement. Stagecoach will pay both a fixed
fee and a variable fee monthly over the term of the agreement. |
Rogue’s Wind
In addition, CPV is party to the following
agreements:
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Rogue’s
Wind Energy Project. In April 2021, an agreement was signed for sale of all the electricity, and the project’s environmental
consideration (including RECs), benefits relating to availability and accompanying services). The agreement was signed for a period of
10 years from the commercial operation date. The CPV Group provided as collateral for securing its liabilities under the agreement, including
execution of certain payments to the other part upon reaching certain milestones (including commencement of activities) in the project
will not be completed in accordance with a specific timetable. |
Potential
Expansions and Projects in Various Stages of Development
Israel
In March 2014, OPC, through one of its
subsidiaries,
was awarded a tender published by the Israeli Land Authority to lease a 5.5 hectare plot of land adjacent to the OPC-Rotem site. The lease
agreement was approved by the Israeli Land Authority in August 2018. In April 2017, OPC was authorized by the Israeli Government to seek
zoning permissions for a gas fired power station on the land adjacent to OPC-Rotem. The agreement is valid for term of 49 years from the
date of the tender win, with an option to an additional lease term of 49 years, subject to the terms and conditions of the agreement.
Furthermore, in August 2022, OPC received from the Israeli Land Authority an extension for the period until completion of the construction
work on the land in accordance with the lease agreement (free of charge), up until
March 9, 2025, in consideration for the payment of
an amount, which is immaterial to OPC. There is currently no expectation as to the filing of the permit application.
In April 2017, OPC was authorized by the Israeli
Government to seek authority for zoning of the land for a natural gas-fired power station on land owned by Infinya near the OPC-Hadera
power plant. OPC Hadera Expansion Ltd. (“Hadera Expansion”), an OPC subsidiary, is party to an option agreement with Infinya
to lease the relevant land, which was extended until the end of 2022. In December 2022, Hadera 2 and Infinya signed an agreement for extending
the project’s land lease period to a 5-year period, at an average cost, which is not material to OPC, and the provisions of the
lease agreement that will apply if the option is exercised were revised.
These plots of lands, if zoning permission
is granted, would provide OPC with land that can be used with tenders but OPC would still require licenses to proceed with any projects
on this land.
In addition, OPC may examine possibilities
for expanding its electricity generation activities by means of construction of power plants and/or acquisition of power plants (including
in renewable energy) in its existing and/or new geographies.
During 2021, OPC completed the acquisition
of 51% interest in Gnrgy, whose business focuses on e-mobility charging stations. For more information on, see “Item
4.B Business Overview—Our Businesses—OPC—OPC’s
Description of Operations—Gnrgy”
Tender
for the sale of the “Eshkol Power Plant.” As part of the IEC
Reform 112, in July 2022, OPC took part in the tender in connection with acquisition of the Eshkol Power Plant. OPC was informed by the
IEC that it passed the tender’s preliminary screening stage 113. In December 2022, the EA published a resolution regarding the eligibility
of the bidders in the tender for the sale of the Eshkol Power Plant to receive an electricity generation license in terms of the Electricity
Sector Regulations and in terms of aggregate concentration by virtue of the Market Concentration Law; under the resolution, OPC complies
with the requirements of the above provisions of the law, and is eligible to a generation license in the Eshkol tender, even after the
transfer of the generation and supply licenses to OPC Israel as part of the completion of the Veridis transaction (provided that the Israel
Infrastructure Fund (“IIF”) and any other entity it controls will cease being an interested party in Dalia as per the Market
Concentration regulations before submitting the tender bids). OPC was informed that on January 3, 2023, IIF informed the EA that it completed
the implementation of an outline that was confirmed by the EA, such that IIF is no longer considered an interested party in Dalia. In
February 2023, the EA published a proposed decision that includes granting of a supplier license to OPC-Rotem with language (terms) similar
to the existing suppliers along with imposition of covenants on OPC-Rotem, including covenants relating to a deviation from the consumption
plans plus arrangements and covenants relating to this. That stated is part of a process that is intended to create uniformity with respect
to arrangements applicable to OPC-Rotem and the other bilateral generators, including, application of the market model to OPC-Rotem and
the manner of determination of the price for purchase of electricity for the consumers at a time of reduction of generation at the plant.
There is no certainty regarding the final language of the arrangements that will be determined (if ultimately determined) and the scope
of their impact. Non-receipt of a supply license by OPC-Rotem, or a parallel arrangement with appropriate terms, a delay in completion
of the process of granting a supply license and application of the decision regarding deviations from the consumption plan would be expected
to have negative impacts on OPC.
Sorek
tender. In February 2023, OPC received a notification that it successfully
the preliminary screening stage in the tender for the execution of a PPP project for the financing, planning, construction, operation,
maintenance and delivery to the government of a gas-fired dual-fuel power plant that is planned to be built in Sorek, with a capacity
of 600-900 MW, with a future expansion option, as decided by the EA.
United States
The development of projects takes a number
of years, and there are number of entry barriers that developers are required to overcome, including: (i) ensuring that sufficient financing
is in place for the project’s development and construction; (ii) obtaining permits or other regulatory approvals, including environmental
impact survey and permits; (iii) obtaining land control and building permits; (iv) obtaining an interconnect agreement; (v) experience
and expertise in the development of projects in the United States energy and electricity sector; and (vi) for carbon capture projects,
adequate storage or offtake for captured carbon.
The exit barriers include: (i) attractive
conditions in the energy sector; (ii) identifying a purchaser with sufficient equity; (iii) receipt of the regulatory approvals required
in connection with change in ownership.
Research and development activities are conducted
in the U.S. energy sector on an ongoing basis with the aim of identifying alternative and more efficient energy generation technologies.
Such alternatives include the generation of energy through various types of technologies, such as coal, oil, hydroelectric, nuclear, wind,
solar and other types of renewable energy facilities; the alternatives also include improvements to traditional technologies and equipment,
such as more efficient gas turbines. CPV believes that the ability to identify new projects in relevant energy markets, with price levels
and liquidity that support new construction, is a significant success factor for development activities. In addition, for renewable energy
projects, it is important that in the state or zone in which the CPV Group seeks to construct new projects, it is possible to generate
additional revenue through the sale of RECs. For carbon capture projects, additional physical and technological factors supporting such
projects must be proven feasible. The CPV Group believes that other factors affecting development include obtaining adequate control of
the land; the ability to connect to the electrical grid at a strategic connection point and at low connection cost within reasonable time;
obtaining permits for construction of new projects, including meeting all environmental requirements; and the ability to raise sufficient
financing and capital for the construction of new projects.
CPV currently has a backlog of renewable energy
projects and natural gas-fired power plants in advanced stages of development.
OPC’s
Raw Materials and Suppliers
Israel
OPC’s power facilities utilize natural
gas as primary fuel, and diesel oil and crude oil as backups. In connection with OPC’s on-site facilities and the Sorek facility,
the required gas is expected to be purchased as part of the agreements in which OPC had engaged and/or will engage. From time to time,
OPC may into additional gas sale and purchase agreements for its operations in the area of activity, and/or as an auxiliary part of the
electricity and energy generation and supply activity. OPC is entitled to a refund for the incremental cost of using diesel for these
periods.
OPC-Rotem and OPC-Hadera have entered into
gas supply agreements with the Tamar Group, composed of Noble Energy Mediterranean Ltd., Delek Drilling Limited Partnership, Isramco Negev
2 Limited Partnership, Avner Oil Exploration Limited Partnership, Dor Gas Exploration Limited Partnership, Everest Infrastructures Limited
Partnership and Tamar Petroleum Limited Partnership, or collectively the Tamar Group, for the purchase of natural gas. For further information
on these agreements see “—OPC-Rotem” and “—OPC-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 USD, 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 U.S. Dollars 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 paid the minimum price during 2021 (excluding two months for OPC-Rotem and one month
for OPC-Hadera). In January 2022, the EA published the electricity tariffs for 2022, which included an increase of the EA’s generation
component tariff by approximately 13.6%. In April 2022, due to a reduction in excise tax on use of coal and to combat the high cost of
living, the EA published a new weighted average generation component tariff effective
May 1, 2022 of NIS 0.2764 per kWh. On
August 1,
2022, the electricity tariff was updated to NIS 0.314 per kWh for the remainder of 2022, being an increase of 13.6% over the tariff published
in May 2022. OPC-Hadera’s and OPC-Rotem’s gas prices were at the minimum price until January 2022 (OPC-Rotem) and February
2022 (OPC-Hadera), and were above the minimum price for the remainder of 2022. On
January 1, 2023, the annual update to the electricity
tariff for 2023 entered into effect. Pursuant to the impact, the generation component was NIS 0.312 per kWh – a decrease of 0.6%
in the generation component that occurred in the final months of 2022. On
February 1, 2023, a decision of the EA entered into effect to
update the costs recognized to the Electricity Company and the Systems Administrator and the tariffs to the electricity consumers. Pursuant
to the decision, an additional update to the generation component for 2023 entered into effect whereby the generation component is NIS
0.3081 per kWh, a decrease of 1.2% compared to the tariff set on
January 1, 2023, resulting from extension of the Excise Tax on Fuel Order,
which calls for a decrease in the purchase tax and excise tax applicable to the coal. For OPC-Rotem, the effect on profit margins depends
on the US/NIS exchange rate fluctuations. 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’s Israel operations—OPC’s profitability depends on the EA’s electricity rates.”
Tzomet is also party to a gas supply agreement
as described under “—Tzomet” above.
In addition, OPC is dependent on INGL which
is the sole transmitter of the natural gas in Israel.
United States
CPV’s project companies are party to
gas supply, transmission and interconnection agreements as well as maintenance and operating agreements and management agreements, as
described above and below.
Natural
Gas-fired Projects
CPV’s project companies with natural
gas-fired power plants purchase natural gas from third parties pursuant to gas sale and purchase agreements.
Services
Agreements, Equipment Agreements and EPC Contracts
The operating companies of CPV projects mostly
enter into long-term operating and maintenance agreements and services agreements with original equipment manufacturers and third-party
suppliers for the maintenance and operation of the project facilities’ equipment. In connection with the projects under construction,
CPV also enters into general purchase agreements and equipment supply agreements with original equipment manufacturers, as well as engineering
and procurement
contracts, for the purpose of identifying and assembling special equipment in certain facilities.
On
March 10, 2022, CPV entered into a framework
purchase agreement of solar panels for a total capacity of approximately 530 MW. According to the agreement, the solar panels will be
supplied based on purchase orders delivered by CPV during 2023-2024. CPV has paid a down payment for the purchase, to the solar panels
supplier. CPV has a right of early termination on certain dates, for partial payments to the supplier based on the date of such early
termination. The agreement further includes, among others, provisions regarding quantities, model, manner of delivery of the panels and
termination. The overall cost of the agreement may total approximately $187 million (assuming purchase of the maximum quantity). The agreement
is planned to be used for CPV’s solar projects in development stages with a total capacity of 530 megawatts. Since its execution,
the agreement has been amended to, among other things, reallocate the total volume of panels among the CPV Group’s solar projects
and increase the number of installment payments with respect thereto.
The CPV Group has started receiving deliveries
of the solar panel, some of which are currently undergoing tests to evaluate compliance with the required specifications and implementation
of corrective actions to meet such specifications. Such actions are yet to be completed, and a delay in their completion may affect the
completion of projects under construction/development in accordance with the predictions.
CPV Group receives credit from most of its
suppliers for a period of approximately 30 days.
OPC’s
Competition
Israel
Within Israel, OPC’s major competitors
are IEC and private power generators, such as Dorad Energy Ltd., Dalia, Rapac-Generation, Shikun & Binui Energy and the Edeltech Group,
who, as a result of government initiatives encouraging investments in the Israeli power generation market, have constructed, and are constructing,
power stations with significant capacity. In 2021, the energy effectively generated by the power plants owned by OPC-Rotem was 4.48 TWh,
constituting about 6.1% of the total energy generated in Israel, and about 12.5% of the energy generated by private electricity producers
in Israel during that year (including renewable energies).
OPC is considering participating in the IEC
tenders of the remaining two of its power stations. There is no certainty that OPC will participate in future IEC tenders or that it will
be successful. See “—Regulatory, Environmental and Compliance Matters.”
In February 2021, the EA made a decision regarding
determination of an arrangement for suppliers that do not have means of generation and revised the standards for existing suppliers, in
order to gradually open supply in the electricity sector to new suppliers and supply to household consumers. As part of the decision,
the EA determines standards and tariffs that will apply to suppliers that do not have means of generation and that will allow them, subject
to receipt of a supply license and provision of security, to purchase energy from the System Operator for their consumers. The pricing
will be based on a component that is based on the SMP price and components that are impacted by, among other things, the consumption at
peak demand hours. The arrangement for suppliers that do not have means of generation is limited to a quota that was provided in the principles
of the arrangement and customers having a consecutive meter only (approximately 36,000 household customers and about 15,000 household
industrial/commercial customers). In addition, for purposes of opening supply to competition, as part of the decision the EA revised the
standards for suppliers regarding, among other things, the manner of assigning the consumers to a private supplier, the manner of concluding
transactions, moving from one supplier to another and payments on the account.
In 2021, the possibility of operating in the
supply of electricity was opened, even without means of generation (virtual supply). This led to the entry of new players who were not
yet active in the Israeli electricity market, and who have received a supply license. OPC estimates that this may increase competition
in the supply segment in the coming years. In addition, due to gradual adoption of ESG standards, there is a significant gradual increase
in demand for electricity from renewable sources, in addition to electricity from uninterrupted and reliable sources such as natural gas.
From 2024, following the commencement of the implementation of the market model regulation in the distribution segment, virtual suppliers
will also be allowed to sell electricity generated using renewable energies to end customers. In OPC’s opinion, the this will further
intensify the competition in the supply segment. As of March 2023, the main actors in the supply segment are Meshek Energy Ltd., Shikun
& Binui Energy Ltd., and Enlight Ltd.
United States
CPV operates in a highly competitive market.
Natural gas, solar, and wind projects account for over 90% of new capacity under construction in the U.S. with significant competition
among independent power producers and renewable project developers. Independent power producers compete with CPV in selling electricity
and capacity to the wholesale electrical grid. In addition, the competitors can also sell electricity to third-party customers by entering
into PPAs. Despite the fact that CPV’s power plants are more efficient compared to the market average and hence they have lower
costs compared to other conventional gas-fired power plants, competition posed by other production sources, and the use of other technologies
may have an adverse effect on electricity prices and capacity, and as a result have a negative effect on CPV Group’s revenues. The
CPV Group project’s share of the total capacity in their respective markets are not significant.
In addition, CPV’s other competitors
in the U.S. energy market include generators of different technology types, such as coal, oil, hydroelectric, nuclear, wind, solar and
other types of renewable energies. Some of the generators in different markets is owned and operated by supervised electricity companies,
venture capital funds, banks and other financial entities.
The main competitors in the field of energy
supply are local electric utility companies, independent power producers, and other suppliers that produce decentralized electricity off
the grid and there may be a difference in terms of capabilities, energy sources, and nature of activity, depending, inter alia, on the
relevant electricity market. Companies that compete with the CPV Group in the field of energy supply are independent utility companies
engaged in the generation of energy, and other suppliers engaged in supply of energy. CPV invests in developing new projects using a range
of technologies in a range of markets while using various types of
contracts in order to improve its ability to compete with existing
producers and other competitors, and in order to diversify the risks. In addition, CPV has internal organizational capabilities in all
key areas of foreign relations, commodities marketing and trade, finance, licensing, and operations that allow its strategy to develop
rapidly and efficiently.
OPC’s
Seasonality
Israel
Revenues from the sale of electricity are
seasonal and impacted by the “Time of Use” tariffs published by the EA. As updated by the EA’s decision in 2023, the
seasons are divided into three, as follows: (i) summer – June and September; (ii) winter – December, January and February;
and (iii) transition season – March to May and October to November.
The following table provides a schedule of the weighted EA’s generation component
rates for 2023 based on seasons and demand hours, published by the EA.
| |
|
|
|
Weighted production rate (AGOROT per kWh) |
|
|
|
|
|
|
|
|
|
|
|
Winter |
|
Off—peak |
|
21.22 |
|
20.45 |
|
23.23 |
| |
|
Mid-peak |
|
41.17 |
|
39.67 |
|
45.06 |
| |
|
On-peak |
|
71.87 |
|
69.25 |
|
78.67 |
|
Transition |
|
Off—peak |
|
18.13 |
|
17.47 |
|
19.84 |
| |
|
Mid-peak |
|
23.17 |
|
22.32 |
|
25.36 |
| |
|
On-peak |
|
29.84 |
|
28.76 |
|
32.67 |
|
Summer |
|
Off—peak |
|
17.91 |
|
17.26 |
|
19.6 |
| |
|
Mid-peak |
|
29.03 |
|
28.00 |
|
31.81 |
| |
|
On-peak |
|
75.37 |
|
72.62 |
|
82.5 |
|
Weighted Average Rate
|
|
|
|
28.69 |
|
27.64 |
|
31.4 |
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-Rotem and 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 (in NIS millions) for 2021 and 2022. These figures have not been audited
or reviewed.
| |
|
|
|
|
|
|
|
Summer (2 months) |
|
|
255 |
|
|
|
338 |
|
|
Winter (3 months) |
|
|
379 |
|
|
|
458 |
|
|
Transitional Seasons (7 months) |
|
|
721 |
|
|
|
838 |
|
|
Total for the year
|
|
|
1,355 |
|
|
|
1,634 |
|
Tzomet’s revenues, to the extent the
project is completed, will be divided into payment for availability and payment for energy. The availability tariff includes reimbursement
for capital costs required for the construction of the plant. However, available capacity in peak demand seasons (i.e., winter and summer)
receives higher compensation compared to capacity during transition seasons. The energy tariff includes reimbursement for electricity
generation expenses and, therefore, does not change significantly between seasons.
United States
The revenues from generation of electricity
are seasonal and are impacted by weather. In general, in natural gas-fuelled power plants, profitability is higher during the highest
and lowest temperatures of the year, which often coincides with summer and winter. In view of the effects of seasonality as stated above,
generally, the preference is to conduct maintenance works in power plants, to the extent possible, during the autumn and spring, in which
demand for electricity is relatively low. The profitability of renewable energy electricity production is subject to production volume,
which varies based on wind and solar operations’ patterns as well as electricity price, which tends to be higher in winter unless
the project is engaged in advance in a
contract for a fixed price.
Forward Capacity Obligations: PJM and ISO-NE’s
capacity markets include “bonuses” and “penalties” imposed based on operating performance of the facilities during
pre-defined emergency events. If a facility is unavailable during the emergency event, penalties could have a material negative financial
impact to the project. In the end of December 2022, extreme weather prevailed known as “Storm Elliott.” During the Storm Elliott,
some of the CPV Group’s power plants were entitled to bonuses while other power plants realized penalties and in aggregate the effect
is not material.
OPC’s
Property, Plants and Equipment
Israel
For summary operational information for OPC’s
operating plants in Israel as of and for the year ended
December 31, 2022, see “
—Our Businesses—OPC—Overview
of OPC’s Operations—Israel.”
OPC leases its principal executive offices
in Israel. OPC owns all of its power generation facilities.
As of
December 31, 2022, the consolidated
net book value of OPC’s property, plant and equipment was $1,220 million.
The table below sets forth summary of primary
land plots owned or leased by OPC, or that OPC has right of use in, in which OPC operates (1 dunam = 1000m2).
Real estate held through Rotem
|
Land on which the Rotem Power Plant was built |
|
Mishor Rotem |
|
Lease |
|
About 55 dunams |
Real estate held through Hadera
|
Hadera Energy Center and the Hadera power plant (including emergency road) |
|
Hadera |
|
Rental |
|
About 30 dunams (Power Plant and Hadera Energy Center) |
Real estate (including options for land) held by Hadera for Hadera
2
|
Hadera Expansion – Land near the area of the Hadera Power Plant |
|
Hadera |
|
Rental option
through the end of 2028 |
|
About 68 dunams |
|
Land near to space on which Rotem Power Plant was built |
|
Mishor Rotem |
|
Lease |
|
About 55 dunams |
Land held by Tzomet (through Tzomet HLH General Partner Ltd. and
Tzomet Netiv Limited Partnership)
|
Land on which Tzomet is situated |
|
Plugot Intersection |
|
Tzomet Netiv Limited Partnership – (by force of a development agreement with
Israel Lands Authority) – Lease |
|
About 85 dunams |
Right-of-use of the land for Sorek
|
Land on which Sorek is being constructed |
|
Sorek 2 Desalination Facility |
|
Right of use |
|
About 2 dunams |
United States
In general, the land on which the projects
are situated (both the active projects and the projects under construction) is held in a number of ways – ownership, lease with
use right, under a permit and licenses. In some cases, the facilities themselves are located on owned land, where there are easements
in land surrounding the facility for purposes of connection and transmission. In addition to the project lands, CPV leases office space
for use by the headquarters in Silver Spring, Maryland and in Braintree, Massachusetts pursuant to multiyear lease agreements.
CPV plants in commercial
operation
|
|
|
|
|
The right in the property |
|
|
|
|
Conventional Energy Projects
|
Land on which the Shore power plant was constructed |
|
Middlesex County, New Jersey |
|
Ownership |
|
About 111,290 square meters (28 acres) |
|
N/A |
|
Land on which the Maryland power plant was constructed |
|
Charles County, Maryland |
|
Ownership / easements / licenses and permits / authority |
|
About 308,290 square meters (76 acres) |
|
N/A |
|
Land on which the Valley power plant was constructed |
|
Wawayanda, Orange County, New York |
|
Substantive Ownership(1)
/ easements or permits |
|
About 121,406 square meters (30 acres) |
|
N/A |
Towantic
|
Land on which the Towantic power plant was constructed |
|
New Haven County, Connecticut |
|
Ownership / easements |
|
About 107,242 square meters (26 acres) |
|
N/A |
|
Land on which the Fairview power plant was constructed |
|
Cambria County, Jackson Township, Pennsylvania |
|
Ownership / easements |
|
About 352,077 square meters (87 acres) |
|
N/A |
|
Land on which the Three Rivers power plant was constructed |
|
Grundy County, Illinois |
|
Ownership / easements |
|
About 485,623 square meters (120 acres) |
|
N/A |
Renewable Energy Projects
|
Land on which the Keenan II wind farm was constructed |
|
Woodward County, Oklahoma |
|
Contractual easements |
|
Rights to land and the equipment |
|
December 31, 2040 |
|
Land on which the Maple Hill power plant is being constructed |
|
Cambria County, Jackson Township, Pennsylvania |
|
Ownership / easements |
|
About 3,063,470 square meters (757 acres, of which 11 acres are leased) |
|
With regard to the leased area December 1, 2061 |
|
Stagecoach Land on which the Stagecoach power plant is being built |
|
Macon County, Georgia |
|
Lease Agreement |
|
Approx. 2,541,426 m² (628 acres) |
|
May 22, 2042 with option to extend for an additional 20 years |
_______________________________________
|
(1) |
This land is held for the benefit of Valley, which is entitled to transfer it to its name. |
Insurance
OPC and its
subsidiaries, including CPV, hold
various insurance policies in order to reduce the damage for various risks, including
“all-risks” insurance. 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 (and such policies include deductibles and exceptions as customary in the areas of activity). In addition, OPC or CPV may
not be able to obtain insurance on comparable terms in the future. OPC and its
subsidiaries, including CPV, may be adversely affected
if they incur losses that are not fully covered by their insurance policies.
Employees
Israel
As of
December 31, 2022, in Israel, OPC had
a total of 150 employees, of which 108 employees are in the OPC Israel division (including plant operation, corporate management, finance,
commercial and other), and 42 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
in Israel by main category of activity as of the dates indicated:
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Number of employees by category of activity:
|
|
|
|
|
|
|
|
|
|
|
Headquarters
|
|
|
42 |
|
|
|
34 |
|
|
|
66 |
|
|
Plant operation, corporate management, finance, commercial and
other |
|
|
108 |
|
|
|
86 |
|
|
|
50 |
|
|
OPC Total (in Israel)
|
|
|
150 |
|
|
|
120 |
|
|
|
116 |
|
Most of OPC-Rotem and OPC-Hadera power plants’
operations employees are employed under collective employment agreements. OPC-Rotem is currently negotiating with its employees the engagement
in a revised collective agreement to come into force immediately upon the end of the term of the said agreement. .
United States
As of
December 31, 2022, CPV had a total of
131 employees. In general, CPV does not enter into employment
contracts with its employees. All employees of CPV are
“at-will”
employees and are typically not physically present at the project companies facilities. Rather, day-to-day operations at the project facilities
are performed by contractors who are employed directly by the applicable O&M service providers.
Shareholders’
Agreements
OPC
Israel
Upon completion of the Veridis transaction,
a shareholders’ agreement between OPC and Veridis regarding OPC Israel entered into force. This agreement replaced shareholder arrangements
made between the parties regarding OPC-Rotem and which were in effect until the completion of the Veridis transaction.
The shareholders’ agreement regarding
OPC Israel includes customary terms and conditions, inter alia regarding shareholder meetings, rights to appoint directors (such that
OPC, as the controlling shareholder, has the right to appoint the majority of directors), shareholder rights in case of share allocation,
and more.
In addition, the shareholders’ agreement
grants Veridis veto rights in connection with certain material decisions regarding OPC Israel, including: (i) changing the incorporation
papers so as to adversely affect or change Veridis’ rights and obligations; (ii) liquidation; (iii) extraordinary transactions (as
the term is defined by the Israeli Companies Law -1999, or the Companies Law) with related parties, with the exception of the exceptions
set forth; (iv) entry into new substantial projects that are not included in OPC Israel’s area of activity; (v) restructuring or
a merger as a result of which OPC Israel is not the surviving company, subject to the exception set forth in the case of a drag-along
sale; (vi) appointing an independent auditor to OPC Israel or a material subsidiary thereof that is not one of the “Big Five”
CPA firms; and (vii) approval of a transaction or project in which the planned investment amount is highly material, in accordance with
criteria set forth, and subject to exceptions set forth.
The agreement provides for additional rights
in the event of the sale of OPC Israel’ shares held by any of the parties, such as the right of first refusal, the tag-along right,
the drag-along right – all in accordance with the terms and conditions set forth.
Under the Veridis transaction, an amount of
NIS 400 million was used by OPC-Rotem for the partial repayment of shareholder loans that were advanced to OPC-Rotem in 2021 (in lieu
of Rotem’s project financing). Following the partial repayment and the balance of shareholders’ loans, divided (pro rata)
between OPC and Veridis, amounts to approximately NIS 545 million, such that OPC’s share is approximately NIS 436 million (the “Shareholder
Loans”). The Shareholders Loans are unlinked and bear interest (representing market conditions) at a rate of 2.65% or interest according
to Section 3(J) of the Income Tax Ordinance, whichever is higher. The loans shall be repaid in quarterly unequal payments in accordance
with the mechanism set in the Shareholder Loans agreement, and in any case no later than October 2031.
CPV-related
OPC Partnership Agreement
In October 2020, OPC signed a partnership
agreement with three institutional investors in connection with the formation of OPC Power (the
“Partnership”) and acquisition
of CPV by the Partnership. OPC is the general partner and owns 70% of the Partnership interests. The limited partners of the Partnership
are: OPC (70% interest; directly or through a subsidiary), Clal Insurance Group (12.75% interest), Migdal Insurance Group (12.75% interest)
and a company from the Poalim Capital Markets Group (4.5% interest) (together, these three investors, the
“Financial Investors”).
The percentages above do not include participation rights in the profits allocated to the CPV managers. The total investment commitments
and shareholder loans of all the partners amount to $815 million, based on their respective ownership interests, representing commitments
for acquisition consideration, as well as funding of additional investments in CPV for implementation of certain new projects being developed
by CPV. In September 2021, the Financial Investors in the Partnership confirmed their participation in an additional undertaking to invest
in developing and expanding CPV’s operations, each according to their proportional share, an additional investment of $400 million.
During 2022, OPC and Financial Investors invested in equity and shareholders’ loans at the total amount of $122 million and $38
million respectively, in accordance with their proportionate share in Partnership’s ownership interests. As of March 2023, the total
amount of the investment is $1,156 million (net of accrued interest, which – as of
December 31, 2022 stood at $29 million). In March
2023, OPC and the Financial Investors approved their participation in an additional investment commitment for backing guarantees that
were or will be provided for the purpose of development and expansion of projects – each based on its pro rata share, as outlined
above, for a total of $75 million.
The general partner of the Partnership, an
entity wholly-owned by OPC, manages the ownership of CPV, with certain material actions (or which may involve a conflict of interest between
the general partner and the limited partners) requiring approval of a majority or special majority (according to the specific action)
of the institutional investors which are limited partners. The general partner is entitled to management fees and success fees subject
to meeting certain achievements. There are limits on transfers of partnership interests, with OPC not permitted to sell its interest in
the Partnership for a period of three years (except in the case of a public offering by the Partnership), tag along rights for the Financial
Investors, drag along rights, and rights of first offer (ROFO) for OPC and the Financial Investors in the case of transfers by the other
party. OPC and the Financial Investors have entered into put and call arrangements, with the Financial Investors being granted put options
and OPC being granted a call option (if the put options are not exercised), with respect to their holdings in the Partnership. These options
are exercisable after 10 years from the date of the CPV acquisition and to the extent that up to such time the Partnership rights are
not traded on a recognized stock exchange.
Legal
Proceedings
For a discussion of other significant legal
proceedings to which OPC’s businesses are party, see Note 17 to our financial statements included in this annual report.
Regulatory,
Environmental and Compliance Matters
Israel
IEC generates and supplies most of the electricity
in Israel in accordance with licenses granted by virtue of the Israeli Electrical Market Law, and distributes and supplies almost all
of the electricity in Israel. In June 2020, the System Operator was granted a license to manage the Israeli electricity system (which
was revised in November 2020), pursuant to which the Minister of Energy and the EA approved commencement of gradual activities of the
System Operator in two stages. The System Operator’s Technological Planning and Development Unit is responsible for planning the
transmission system and, among other things, preparing a development plan for the transmission and generation of electricity, determining
criteria for development of the electricity system, formulating forecasts, engineering and statutory planning of the transmission system,
and performing studies with respect to connection to generation facilities. The System Operators’ Market Statistic Unit is responsible
for the current ongoing operation of the transmission system and is intended to, among other things, maintain a 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.
Pursuant to the Electricity Sector Law, IEC
and the System Operator are each defined as an “essential service provider” and as such they are subject to the criteria and
tariffs provided by the EA. 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.
IEC Reform
Pursuant to the Israeli Government’s
electricity sector reform, the IEC will be required to sell five of its power plants through a tender process over the 7 years. 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 Operator. Following the Israeli Government’s
electricity sector reform, as part of which the IEC is expected to sell five of its sites, the Israel Competition Authority issued guiding
principles for sector concentration consultation in such sale process. According to such principles, which are subject to change and review
considering the relevant circumstances:
|
• |
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. The generation capacity of an entity’s related parties with generation licenses will be counted towards such
entity’s capacity for purposes of this 20% limitation. In addition, the EA published proposed regulations in respect of maximum
holdings in generation licenses which are not identical to the Competition Authority principles. The Competition Authority has stated
that the relevant limit is 20% of 10,500 MW (which is the anticipated capacity in the market held by private players by 2023, excluding
capacity of IEC), while, the EA has proposed regulation whereby the relevant limit is 20% of 16,000 MW (including capacity of IEC). OPC
may be subject to a more restrictive interpretation. The MW currently attributable to OPC, including Oil Refineries Ltd., or ORL, and
Israel Chemicals Ltd. as parties with generation licenses that are related to OPC, is approximately 1,480 MW; and |
|
• |
An entity holding a right to a fuel venture may not acquire any of the sites being sold. |
OPC participated in the tenders of the Alon
Tabor plant and Ramat Hovav plants — the first two plants that have been sold out of the five plants to be sold by the IEC —
but was not the winning bidder.
Ministry of Energy and EA
The Ministry of Energy regulates 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.
According to publications of the Ministry
of Energy, the Ministry of Energy’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’s electricity.
The Ministry of Energy’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’s electricity structure, performing
control and supervision of the implementation of the IEC’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 2019 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 the transfer of system management activities from the IEC to the new System
Operator.
Energy Sector Targets for 2050
In April 2021, the Ministry of Energy published
the roadmap for a low-carbon energy sector by 2050. The Ministry of Energy has set four “primary targets” that will reflect
the strategic goal of reducing emissions, and also supportive sectoral objectives which will help to achieve them. The “super target”
is defined as a reduction of greenhouse gas emissions from the energy sector by 80% compared to the 2015 reference year, by 2050. The
targets and indices for the energy sector are presented by the Ministry of Energy in the following table.
|
|
|
|
|
|
|
|
|
|
|
Reducing greenhouse gas in the energy sector |
|
Percentage reduction of greenhouse gas over 2015 |
|
0% |
|
22% |
|
80% |
|
Reducing greenhouse gas in the electricity sector |
|
Percentage reduction of greenhouse gas over 2015 |
|
7.5% |
|
30% |
|
75%-85% |
|
Energy efficiency |
|
Percentage of annual improvement in energy intensity (TW/NUS million) |
|
0.7% |
|
Annual improvement of 1.3% in energy intensity |
|
Annual improvement of 1.3% in energy intensity |
|
Use of coal |
|
Percentage of coal in the electricity generation mix |
|
30% |
|
0% |
|
0% |
In February 2022, Israeli Knesset discussed
the Climate Law bill, the objective of which is to prevent and reduce greenhouse gas emissions and the damages of global warming in Israel,
as part of the State of Israel’s commitment to take steps for tackling global warming, including setting targets and drawing up
plans for reducing greenhouse gas emissions. As part of the bill, it was suggested that the government will take steps to reduce annual
greenhouse gas emissions, such that emissions will not exceed the following targets (in relation to 2015 as the base year):
|
(1) |
In 2030 and through 2049 – no more than 73% of the annual quantity measured in the base year.
|
|
(2) |
In 2050 and thereafter – no more than 15% of the annual quantity measured in the base year.
|
Closure of the IEC’s Coal-Fired Production
Units
As of
March 19, 2023, the IEC’s generation
units run on coal, natural gas, fuel oil or diesel fuel as their secondary or primary fuel, as the case may be. The power plants operated
by the independent electricity producers are powered by natural gas as primary fuel and diesel fuel as backup. Use of natural gas for
power generation reduces air pollution and greenhouse gas emissions in the power generation process compared to the use of coal.
According to Government Decision 4080, by
June 2022, the generation of electricity in units 1-4 will be stopped, subject to the existence of two cumulative conditions: (i) connection
of a third gas reservoir (Karish Tanin reservoir) to the national gas transmission system, (ii) commencement of operation of the first
combined cycle with a capacity of 600 MW at the
“Orot Rabin” site in Hadera. As of
March 19, 2023, the generation units of
units 1-4 at the Orot Rabin site has not yet terminated and there is no certainty regarding compliance with the conditions and the cessation
of generation in these units.
According to the policy principles set by
the Minister of Energy from November 2019, until the end of 2025, production units 5-6 at the Orot Rabin site in Hadera and generation
units 1-4 at the “Rutenberg” site in Ashkelon will be converted to natural gas and the use of coal will cease. In accordance
with information published by the EA as part of the tariff update, the first combined cycle in “Orot Rabin” is expected to
start operations in July 2023. After the operation of the combined cycle, the two units are expected to be decommissioned. In addition,
the project for the conversion of the coal-fired power plants is delayed and is expected to be completed only in April 2023.
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 (“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, 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 Sector 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.
In 2022, the EA continued to publish resolutions
intended to promote the construction of solar facilities, storage facilities, and installation of EV charging stations in the land divisions,
updated the demand hours clusters and underlying tariffs, revised the criteria for promoting competition in the supply segment, established
principles for installing smart meters, and approved virtual supply licenses. In addition, the EA published a resolution to amend criteria
for the purpose of applying the market model to existing private electricity generation.
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— Revenue—EA
Tariffs.”
Independent Power Producers (IPPs)
Activity by IPPs, 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.
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, an
applicant 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 and, upon completion of construction of the facility and successful compliance with acceptance tests, a
generation 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 all types of technology, with the exception of facilities with an installed capacity under 16 MW,
for which no license is required for their operation. A party requesting a supply license must demonstrate compliance with the shareholders’
equity requirements as provided by the EA as a condition for receipt of a supply license for suppliers without means of generation.
According to the 2021 Electricity Market Report,
as of 2021, IPPs (including OPC-Rotem and OPC-Hadera), including those using renewable energy, active in Israel have an aggregate generation
capacity of 9,887 MW, constituting 46% of the total installed generation capacity in the country. According to the Electricity Sector
Status Report for 2021, by the end of the IEC Reform period, the market share of the independent electricity producers (including OPC-Rotem
and OPC-Hadera), including renewable energies, is expected to amount to approximately 69% of the total installed capacity in the sector.
In generation terms, in 2025, the market share of the independent electricity producers (including OPC-Rotem and OPC-Hadera), including
renewable energies, is expected to amount to approximately 62% of the total generation in the 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,
diesel oil or carbon). As of December 31, 2021, the total installed capacity in this technology which is primarily held by the independent
producers, is about 5,931 megawatts. Gas-fired combined cycle generation facilities are planned to be operational during most hours over
the year. Conventional open cycle power plants (the “peaker power plants”) are generally planned to operate for a number of
hours during the day; these power plants are operated when the demand for electricity exceeds the supply - whether due to demand peaks,
as backup in case of malfunctions in other generation facilities, or as a supplement when solar energy is unavailable – whether
in the early morning hours or at night. |
|
• |
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 approximately 990 MW assigned under the current regulation. |
|
• |
Renewable
energy – generation of electric power the source of energy of which
includes, inter alia, sun, wind, water or waste. In November 2020, the Israeli government updated the generation targets for renewable
energy to 30% of the consumption up to 2030. As of the end of 2022, the installed capacity of renewable energy generation facilities was
4,795 MW. In recent years, there has been an uptick in the entrance of electricity producers and generation facilities that use renewable
energies in to the electricity generation market, including solar energy, wind energy, and storage; that use the grid resources. Most
of the renewable energy generation activities are sold to the System Operator or for own consumption and to the onsite consumers.
|
|
• |
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 capacity of one of the production facilities (which is
in operation) using this technology amounts to 300 MW with two additional facilities using this technology with capacity of approximately
800 MW are under construction. |
|
• |
Energy
storage – this is possible through a range of technologies, including,
among others, pumped storage, mechanical storage (for example compressed air) and chemical storage (for example batteries). Considering
the Israeli government decision that provides a target for generation of electricity using renewable energies (mainly solar energy) at
the rate of 30% out of the generation up to 2030, the EA estimates that the electricity sector in Israel will need to prepare for construction
of facilities for energy storage. The use of this technology is currently negligible; however, it is expected to increase significantly
in the upcoming years due to the need for storage facilities as a result of the anticipated increase in renewable energies. In particular,
based on EA publications, compliance with the target for renewable energies up to 2030 will require construction of storage facilities
with a capacity of thousands of MWh, deriving from the readiness of the technology and the economic feasibility of its use. OPC takes
steps to integrate energy storage. For example, OPC entered into a number of agreements for generation of electricity at the consumers’
premises, which allow OPC to build storage facilities. |
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 and system administration
service. In accordance with the EA’s
“Principles for the Integration of the IEC into the Field of Energy Storage in the Transmission
and Distribution Grid” of
January 18, 2023, the IEC’s market share in the field of storage shall not exceed 15% of the market
share of the private market. The deployment plan that will be filed by the IEC for the construction of storage facilities will be coordinated
with the System Operator and approved by the EA in view of the purpose of the storage facilities it will build, for system-wide purposes.
The facilities will be operated by the IEC under the directives of the System Operator, and its supervision and control.
Electricity Consumers
In recent years more so than in the past,
due to the Israeli government’s targets with respect to renewable energies and the targets of the Minister of Energy for decentralized
generation, the impact of electricity consumers on the market has strengthened. In recent years, there is a global trend of transition
from generation of electricity using fossil fuels to generation using renewable energy technologies due to, among other things, the increasing
awareness of the climate change crisis, as well as in light of the decline in the construction costs of the renewable energy facilities,
particularly the photovoltaic generation facilities. In addition, recently, due to technology developments, including the introduction
of electric vehicles and the definition of the renewable energy targets set by the Israeli government and the targets set by the Ministry
of Energy for decentralized generation, the status of the electricity consumers - as active stakeholders - has strengthened. In accordance
with the regulations forecast as per the EA’s decision to deploy smart meters, in 2023, the number of smart meters will reach 300,000.
OPC believes, the steps taken by the EA to open up the supply segment to competition, including decisions regarding installation of smart
meters and licensing suppliers without means of production, are expected to expand the scope of consumption associated with independent
suppliers and enhance the growing competition in this segment.
Market model for generation and storage facilities
connected to or integrated into the distribution grid
In September 2022, the EA published a resolution
on “market model for generation and storage facilities connected to or integrated into the distribution grid.” The resolution
regulates the activity of generation (all technologies) and storage facilities in the distribution grid, and determines their option to
sell electricity directly to virtual suppliers as from January 2024. The resolution allows for the opening of the supply segment to competition,
while removing the quotas that were previously set regarding this matter. The main goal of the resolution is: (i) allowing the sale of
energy from a generation facility to a private virtual provider as from January 2024, and (ii) allowing the transfer from other regulations
for the generation facility to this regulation; implementation of a generation plan for high voltage facilities by the distributor and
provision of a load plan. As part of the resolution, the formula for acquiring electricity through the virtual supplier was amended such
that the difference between the cost of acquiring the supplier’s energy and the cost of selling the energy to IEC’s consumers
was minimized, and a unified tariff was set (which is based on an economy-wide profile) in respect of acquisition of electricity during
peak demand hours net. In fact, the resolution allows for the opening of the supply segment to competition, while removing the quotas
that were previously set regarding this matter. OPC expects that, in the short term, the resolution reduces the economic viability of
the virtual supply activity, compared to the conditions prior to the resolution, and in the long term, the resolution encourages increased
competition in the supply segment while integrating generation facilities and storage facilities.
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.
Upon the development of the electricity sector
and the full utilization of EA Regulation 241 quotas, the EA published a follow-up arrangement 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 amended Regulation 914.
Under the amendment, a higher tariff was adopted for production facilities that comply with certain flexible requirements. The amendment
also offers open-cycle producers several alternatives, including receiving surplus gas from the gas agreements of other producers. The
total quota for new facilities pursuant to this arrangement was limited to 1,100 MW distributed across various plants (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). Furthermore, under
the 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. Finally, in order to grant IPPs sufficient time to reach financial closing, Regulation
914 was extended to apply to producers who will receive licenses no later than
January 1, 2020.
In November 2018, the EA published a decision
regarding the activity arrangement of natural gas generation facilities connected to the distribution network. Pursuant to this decision,
generators under 16 MW are encouraged to construct power plants within customers’ facilities. These power plants will only be permitted
to sell electricity to customers within the facility (and not other private customers) and the System Operator.
In March 2019, the EA published a decision
regarding the establishment of generators connected to the high-voltage network without a tender process. This decision would permit the
establishment of generation facilities that are connected to the transmission grid or integrated in the connection of a consumer connected
to the 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 Operator, that will upload the capacity to the grid according
to central upload system. The EA has stated that it intends to publish information on the tender process for construction of such generation
facilities in the future.
In December 2021, the Electricity Sector Regulations
(Promotion of Competition in the Generation Segment) (Temporary Order), 2021 were issued by the Minister of Energy after consultation
with the Competition Commissioner. The regulations were published under a temporary order and are in effect for three years, i.e. until
November 30, 2024. The purpose of the regulations is to promote competition in the generation segment of the electricity sector. Pursuant
to the regulations, a person will not be granted a generation license or approval in accordance with Sections 12 or 13 of the
Electricity Sector Law upon existence of one of the following: (i) following the issuance, the person will hold generation licenses
or connection commitment for gas-fired power plants the total capacity of which exceeds 20% of the planned capacity for this type
of power plant. As of
March 19, 2023, according to the appendix attached to the regulations - the planned capacity for 2024 for gas-fired
power generation units is 16,700 MW; (ii) after the allocation, the person will hold generation licenses or connection commitment
for more than one power plant using pumped storage technology; (iii) after the allocation, the person will hold generation licenses
or connection commitment for wind-powered power plants where the total capacity exceeds 60% of the planned capacity for this type of power
plant, which, according to the appendix, is 730 MW for 2024. Pursuant to the regulations, notwithstanding the above, the EA may grant
such a generation license or approval on special grounds that shall be recorded (after consultation with the Israel Competition Authority)
and for the benefit of the electricity sector. Furthermore, the EA may refrain from granting a generation license or from approving a
connection to the grid if it believes that the allocation is likely to prevent or reduce competition in the electricity sector after taking
into account additional considerations, including the impact of holdings of a person in other generation licenses that do not constitute
a holding of a right as defined in the regulations, the impact of joint holdings in companies with a holder of other rights, as well as
the impact of holdings of a person in holders of licenses that were granted under the Natural Gas Market Law. For the purpose of calculating
the holdings in rights or a connection commitment, a person shall be viewed as a holder regarding the entire installed capacity of the
generation license or the connection commitment. It is noted that the
“planned capacity” of gas-fired power plants for 2024
in accordance with the regulations (16,700 MW) includes gas-fired generation facilities without distinguishing between an essential service
provider (IEC), independent electricity producers and the relevant types of arrangements, as opposed to the
“planned installed capacity”
stated in the Sector Consulting Principles published by the Competition Commissioner (10,500 MW, and it does not include the capacity
owned by the IEC), which preceded the regulations.
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 signed a PPA with the IEC in 2009 (the “IEC PPA”),
which stipulates OPC’s regulatory framework. This PPA will be assigned by IEC to the System Operator. 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’s Israel operations—OPC’s profitability depends on the EA’s electricity rates.”
In November 2017, OPC-Rotem applied to the
EA to obtain a supply license for the sale of electricity to customers in Israel. In February 2018, the EA responded that OPC-Rotem needs
a supply license to continue selling electricity to customers and that the license will not change the terms of the PPA between OPC-Rotem
and the IEC. 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. OPC-Rotem has not received a supply license to date and there is no assurance regarding the
receipt of the license and its terms. If OPC-Rotem does not receive a supply license, it may adversely affect OPC-Rotem’s operations.
In February 2020, the EA published the resolution
made in Meeting 573 regarding deviations from the consumption plan. Pursuant to the resolution, a supplier may not sell more to its consumers
than the total capacity that is the object of all the engagements it has entered into with independent production license holders. Actual
energy consumption at a rate higher than 3% of the installed capacity allocated to the supplier will trigger payment of an annual tariff
reflecting the annual cost of the capacity the supplier used as a result of the deviation, as detailed in the resolution. In addition,
the resolution stipulates a settlement of accounts mechanism due to a deviation from the daily consumption plan (surpluses and deficiencies),
that will apply in addition to such annual tariff payment. The decision applies to OPC-Hadera and is expected to apply to OPC-Rotem after
the complementary arrangements are set. On
February 19, 2023, the EA published a proposed resolution to apply criteria to OPC-Rotem as
part of a move that was designed to unify the regulations that apply to OPC-Rotem and all other bilateral producers, including the application
of the market model to OPC-Rotem. In
February 19, 2023, the EA published a proposed resolution for the application of covenants and complementary
arrangements to OPC-Rotem. This proposed resolution, should it be passed, aligns in many respects the regulation applicable to OPC-Rotem
with that applicable to generation facilities that are allowed to enter bilateral transactions, and enables OPC-Rotem to operate in the
energy market in a similar and equal manner to that of other generation facilities that are allowed to conduct bilateral transactions.
As of
March 19, 2023, the final resolution has not yet been made, and therefore, the extent of the resolution’s effect on OPC-Rotem
is uncertain, and it depends, among other things, on the final supplementary arrangements to be determined.
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 mid-peak 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 March 2019, 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
In connection with construction of a cogeneration
power station in Israel, OPC-Hadera reached its COD on
July 1, 2020. In June 2020, the EA granted a permanent license to the OPC-Hadera
power plant for generation of electricity using cogeneration technology having installed capacity of 144 MW and a supply license. The
generation license is for a period of 20 years, as is the supply license so long as a valid generation license is held (the generation
license may be extended by an additional 10 years).
In connection with 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 September 2019, Tzomet received the results
of an interconnection study performed by the System Operator. The study included a limitation on output of the power plant’s full
capacity to the grid beyond a limited number of hours per year, up to completion of transmission projects by IEC, which are expected to
be completed by the end of 2023. In December 2019, the EA approved Tzomet’s tariff rates, which will be applicable upon completion
of the power plant and receipt of a permanent generation license. Given the limitation included in the interconnection study, Tzomet will
be subject to a reduced availability tariff during 2023. See “Item 3.D Risk Factors—Risks
Related to OPC’s Israel operations—OPC faces limitations under Israeli law in connection with the expansion of its business.”
In January 2020, Tzomet entered into a PPA
with IEC, the government-owned electricity generation, transmission and distribution company in Israel, or the Tzomet PPA (in October
2020, OPC-Rotem received notice of assignment by IEC to the System Operator which was subsequently reassigned to Noga). The term of the
Tzomet PPA is for 20 years after the power station’s COD. According to the terms of the Tzomet PPA, (i) Tzomet will sell energy
and available capacity to IEC and IEC will provide Tzomet infrastructure and management services for the electricity system, including
back-up services (ii) all of the Tzomet plant’s capacity will be sold pursuant to a fixed availability arrangement, which will require
compliance with criteria set out in Regulation 914, (iii) the plant will be operated pursuant to the System Operator’s directives
and the System Operator will be permitted to disconnect supply of electricity to the grid if Tzomet does not comply with certain safety
conditions and (iv) Tzomet will be required to comply with certain availability and credibility requirements set out in its license and
Regulation 914, and pay penalties for any non-compliance. Once the Tzomet plant reaches its COD, its entire capacity will be allocated
to the System Operator pursuant to the terms of the Tzomet PPA, and Tzomet will not be permitted to sign agreements with private customers
unless the electricity trade rules are updated.
Tzomet has not entered into a gas supply agreement
yet, but has the option to engage with a gas supplier or have its gas supplied by the IEC.
United States
The electricity market in the United States
has both Federal oversight (wholesale sales of electricity and inter-state transmission) and State oversight (retail sales of electricity
and provision of distribution service to end users). The major players in the US electricity sector are RTO, FERC, and ISO, electricity
producers (which are, in general, private entities) and electric utility companies and electricity distribution companies operating on
behalf of the different consumers (such as private and commercial consumers). The primary federal regulator is the Federal Energy Regulatory
Commission (FERC), alongside separate state-level Public Service Commission’s exercising oversight in their respective states. The
wholesale electric marketplace in the United States operates within the framework of several FERC-approved regional or state market operators,
including RTO or ISO. RTO/ISOs are responsible for the day-to-day operation of the transmission system, the administration of the wholesale
markets in the regions in which they operate, and for the long-term transmission planning and resource adequacy functions.
The PJM market
The PJM Interconnection (PJM) is an RTO and
ISO that operates a wholesale electricity market and serves as an administrator of the electric transmission system which covers parts
of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West
Virginia, and the District of Columbia, serving more than 65 million residents. The PJM market is the largest among the RTOs with
approximately 187 gigawatts of installed capacity and peak demand of approximately 150 gigawatts in 2022. PJM oversees the operation of
more than 150,000 kilometers of transmission lines and its internal forecasts indicate a peak demand of approximated 163 GW for 2023.
Sale of electricity in the organized PJM market is supervised and managed by PJM to assure supply of the electricity, based on price offers
of the electricity generators.
The PJM is supervised by and receives its
authority from the FERC and is financed by payments from participants in the market. PJM collects payments for capacity, electricity,
transmission, accompanying services and other services required for operation of the electricity system from utilities and electric distribution
companies acting on behalf of consumers (households, commerce and industry), and distributes the payments to the generators and transmitters,
by means of a variety of market mechanisms, including purchase of capacity (Forward Capacity Market) and an electricity acquisition mechanism
in the Day-Ahead and Real-Time markets. In general, the capacity price is determined in an annual tender for operations over one year
three years in advance and is guaranteed without reference to the actual amount of electricity generated. For the supply year starting
2023/2024, the capacity tender on the PJM was postponed due to FERC’s procedure for assessing the fairness and reasonableness of
the methodology and inputs used to determine the tender prices in PJM’s reserves capacity tender. The capacity tenders for 2023/2024
took place in June 2022; they are expected to be held every six months until the normal timelines for three-year forward tenders is renewed.
Subsequently, the tenders are expected to continue as stated above. Payments for electricity are made for actual electricity generation
and are determined on the basis of the marginal price in the market. A capacity auction was held in December 2022, and its results were
published in February 2023.
Requests
for network connections. The increasing demand for renewable energy in the
PJM, MISO and SPP electricity markets, led to an increase in demand for connections to the grid and requests for connection surveys of
projects to the grid. These demands cause overload and delays in processes for approving the connection, and may affect the procedure
and pace of advancing the project. In April 2021, PJM set up a dedicated task force for applying the reform of the interconnection process;
the task force is comprised of PJM’s teams and teams of stakeholders thereof; the objective of the task force is to assess and suggest
reforms in PJM’s electricity transmission system that will address, among other things, the large backlog of proposed projects that
await the completion of their interconnection surveys, and include system upgrade costs for each proposed project. PJM’s teams and
management suggested a new work framework for the system interconnection process, including an interim process that regulates the period
of transition from the existing process to the new work framework. In November 2022, the reform was approved by the FERC (subject to conditions),
and entered into effect in January 2023. In the framework of the changes, PJM will make preparations for three-phased interconnection
analysis procedure that will apply to all applicants, who filed an interconnection application within the same time frame. At the end
of the three phases, there will be a period during which entities will be able to engage in interconnect agreements. Projects that do
not need grid upgrades will be allowed to progress to the interconnect agreement phase after the first two stages.
CPV is of the opinion that the implementation
of this reform may cause a two-year delay in the construction and commercial operation of certain projects in the PJM market, depending,
among other things, on the costs of the required grid upgrades, and on how far they are in the interconnection process. The Maple Hill
and Three Rivers projects, which are presently in the construction stages are not expected to be impacted by the reform.
The NYISO market
The NYISO market has operated since 1999,
and is one of the most advanced electricity markets in the United States and in the world. The NYISO market includes about 41 gigawatts
of installed capacity and more than 18,000 kilometers of transmission lines, serving about 20 million customers with a peak demand
of about 32 gigawatts. The market is divided into 11 regions (zones). The pricing of the electricity and the capacity varies among
the regions based on demand and available supply. The NYISO electricity market includes a Day-Ahead and Real-Time market for the sale
of electricity and other ancillary services. In addition, the NYISO has operated a capacity market since 2003. Capacity prices are determined
on a monthly basis, with up to six-month forward auctions. Capacity payments are guaranteed without reference to the amount of electricity
actually generated. The electricity prices are determined on the basis of the marginal price on the market.
The ISO–NE market
ISO–NE is the ISO responsible for managing
the day-to-day operation of the New England transmission system, as well as administering the wholesale electricity and capacity markets
in New England. ISO–NE was created in 1997 to operate the wholesale power market under the direction of the New England Power Pool
(NEPOOL). In 2005, it became an independent RTO, assuming broader authority over the day-to-day operation of the power system, market
administration, and transmission planning with direct control over the transmission rates and market rules. The ISO-NE managed footprint
covers Connecticut, Massachusetts, New Hampshire, Rhode Island, Vermont, and most of Maine. It serves about 15 million residents with
a generation scope of about 33 gigawatts and peak demand of about 28 gigawatts. ISO-NE administers more than 14,000 kilometers of transmission
lines ranging from 69kv to 345kv and including several tie lines to neighboring control areas NY, Quebec, and New Brunswick. ISO–NE
is a non-profit FERC-regulated entity which operates pursuant to a tariff on file with FERC.
The markets in New England include a Day Ahead
and Real Time Energy Market for the sale of electricity, a Forward Capacity Market of tenders for operations over one year three years
in advance. New projects have the option of ensuring capacity for a longer period, and other ancillary services.
Regulation permits/licenses
In general, CPV’s facilities and operations
are regulated under a variety of federal and state laws and regulations. For example, the construction and operation of CPV’s natural
gas-fired power plants are subject to permitting and emission limitations pursuant to the CAA and related state laws and regulations that
implement the CAA, which laws and regulations and may be more stricter than the provisions of the federal CAA depending on the state in
which a plant is located. The CPV Group is required to hold major source permits (mostly issued by the environmental protection agencies
in each state) before the commencement of the construction of such power plants. Depending on air quality in a certain region and its
being in line with air quality standards, CPV may be required to obtain emission reduction credit in order to offset potential emissions
of each power plant (as it’s the case in connection with natural gas-fired power plants that were or will be built by the CPV Group
in New York, New Jersey, Connecticut and Illinois). Furthermore, the CPV project companies are generally required to obtain Title V operating
permits in order to operate these plants. Such permits will incorporate regulatory standards that apply to air-polluting emissions for
natural gas-fired power plants and relevant conditions that are to be met under the building permits issued for such plants. Those standards
include technology-based pollution control limitations, and also include restrictions on allowed emissions of SO2 and/or NOx on an annual
basis or on the basis of “ozone” season for offsetting annual or ozone season emission, pursuant to the Federal Acid Rain
Regulations (which applies in all states to annual SO2 emissions from fossil-to-fuel fired power plants) and the Cross-State Air Pollution
Rule. Most of CPV’s natural gas-fired power plants are subject to the Cross State Air Pollution Rule, which requires certain state
in the eastern half the United States (“upwind” states) to improve air quality by reducing NOx and/or SO2 emissions of power
plants that cross state lines and contribute to smog and soot pollution in the downwind states. In April 2022, the U.S. EPA proposed a
number of revisions to the Cross-State Air Pollution Rule in order to ensure that emissions from upwind states are not contributing downwind
states ability to achieve compliance with the 2015 ozone national ambient air quality standard, or interfering with downwind states’
ability to maintain compliance with such standard. The regulation, when finalized, will result in the revised state NOx ozone season emissions
budgets and will also modify various aspects of the program, including making dynamic adjustments to emissions budgets over time to reflect
to changes in the generation fuel mix, and to modify the rules relating to the use of banked allowances.
Federal regulations require entities to report
the emission of greenhouse gases emissions under the Clean Air Act (CAA). The CAA regulates emissions of air pollutants from various industrial
sources, such as natural gas-fired power plants, including by requiring Title V Permits to Operate for such sources of air pollution emissions
above certain thresholds. Furthermore, federal regulations also impose restrictions on carbon dioxide emissions from new combined cycle
plants (whose construction commenced after
January 8, 2014) or reconstructed (commenced reconstruction after
June 8, 2014) combined-cycle
power plants. States may also impose additional regulations or limitations on such emissions. Furthermore, 22 states, including Maryland,
New York, New Jersey, Connecticut and Illinois, states in which the CPV Group operates, in the United State adopted legislative agendas
and/or administrative orders in order to achieve carbon neutrality or 100% zero-emission electricity supply within the next 20-30 years.
For example, CPV’s natural gas-fired power plants in Connecticut, New York, New Jersey and Maryland are subject to the RGGI, which
requires CPV’s natural gas-fired plants to obtain, either through auctions or trading, greenhouse gas emission allowances to offset
each facility’s emission of CO
2. In its Title V application
process, Valley was required to address New York legislation on such matters. Under the RGGI, an independent market monitor provides oversight
of the auctions for CO
2 allowances, as well as activity
on the secondary market, to ensure integrity of, and confidence in, the market. In 2022, the minimum price that carbon dioxide allowances
could be sold for was $13.49 per allowance. A legal proceeding is outstanding in the state of Pennsylvania regarding whether the sale
of carbon dioxide allowances pursuant to Pennsylvania’s carbon cap and trade budget program is an authorized
“fee” or
a
“tax” that can only be imposed by the state legislature. Should the Pennsylvania courts uphold the regulation, the power
plants operating in Pennsylvania (including the Fairview power plant) are expected to be required to purchase carbon dioxide allowances,
as is the case for the Valley, Maryland, Shore, and Towantic power plants. The cost of acquiring the allowances in Pennsylvania is estimated
at approximately $10 million per year (the CPV Group’s share), as from the date on which the decision is made (if made); the CPV
Group believes that the cost may result in an increase in electricity prices across PJM.
CPV’s natural gas-fired projects are
also subject to regulation under the CWA and related state laws in connection with any discharges of wastewater and storm water from its
facilities. The CWA prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits, including
wastewater and stormwater permits under the National Pollutant Discharge Elimination System. The discharge of wastewater into public water
sources may be subject to federal standards (depending on the source of the wastewater). For discharges from a facility that are directed
to a publicly owned treatment works, the main regulator that regulates such discharges is, generally, a municipal authority that operates
system for treating the wastewater.
The projects of CPV are also subject, as applicable,
to requirements under federal and state laws governing the management, disposal and release of hazardous and solid wastes and materials
at or from its facilities, including the federal Resource Conservation and Recovery Act (“RCRA”) and the CERCLA (and equivalent
state laws). RCRA requires owners and operators of facilities that generate and dispose of hazardous waste in third-party sites to obtain
facility identification numbers from the EPA and to comply with the regulations that apply to storage and disposal of such waste. Facilities
that store hazardous waste for periods longer than those set in the regulations, or which treat or dispose of the hazardous waste in the
facility’s site are required to hold such a permit and operate in accordance with the provisions of RCRA Subtitle C permits. CPV
facilities are operated in a manner whereby they are not required to RCRA Subtitle C permits.
CERCLA, together with other state laws, stipulate
that the current or previous owners, that operated facilities in which hazardous substances were discharged to the environment, or which
transported waste containing hazardous substances to third parties’ waste sites, might be held liable by the United States government,
state agencies or private entities, in respect of response costs borne by such entities to investigate and treat pollution in the said
sites, or that might be subject to orders to investigate and treat such pollution as issued by the EPA or state agencies (under state
regulations). Parties that were found liable under the CERCLA might also be found liable to damages caused to natural resources as a result
of discharge of waste as stated above. Generally, parties that were found liable under the CERCLA and similar state laws are not covered
by the defense claim whereby they acted in accordance with the applicable law. Furthermore, the liability generally applies “jointly
and severally”; that is to say, the liable party may be liable to a share of the response costs amount that is larger than its share
in the disposal of waste in the relevant site.
The sites and operation of CPV’s renewable
power projects are subject to a variety of federal environmental laws, including with respect to protection of threatened and endangered
plant and animal species, such as the Endangered Species Act, the Migratory Bird Treaty Act, and the Bald and Golden Eagle Protection
Act. These laws and their state and local equivalents provide for significant civil and criminal penalties for unpermitted activities
that result in harm to or harassment of certain protected animals and plants, including damage to their habitats. The CPV Group’s
operations in areas where there are threatened or endangered species, or in areas where there are critical natural habitats, may require
certain permits or be subject to harsh restrictions or requirements to take protective measures in connection with these species. The
CPV Group may also be prevented from developing projects in these areas. Furthermore, the CPV Group’s natural gas-fired projects
are also subject to the said laws; however, these regulations have larger effect on wind and solar projects, given the area required to
build such projects, their location, and in the case of wind projects, there is higher probability that birds and listed species of bats
will be affected.
Projects that were awarded federal funding,
or which are required to obtain a federal permit or other discretionary permit (except for a number of exceptions) are subject to the
National Environmental Protection Act (“NEPA”), that requires federal agencies to assess the potential environmental impact
of those permits and approvals. For example, if, due to the project’s impact on the ‘Waters of the U.S.’, it is required
to hold an ‘Individual Section 404 Permit’ issued by the United States Army Corps of Engineers (the “ACOE”), which
permits such an impact, then the project will be required to undergo an environmental impact survey under NEPA. The environmental impact
survey might cause significant delays in the project’s development, depending on the project’s potential environmental impact.
If a project is required to obtain federal approval, it will also be subject to the National Historic Preservation Act, which requires
federal agencies to consider the effects of federal projects on significant historic, cultural and archaeological resources. The CPV Group’s
project companies may be subject to other federal permits, licensing arrangements, approvals and other requirements by other federal agencies
under various legislation, including the Advisory Council on Historic Preservation; the ACOE referred to above (in connection with the
‘Waters of the U.S.’); the United States Fish and Wildlife Service in connection with potential effects on endangered species,
migratory birds, certain species of eagle, and natural habitats that are critical for those animals; and the Federal Bureau of Land Management
(“BLM”), in connection with projects that require the use of federal land managed by the BLM and the EPA. Local or state regulations
(including dedicated regulations requiring entities to obtain conditional or special use permits for the purpose of building a project),
including, for example, the New York Accelerated Renewable Energy and Community Benefit Act (that applies to large-scale renewable energy
projects in New York), may require a similar consultation with state agencies and/or conducting environmental impact surveys in accordance
with state laws.
CPV’s operations also are subject to
a number of federal and state laws and regulations designed to protect the safety and health of workers, including the Federal Occupational
Safety and Health Act, and equivalent state laws.
Permits/licenses required in connection with
operational projects
As part of its activities, CPV is required
to obtain and hold permits due to various federal, state and local legislation and regulations relating to power plant operations and
environmental protection. Such permits are required both due to the activities of the power plants involving generation therein based
on natural gas and the impact of the generation process on the air and water in the area of the facilities, as well as a result of construction
of the renewable energy facilities (wind farms and solar fields) that could constitute environmental hazards and have a harmful impact
on the area in which they are located. The main required permits/licenses (without distinction between different requirements of the various
jurisdictions in which the power plants / facilities are located):
|
1. |
CPV is required to hold permits in order to operate and/or construct the power plants, the purpose of which is prevention or reduction
of air pollution. The power plants may also be required to hold permits for flowing water, waste-water and other waste into the local
sewer systems or into other water sources in the United States. |
|
2. |
Due to the height and location of the exhaust stacks and other components of the generation facilities, which could endanger the
air traffic, the power plants are required to hold a permit for construction of the stacks and additional components in the generation
facilities. This permit is issued by the Federal Aviation Authority (FAA). |
|
3. |
Electricity production facilities using renewable energy are often required to hold coverage in accordance with general permits applicable
to flood water and, the discharge of dredged and fill materials to the ‘Waters of the U.S.’ Depending on the area of the affected
site, these facilities may be required to obtain individual permits from ACOE in respect of those effects; however, generally, it is possible
to build projects in places that will not require such permits. |
|
4. |
State and local permits for renewable energy facilities (the permit’s requirements depend on the state in which the project
is built and its location within the state). |
All of CPV’s active plants, as well
as the plant under construction, hold relevant valid permits for their operational and/or construction activities. With respect to Valley,
it commenced operations in January 2018 under a combined Air State Facility and a pre-construction Prevention of Significant Deterioration
permit (together, the
“ASF Permit”), among other permits and approvals. Valley subsequently filed its Title V Air Permit Application
on
August 24, 2018, (which is required to replace the ASF Permit) and continued operations under the automatic permit extension provision
in the State Administrative Procedure Act, which also extends the ASF Permit. The New York State Department of Environmental Conservation
(
“NYSDEC”) published notice on
May 29, 2019 that the Title V application was complete. NYSDEC was required to make a final
determination on Valley’s Title V permit application within eighteen months after the application was deemed complete. Rather than
making a final determination within that time frame, however, NYSDEC revoked its prior application completeness determination and issued
a Notice of Incomplete Application on
November 29, 2020. NYSDEC stated that Valley was required to provide an assessment of how NYSDEC’s
issuance of a Title V permit would be consistent with the statewide greenhouse gas emissions limits (including a 40% reduction in greenhouse
gas emissions in New York by 2030, zero (0) greenhouse gas emissions by 2050, and 100% zero emissions electric from electricity production
by 2040), that were established in the New-York Climate Leadership and Community Protection Act (the
“CLCPA”) passed in July
2019. During 2022, Valley was engaged in discussions with NYSDEC staff to identify the scope of the information the NYSDEC seeks under
the CLCPA. In January 2023 and March 2023, Valley submitted supplement filings of the Title V application and is in contact with the NYDEC
authority which has not yet determined if the revised application is deemed complete and whether additional information will be requested.
Valley can continue to operate under the ASF Permit until a final determination (after exhausting an appeal in case of rejection) is made
regarding the Title V permit. NYSDEC and Valley entered into a tolling agreement reserving Valley’s rights to appeal on the revocation
of the completion of the application submission, which was extended from time to time, and is now in effect until
March 31, 2023. Until
the Title V permit is issued (if issued), the terms of new or amended financing agreements of Valley may be adversely affected by the
permit receipt which has not been completed. There is no certainty regarding receipt of a Title V permit or timing thereof. Should the
NYSDEC reject the Title V application and such rejection will remain in place, Valley would not be permitted to continue with its activity;
alternatively, the NYSDEC may approve the Title V and include in the Title V permit conditions that that might adversely affect Valley’s
activity and its financial performance.
A direct or indirect change in ownership or
control of voting rights in a corporation that provides infrastructure services (
“public utilities”) (including one of the
CPV project companies in the U.S.), or in any property used for infrastructure services, may be subject to FERC approval, pursuant to
the Federal Power Act. Such approval may also be required for holding the position of officers or directors in corporations that provide
infrastructure services or certain other companies that provide financing or equipment for infrastructure services. The FERC also applies
the requirements in the Public Utility Holding Company Act of 2005 to companies that directly or indirectly hold at least 10% of the voting
rights in companies that, among other activities, own or operate facilities that generate electricity for sale, including renewable energy
facilities. There is similar state regulation in some states that regulates ownership or control, directly or indirectly through
subsidiaries,
of voting rights in corporations that provide infrastructure services. Therefore, the acquisition of 10% or more of the share capital
of OPC, or Kenon may be subject to the FERC approval, and such direct or indirect acquisition may also be subject to the approval of state
regulatory authorities in some U.S. states where
the company has business operations.
Property taxes/community payments
In general, each CPV project company is subject
to property taxes annually paid to the local jurisdiction in which it is located. In some cases (Shore, Maryland, Valley, Towantic, Maple
Hill and Stagecoach), the projects have come to an arrangement for a long-term payment which replaces the regular assessment and taxation
process or recognizes certain exemption provisions in relevant laws or regulations. The long-term payment arrangements run between 20
and 35 years from COD for each applicable project. In other cases (Fairview & Keenan), the projects are subject to an annual assessment
on the value of their taxable property and then pay property taxes at the relevant taxing jurisdiction rates.
Certain CPV project companies (Fairview and
Valley) entered into agreements for the benefit of community purposes in their respective local communities. The long-term payments by
virtue of such agreements fund community entities or reimburse the local community for the impact during construction. These payments
are spread over periods of 20 to 30 years from COD.
Renewable energies
The
Inflation Reduction Act of 2022
In 2022, the IRA was signed into law by President
Biden. Among other things, this law awards significant tax benefits to renewable energies and technologies aimed at reducing carbon emissions.
One of the IRA’s key objective is to increase the production of electricity using renewable energies and to increase regulatory
stability in this sector. Following are key arrangements set forth in the IRA which may be relevant for the CPV Group’s activities:
The IRA includes a number of benefits available
to renewable energy projects. The IRA extends the ITC and the PTC for renewable energy projects that commence construction before
January
1, 2025. The base level for the investment tax credit is 6% and the base level for the production tax credit is 0.3 cents/kWh (adjusted
for inflation). Projects that meet prevailing wage and registered apprenticeship requirements may be eligible for an investment tax credit
of up to 30% or a production tax credit of up to 1.5 cents/kWh (adjusted for inflation). Bonus credit amounts, may be earned, increasing
by 10% the PTC or 10 percentage points the ITC if the applicable project meets domestic steel, iron and manufactured products requirements.
An additional bonus credit amounts may also be earned, increasing by 10% the PTC or 10 percentage points the ITC if the applicable project
is located in specially designated energy communities, such as (i) brownfield sites, (ii) locations with above national average unemployment
and oil, gas or and/or coal industry contributions to direct employment or local tax revenues above specified levels, and (iii) census
tracts in or adjacent to those in which a coal mine has closed since
December 31, 1999, or coal-fired power plant has closed since
December
31, 2009. These tax credits are transferable to unrelated entities.
Electric generation projects placed in service
after
December 31, 2024, that emit zero or less greenhouse gases are eligible for a technology neutral ITC or PTC established under IRA,
at the same credit levels as described above for the existing ITC and PTC. These tax credits are subject to phase out, starting from the
later of 2032 and when U.S. greenhouse gas emissions from electricity generation equal or are less than 25% of 2022 electricity generation
emissions levels. Projects eligible for these tax credits will also be eligible to use 5-year accelerated depreciation for project assets.
The CPV Group is of the opinion that the IRA
is expected to have a positive effect on renewable energy projects under development and construction, including Maple Hill and Stagecoach;
among other things, the IRA is expected to increase the tax credit amounts receivable compared to the amounts that were receivable prior
to its enactment. Although some of the regulatory arrangements have not yet been finalized, some of the CPV Group’s renewable energy
projects will be eligible to higher tax credit rates due to their location (for instance, in the sites of closed coal mines), including
in the Maple Hill project. The CPV Group is assessing the effect of the IRA on Maple Hill, and believes that the project complies with
the criteria for receiving an additional 10% ITC (40% in total). In addition, the CPV Group is analyzing the impact of the IRA on Stagecoach
and Rogue’s Wind, and the economic benefits that will arise from opting for ITC or PTC in respect of the project, as well as the
project’s eligibility for an additional tax credit. The CPV Group believes that it will opt for an ITC for Maple Hill, and for another
project under development; the Group assesses the economic feasibility of ITCs or PTCs for Stagecoach and Rogue’s Wind, taking into
consideration the arrangements that will be set. In addition, the option of selling the tax benefits is expected to increase CPV Group’s
capability to realize some of the value of its renewable energy projects’ tax credits, and to improve the terms of investment.
Other Relevant Legislation
In November 2021, the US Congress approved
a bipartisan infrastructure law, signed by the President of the US (the “Infrastructure Act”). The Infrastructure Act is the
first part of legislation (which includes two parts) addressing many sectors of the US economy, including transportation, construction,
and energy. A significant part of the Infrastructure Act addresses the expansion of transmission infrastructure, research and development
of technologies, including carbon capture and use of hydrogen, reinforcement of the grid, and energy efficiency. However, there are several
provisions within the legislation that provide funding opportunities through the Department of Energy to support the development of zero
and low emitting generation projects. A second piece of relevant legislation, known as the Build Back Better (“BBB”) Act from
an energy perspective focuses on tax incentives to support numerous zero and low carbon technologies. The BBB Act bill (the “BBB
Act”) that passed the House of Representatives in November of 2021 was passed largely along a party line vote (one democrat and
all republicans voting against) included refundable production and investment tax credits for the expansion of renewable energy production
facilities, carbon capture technologies and hydrogen investments. The BBB Act remains in negotiations in the Senate. There is uncertainty
regarding the enactment of the BBB Act as a singular piece of legislation or whether it can be passed at least in part incrementally through
smaller limited scope standalone bills. If the energy provisions of the BBB Act are passed in separate bills, such legislation may have
a significant effect on electricity demand by promoting low-carbon transport and a low-carbon economy while raising standards for electricity
generation using clean energy.
In April 2021, PJM established an Interconnection
Process Reform Task Force that includes PJM staff and PJM member stakeholders to study and propose reforms to PJM’s interconnection
process to address, among other items, a large backlog of proposed projects awaiting the completion of their interconnection studies and
its effect on the iterative cost-causation process that allocates network upgrade costs to a proposed project. PJM staff and management
have proposed a new interconnection process framework as well as options for transitioning from the current process to the new framework.
Each of these are expected to be voted on by the task force in the first quarter of 2022 with the corresponding PJM FERC tariff changes
to be developed and filed for approval at FERC by the
end of the 3rd quarter of 2022, and with the transition to the new system
to start in the 4th quarter of 2022. Under the proposed process the interconnection study and cost allocation construct would shift to
cluster/cycle group study process and the current first-in/first-out processing construct would shift to a first-ready/first-out processing.
Under the transition proposal PJM will stop accepting new interconnection requests from the transition effective date until the new framework
begins to be used—which under the different transition options under consideration could be from one year up to as long as four
years. During the FERC review process and prior to implementation, PJM has stated that they will continue to work to complete existing
interconnection requests. The exact impact on CPV’s projects is yet to be determined although some of CPV’s projects that
are expected to operate in the PJM market may be delayed.
Qoros
Kenon holds a 12% interest in Qoros, a China-based
automotive company. Kenon previously held a 50% stake in Qoros prior to the Majority Shareholder’s investment in Qoros, and was
one of the founding members of
the company.
In 2018, the Majority Shareholder acquired
51% of Qoros from Kenon and Chery for RMB 3.315 billion, as part of a total investment of approximately RMB 6.63 billion by the Majority
Shareholder. As a result of this investment, Kenon and Chery had 24% and 25% stakes in Qoros, respectively. In April 2020, Kenon sold
half of its remaining interest in Qoros (i.e., 12%) to the Majority Shareholder for RMB1.56 billion (approximately $220 million),
which was based on the same post-investment valuation as the initial investment by the Majority Shareholder. As a result, Kenon holds
a 12% interest in Qoros, the Majority Shareholder holds 63% and Chery holds 25%.
In April 2021, Kenon’s subsidiary Quantum
entered into an agreement with the Majority Shareholder to sell its remaining 12% interest in Qoros for RMB 1.56 billion (approximately
$245 million). The agreement provided that a deposit of 5% was due
July 30, 2021 and that the purchase price would be payable in installments
from September 2021 through March 2023. The agreement also provides that any payment delayed for more than 30 days is subject to interest.
Neither the deposit nor any of the installments were paid. In the fourth quarter of 2021, Quantum initiated arbitral proceedings against
the Majority Shareholder and Baoneng Group with CIETAC. The proceedings are ongoing.
As a result of the non-payment of amounts due under
the agreement with the Majority Shareholder, Quantum had the right to exercise the put option it had to sell its remaining interest to
the Majority Shareholder for RMB 1.56 billion (approximately $220 million), subject to adjustments. Kenon has exercised this option, but
the Majority Shareholder has not complied with its obligations to purchase Kenon’s remaining 12% interest in Qoros.
Kenon had outstanding “back-to-back”
guarantee obligations of approximately $16 million to Chery in respect of guarantees that Chery has given in respect of 50% of the RMB
3 billion and 100% of the RMB 700 million loan facilities. In the fourth quarter of 2021, Chery paid the full amount of its guarantee
obligations relating to these two loans. Chery had issued to Kenon demand notices to pay these guaranteed amounts. Kenon has paid the
amount demanded by Chery, and does not have any remaining guarantee obligations with respect to Qoros debt.
Substantially all of Quantum’s interests
in Qoros are pledged to secure Qoros’ RMB 1.2 billion loan facility. Although the Majority Shareholder was required to assume its
pro rata share of pledge obligations in lieu of Quantum’s, it has not yet provided such pledges, and Quantum’s pledge has
not been released. Baoneng Group has provided Kenon with a guarantee for a certain percentage, and up to all, of Quantum’s pledge
obligations.
As Quantum has exercises its put option, the Majority
Shareholder is required to assume the full pledge of obligations under Kenon’s pledge of its shares in Qoros, but it has not yet
done so. In November 2021, Kenon filed a claim against Baoneng Group at the Shenzhen Intermediate People’s Court relating to the
breaches of the guarantee agreement by the Majority Shareholder. The court proceedings are ongoing. Kenon has obtained an order freezing
certain assets of Baoneng Group in connection with the litigation pursuant to a court order. There is no assurance as to the outcome of
such proceedings or any value Kenon may realize in respect of its remaining shares in Qoros. Since April 2020, Kenon no longer accounts
for Qoros pursuant to the equity method of accounting and in 2021, Kenon wrote down the value of Qoros to zero.
Qoros’
Description of Operations
Qoros is an automobile manufacturer in China.
Kenon understands that manufacturing production
at Qoros has been shut down since July 2021.
Agreements
relating to Sales of Kenon’s interests in Qoros
Qoros’ Investment Agreement
In January 2018, the Majority Shareholder
acquired 51% of Qoros from Kenon and Chery for RMB 3.315 billion (approximately $526 million), which was part of an investment structure
to invest a total of approximately RMB 6.63 billion (approximately $1,053 million) by the Majority Shareholder. As a result of the 2018
investment, Kenon’s and Chery’s interests in Qoros were reduced to 24% and 25%, respectively. In April 2020, we sold half
of our remaining interest in Qoros (i.e., 12%) to the Majority Shareholder for a price of RMB 1.56 billion (approximately $220 million),
which was based on the same post-investment valuation as the initial investment by the Majority Shareholder. Kenon now holds a 12% interest
in Qoros, the Majority Shareholder holds 63% and Chery holds 25%. For purposes of this section, references to Kenon include Quantum (Kenon’s
wholly-owned subsidiary which owns Kenon’s interest in Qoros) and references to Chery include Wuhu Chery (the direct owner of Chery’s
interest in Qoros).
In connection with the 2018 investment, Kenon
received initial cash proceeds of RMB 1.69 billion (approximately $260 million) and Chery received cash proceeds of RMB 1.625 billion
(approximately $250 million).
Guarantee Obligations and Equity Pledges
Kenon had outstanding “back-to-back”
guarantee obligations of approximately $16 million to Chery in respect of guarantees that Chery has given in respect of 50% of the RMB
3 billion and 100% of the RMB 700 million loan facilities. In the fourth quarter of 2021, Chery paid the full amount of its guarantee
obligations under these two loans. Kenon had total outstanding back-to-back guarantees to Chery of approximately $16 million in respect
of these loans, and Chery had issued to Kenon demand notices to pay these guaranteed amounts. Kenon has paid the $16 million back-to-back
guarantees to Chery, and Kenon does not have any additional credit guarantee obligations with respect to Qoros debt.
Quantum has pledged substantially all of its
interests in Qoros to secure Qoros’ RMB 1.2 billion loan facility. Although the Majority Shareholder was required to assume its
pro rata share of pledge obligations, it has not yet assumed all such pledges. Baoneng Group has provided Kenon with a guarantee for a
certain percentage, and up to all, of Quantum’s pledge obligations.
Kenon’s Put Option
Kenon had a put option over its remaining
equity interest in Qoros, giving Kenon with the right to cause the Majority Shareholder to purchase all of its remaining equity interests
in Qoros for RMB 1.56 billion (approximately $220 million), subject to adjustment for inflation. Another company within the Baoneng Group
guarantees the Majority Shareholder’s obligations under this put option by granting a similar option. Kenon has exercised this put
option, but the Majority Shareholder has not complied with its obligations to purchase Kenon’s remaining stake in Qoros and Baoneng
Group has not complied with its obligations in respect of the guarantee of this put option.
The investment agreement provides that any
changes in the equity holdings of Qoros by Kenon, Chery or the Majority Shareholder, including as a result of the put option 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.
Because Quantum has exercised the put option,
the Majority Shareholder is required to assume the full pledge. The guarantee by Baoneng Group of Quantum’s pledge obligations provides
for a number of obligations, including the obligation for Baoneng Group to reimburse Kenon in the event of foreclosure over Quantum’s
shares. Baoneng Group is required to deposit an amount sufficient in escrow to ensure sufficient collateral to avoid the banks foreclosing
the Qoros shares pledged by Quantum. Baoneng Group has failed to do so after Kenon made a demand in the fourth quarter of 2021, and in
November 2021, Kenon filed a claim against Baoneng Group at the Shenzhen Intermediate People’s Court relating to the breaches of
the guarantee agreement by the Majority Shareholder. The court proceedings are ongoing. Kenon has obtained an order freezing certain assets
of Baoneng Group in connection with the litigation pursuant to a court order. There is no assurance as to the outcome of such proceedings
or any value Kenon may realize any value in respect of Kenon’s remaining shares in Qoros. Kenon understands that manufacturing production
at Qoros has been shut down since July 2021. Since April 2020, Kenon no longer accounts for Qoros pursuant to the equity method of accounting
and in 2021, Kenon wrote down the value of Qoros to zero.
Kenon’s 2020 Sale of 12% interest in
Qoros to the Majority Shareholder
In April 2020, Kenon sold half of its remaining
interest in Qoros (i.e., 12%) to the Majority Shareholder for a price of RMB 1.56 billion (approximately $220 million), which was based
on the same post-investment valuation as the initial 2018 investment by the Majority Shareholder. As a result, Kenon holds a 12% interest
in Qoros, the Majority Shareholder holds 63% and Chery holds 25%. The Majority Shareholder has agreed to assume its pro rata share of
the pledge obligations with respect to the RMB 1.2 billion loan facility after which Kenon will also be proportionately released from
its pledge obligations thereunder, subject to the Qoros bank lender consent. As a result of the initial investment in 2018 and the 2020
sale by Kenon, the Majority Shareholder is required to pledge additional shares or to provide other support acceptable to the lender banks.
The Majority Shareholder has not provided such pledges and Kenon has not been proportionately released by the bank lenders from these
pledge obligations. The Majority Shareholder has provided Kenon with a guarantee for a certain percentage, and up to all, of Quantum’s
share of the pledge obligations.
Kenon’s Agreement to Sell its Remaining
12% Interest in Qoros to the Majority Shareholder
In April 2021, Kenon’s subsidiary Quantum
entered into an agreement with the Majority Shareholder to sell its remaining 12% interest in Qoros for RMB 1.56 billion (approximately
$241 million). The agreement provided that a deposit of 5% was due
July 30, 2021 and that the purchase price would be payable in installments
from September 2021 through
March 31, 2023.
Neither the deposit nor any of the installments
have been paid. In the fourth quarter of 2021, Quantum initiated arbitral proceedings against the Majority Shareholder and Baoneng Group
with the CIETAC. The proceedings are ongoing.
The agreement also provides that any payment
delayed for more than 30 days is subject to interest. In addition, Quantum exercised the put option it has over its remaining shares in
Qoros, but the Majority Shareholder has not complied with its obligations to purchase Kenon’s remaining stake in Qoros and Baoneng
group has not complied with its obligations in respect of the guarantee of this put option.
Substantially all of Quantum’s shares
in Qoros remain pledged to Qoros’ lenders and any transfer of Kenon’s remaining stake in Qoros would require a release of
the pledge over Kenon’s shares in Qoros as well as obtaining necessary regulatory approvals and registrations.
Qoros’
Joint Venture Agreement
We are party to a joint venture agreement,
or the Joint Venture Agreement, with respect to our and the out joint venture parties’ 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 Majority Shareholder with respect to Qoros.
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 RMB
200 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 RMB 60 million (approximately $9 million) but
less than RMB 200 million (approximately $29 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 the 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 Majority Shareholder has the right to appoint the remaining five of Qoros’ directors. If the Majority Shareholder’s
stake in Qoros increases to 67% through 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 Majority Shareholder will have the right to appoint four directors, while
Kenon and Wuhu Chery will each have the right to appoint one director. The Majority Shareholder 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 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 initial
investment by the Majority Shareholder, Wuhu Chery and the Majority Shareholder 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 Majority Shareholder’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.
ZIM
Information in this report on ZIM is based
on ZIM’s annual report on Form 20-F filed with the SEC on
March 13, 2023.
Overview
ZIM is a global container liner shipping company
with leadership positions in niche markets where ZIM believes it has distinct competitive advantages that allow ZIM to maximize its market
position and profitability. Founded in Israel in 1945, ZIM is one of the oldest shipping liners, with over 75 years of experience, providing
customers with innovative seaborne transportation and logistics services with a reputation for industry leading transit times, schedule
reliability and service excellence.
As of
December 31, 2022, ZIM operated a fleet
of 150 vessels and chartered-in 94.2ֵ% of its TEU capacity and 94.0ֵ% of the vessels in its fleet. For comparison, according
to Alphaliner, ZIM’s competitors chartered-in on average approximately 45.3% of their fleets as of the end of 2022 (in accordance
with Alphaliner January 2023 Report). During 2021 and 2022, ZIM has entered into several strategic long-term charter agreements, including
two strategic agreements with Seaspan for the long-term charter of ten 15,000 TEU and fifteen 7,000 TEU liquified natural gas (LNG dual-fuel)
container vessels to serve ZIM’s Asia-US East Coast Trade and other global-niche trades, with the first vessel delivered to ZIM
in February 2023, and the other nine vessels expected to be delivered to ZIM during 2023-2024. ZIM has also entered into a new eight-year
charter agreement with a shipping company that is an affiliate of its largest shareholder, Kenon, according to which ZIM will charter
three 7,000 TEU LNG dual fuel container vessels, expected to be delivered during the first and second quarters of 2024. Furthermore, in
February 2022 ZIM announced a new chartering agreement with Navios Maritime Partners L.P. for a total of 13 vessels (five of which are
secondhand), ranging from 3,500 to 5,300 TEUs, and, in March 2022, ZIM announced it had entered into a seven-year charter transaction
for six 5,500 TEU wide beam newbuild vessels with MPC Container Ships ASA and MPC Capital AG scheduled to be delivered between May 2023
and February 2024. See “
Item 4.B Business Overview—
Our
Businesses—
ZIM—
Strategic Chartering Agreements.”
During the second half of 2021, ZIM completed the purchase of eight secondhand vessels, ranging from 1,100 to 4,250 TEU, in several separate
transactions, for an aggregated amount of $355 million, with all vessels delivered to ZIM. See “—
ZIM’s
Vessel Fleet” below.
As of
December 31, 2022, ZIM chartered-in
most of its capacity; in addition, 80.9% of its chartered-in vessels are under leases having a remaining charter duration of more than
one year (or 83.1% in terms of TEU capacity). ZIM continues to adjust its operations in response to the effects of COVID-19 pandemic and
other recent geopolitical trends (including the Russia-Ukraine conflict). ZIM’s fleet, mainly in terms of the size of its vessels,
enables ZIM to optimize vessel deployment to match the needs of both mainlane and regional routes and to ensure high utilization of its
vessels and specific trade advantages. Almost all of ZIM’s operated vessels have capacities that range from less than 1,000 TEUs
to almost 12,000 TEUs, with one 15,000 TEU LNG (dual fuel) vessel delivered to ZIM in February 2023 in accordance with its long-term charter
agreement with Seaspan, and nine other vessels expected to be delivered during 2023-2024 (See “
Item
4.B Business Overview—
Our Businesses—
ZIM—
Strategic
Chartering Agreements”). Furthermore, ZIM operates a modern and specialized container fleet, which ZIM significantly increased
during 2021 to a capacity of nearly one million TEUs.
ZIM operates across five geographic trade
zones that provide ZIM with a global footprint. These trade zones include (for the year ended
December 31, 2022, of carried TEUs): (i)
Transpacific (34%), (ii) Atlantic (15%), (iii) Cross Suez (13%), (iv) Intra-Asia (31%) and (v) Latin America (7%). Within these trade
zones, ZIM strives to increase and sustain profitability by selectively competing in niche trade lanes where ZIM believes that the market
is underserved and that ZIM has a competitive advantage versus its peers. These include both trade lanes where ZIM has an in-depth knowledge,
long-established presence and outsized market position as well as new trade lanes into which ZIM is often driven by demand from its customers
as they are not serviced in-full by its competitors. Several examples of niche trade lanes within ZIM’s geographic trade zones include:
(i) US East Coast & Gulf to Mediterranean lane (Atlantic trade zone) where ZIM maintains a 13.4% market share, (ii) East Mediterranean
& Black Sea to Far East lane (Cross Suez trade zone), 8.5% market share and (iii) Far East to US East Coast (Pacific trade zone),
8.6% market share, in each case according to the Port Import/Export Reporting Service (
“PIERS”) and Container Trade Statistics.
During 2022, ZIM announced the following newly
launched services and service upgrades: (i) the extension of ZIM service connecting the Indian sub-continent and the East Mediterranean
to service the East Mediterranean- North Europe trade; (ii) a new Venezuela feeder line and the upgrade of two existing central American
lines; (iii) a new speedy e-commerce service from China and South East Asia to the U.S. East Coast, which was further upgraded in February
2023; (iv) the commencement of two separate and independent new Asia Pacific North West and Asia Mediterranean services in April 2022;
(v) the upgrade of the Turkey – USEC line to a weekly service; (vi) a new Thailand Fremantle Express Service, covering major ports
in South East Asia and Australia; and (vii) the ZIM Colibri Xpress, a new premium line from South America West Coast to the USEC.
In addition to containerized cargo, in an
effort to respond to increased demand for car carrier services, and specifically to the increase in vehicle exports from China (and electric
and hybrid cars in particular), ZIM also transports vehicles (such as cars, buses and trucks) via dedicated car carrier vessels westbound
from Asia, and primarily from China, Japan, South Korea and India. Currently, ZIM charters 11 car carrier vessels and ZIM has expanded
the volume and its range of services to include additional calls to ports in Europe, the Mediterranean and South America.
As of
December 31, 2022, ZIM operated a global
network of 67 weekly lines, calling at approximately 300 ports, delivering cargo to and from more than 90 countries. Within its global
network ZIM offers value-added and tailored services, including operating several logistics
subsidiaries to provide complimentary services
to its customers. These
subsidiaries, which ZIM operates, among others, in China, Vietnam, Canada, Brazil, India, Singapore, Hong Kong
and the U.S., are asset-light and provide services such as land transportation, custom brokerage, LCL, project cargo and air freight services.
Out of ZIM’s total volume in the twelve months ended
December 31, 2022, approximately 20% of its TEUs carried utilized additional
elements of land transportation.
ZIM’s network is significantly enhanced
by cooperation agreements with other container liner companies and alliances, allowing ZIM to maintain a high degree of agility while
optimizing fleet utilization by sharing capacity, expanding its service offering and benefiting from cost savings. Such cooperation agreements
include vessel sharing agreements (VSAs), slot purchase and swaps. ZIM’s strategic collaboration with the 2M Alliance, comprised
of the two largest global carriers (Maersk and MSC, which announced the termination of the 2M Alliance in January 2025), was launched
in September 2018, amended in February 2022, provides faster, wider and more efficient service in the Asia-USEC and the Asia-USGC with
two trade lanes, seven services and approximately 15,000 weekly TEUs. In addition to its collaboration with the 2M Alliance, ZIM also
maintains a number of partnerships with various global and regional liners in different trades. For example, in the Intra-Asia trade,
ZIM partners with both global and regional liners in order to extend its services in the region.
ZIM has a highly diverse and global customer
base with approximately 34,000 customers (which considers each of ZIM’s customer entities separately, also when it is a subsidiary
or branch of another customer) using ZIM’s services. In 2022, ZIM’s 10 largest customers represented approximately 16% of
its freight revenues and its 50 largest customers represented approximately 31% of its freight revenues. One of the key principles of
ZIM’s business is its customer-centric approach and ZIM strives to offer value-added services designed to attract and retain customers.
ZIM’s strong reputation, high-quality service offering and schedule reliability has generated a loyal customer base, with 8 of its
10 top customers in 2022 having a relationship with ZIM lasting longer than 10 years.
ZIM has focused on developing technologies
to support its customers, including improvements in its digital capabilities to enhance both commercial and operational excellence. ZIM
uses its technology and innovation to power new services, improve its customer experience and enhance its productivity and portfolio management.
Several recent examples of ZIM’s digital services include: (i) ZIMonitor, which is an advanced tracking device that provides 24/7
online alerts to support high value cargo; (ii) eZIM, ZIM’s easy-to-use online booking platform; (iii) eZQuote, a digital tool that
allows customers the ability to receive instant quotes with a fixed price and guaranteed terms; (iv) Draft B/L, an online tool that allows
export users to view, edit and approve their bill of lading online without speaking with a representative; and (v) ZIMGuard, an artificial
intelligence-based internal tool designed to detect possible misdeclarations of dangerous cargo in real-time. Furthermore, ZIM has formed
a number of partnerships and collaborations with third-party start-ups for the development of multiple engines of growth which are adjacent
to ZIM’s traditional container shipping business. These technological partnerships and initiatives include: (i) “ZKCyberStar,”
a collaboration with Konfidas, an Israeli cyber-security consulting company, to provide bespoke cyber-security solutions, guidance, methodology
and training to the maritime industry; (ii) “ZIMARK,” a new initiative in cooperation with Sodyo (in which ZIM made an additional
investment in August 2022), an early-stage scanning technology company, aimed to provide visual identification solutions for the entire
logistics sector (inventory management, asset tracking, fleet management, shipping, access control, etc.), whose technology is extremely
fast and is suitable for multiple types of media; (iii) ZIM’s investment in and partnership with WAVE, an electronic bill of lading
based on blockchain technology, to replace and secure original documents of title; (iv) ZIM’s investment in Hoopo Systems Ltd.,
a provider of tracking solutions for unpowered assets; (v) Ship4wd, a digital freight forwarding platform offering an online, simple and
reliable self-service end-to-end shipping solution that is initially targeting U.S. & Canadian small and medium-sized businesses importing
from China, Vietnam and Israel; (vi) ZIM’s investment in Data Science Consulting Group (DSG), a technology company specializing
in artificial intelligence (AI) based products, solutions and services, developer of e-volve, a holistic AI governance and decision management
system, and its co-creator of a center of excellence for the development of AI tools for the maritime shipping industry; (vii) 40Seas,
a fintech company serving as a platform for cross-border trade financing, in which ZIM made an equity investment in addition to extending
an approximately $100 million credit facility, with a possibility subject to both parties’ agreement to increase this credit facility
up to $200 million if mutually agreed by the parties.
Over the past three years ZIM has taken initiatives
to reduce and avoid costs across its operating activities through various cost-control measures and equipment cost reduction (including,
but not limited to, equipment interchanges such as swapping containers in surplus locations, street turns to reduce trucking of empty
containers and domestic repositioning from inland ports).
ZIM is headquartered in Haifa, Israel. As
of
December 31, 2022, ZIM had approximately 6,530 full-time employees worldwide (including
contract workers). In 2022 and 2021, ZIM carried
3.38 million and 3.48 million TEUs, respectively, for its customers worldwide. During the same periods, ZIM’s revenues were $12,562
million and $10,729 million, its net income was $4,629 million and 4,649 million and its Adjusted EBITDA was $7,541 million and $6,597
million, respectively.
ZIM’s services
With a global footprint of more than 200 offices
and agencies in more than 90 countries, ZIM offers both door-to-door and port-to-port transportation services for all types of customers,
including end-users, consolidators and freight forwarders.
Comprehensive
logistics solutions
ZIM offers its customers comprehensive logistics
solutions to fit their transportation needs from door-to- door. ZIM’s wide range of transportation services, handled by its highly
trained sea and shore crews and supported with personalized customer service and its unified information technology platform, allows ZIM
to offer its customers higher quality and tailored services and solutions at any time around the world.
ZIM has also partnered with a Chinese multinational
company through its logistics subsidiary in China to expand its offerings to small- and medium-sized enterprises who conduct their business
through
the company’s platform. ZIM’s commercial cooperation agreement with this company was extended until March 2024.
ZIM’s
services and geographic trade zones
As of
December 31, 2022, ZIM operated a global
network of 67 weekly lines, calling at approximately 290 ports delivering cargo to and from more than 90 countries. ZIM’s shipping
lines are linked through hubs that strategically connect main lines and feeder lines, which provide regional transport services, creating
a vast network with connections to and from smaller ports within the vicinity of main lines. ZIM has achieved leadership positions in
specific markets by focusing on trades where it has distinct competitive advantages and can attain and grow its overall profitability.
ZIM’s shipping lines are organized into
geographic trade zones by trade. The table below illustrates ZIM’s primary geographic trade zones and the primary trades they cover,
as well as the percentage of ZIM’s total TEUs carried by geographic trade zone for the years ended
December 31, 2022,
2021 and
2020:
| |
|
|
|
|
|
Geographic trade zone
(percentage of total TEUs carried for
the period) |
|
|
|
|
|
|
|
|
|
|
|
|
Pacific
|
|
Transpacific |
|
|
34 |
% |
|
|
39 |
% |
|
|
40 |
% |
|
Cross-Suez
|
|
Asia-Europe |
|
|
13 |
% |
|
|
10 |
% |
|
|
12 |
% |
|
Atlantic-Europe
|
|
Atlantic |
|
|
15 |
% |
|
|
18 |
% |
|
|
21 |
% |
|
Intra-Asia
|
|
Intra-Asia |
|
|
31 |
% |
|
|
27 |
% |
|
|
21 |
% |
|
Latin America
|
|
Intra-America |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Pacific
geographic trade zone.
The Pacific geographic trade zone serves the
Transpacific trade, which covers trade between Asia, including China, Korea, Southeast Asia, the Indian subcontinent, and the Caribbean,
Central America, the Gulf of Mexico and the east coast and west coast of the United States and Canada. ZIM’s services within this
geographic trade zone also connect to Intra-Asia and Intra-America regional feeder lines, which provide onward connections to additional
ports.
Pacific
Northwest service.
Based on information from PIERS, Port of Vancouver
and Prince Rupert Port Authority, approximately 44% of all goods shipped to the United States are transported via ports located in the
west coast of the United States and Canada. These include local discharge as well as delivery by train or trucks to their final destinations,
mainly to the Midwestern United States and to the central and eastern parts of Canada. ZIM holds a position within the Pacific Northwest,
via the Vancouver port, which enables ZIM to serve the very large Canadian and U.S. Midwest markets quickly and efficiently. ZIM believes
that its strategic relationships in these markets with Canadian National Railway Company, a rail operator, have allowed it to obtain competitive
rates and provide consistent, high-quality service to its customers. In April 2022, ZIM launched an independent service line to the Pacific
Northwest trade, replacing the previous cooperation with the 2M Alliance.
Pacific Southwest Coast
services.
In response to the growing trend in eCommerce,
during 2020 and 2021, ZIM launched three eCommerce Xpress high-speed services, focusing on e-Commerce between South China and Los Angeles
(ZEX, ZX2 and ZX3 lines). As a result of current global market conditions due to COVID-19, ZIM has experienced heavy congestion in U.S.
West Coast ports throughout 2021. In 2022 this trade experienced a softening of demand.
Asia-U.S.
All-Water service.
With respect to the Asia-U.S. east coast trade,
“all-water” refers to trade between Asia and the U.S. east coast and Gulf Coast using marine transportation only, via the
Suez or Panama Canal. In accordance with its agreement with the 2M as amended in February 2022 effective from April 2022, ZIM operates
one out of the five joint Asia to USEC services (ZCP) as well as one of two joint Asia to USGC services (ZGX). ZIM has stated that it
plans to deploy ZIM’s 15,000 TEU LNG dual fuel vessels expected to be delivered to ZIM during 2023 on the ZCP. See “Item
4.B Business Overview—Our Businesses—ZIM—Strategic
Chartering Agreements.”
As of
December 31, 2022, ZIM offered 11 services
in the Pacific geographic trade zone, which had an effective weekly capacity of 23,589 TEUs and covered all major international shipping
ports in the Transpacific trade. ZIM’s services in the Pacific geographic trade zone accounted for 50% of its freight revenues from
containerized cargo for the year ended
December 31, 2022.
Cross-Suez
geographic trade zone.
The Cross-Suez geographic trade zone serves
the Asia-Europe trade, which covers trade between Asia and Europe (including the Indian sub-continent) through the Suez Canal, primarily
focusing on the Asia-Black Sea/East Mediterranean Sea sub-trade, which is one of ZIM’s key strategic zones. In previous years, this
trade was characterized by intense competition, and ZIM has undertaken several initiatives to help it remain competitive within it.
ZIM’s cooperation with the 2M Alliance
which began in March 2019 as a slot charter agreement on two services from Asia to the East Mediterranean was terminated effective as
of April 2022. Consequently, ZIM launched an independent service line on the Asia-Mediterranean trade replacing its cooperation with the
2M Alliance on this trade. In addition, ZIM terminated its slot purchase from MSC which began in October 2018 on two lines in India-East
Mediterranean trade and ZIM replaced this cooperation with an independent service line on this trade in December 2021 (ZMI). This service
was extended to North Europe as of February 2022.
As of
December 31, 2022, ZIM offers two services
in the Cross-Suez geographic trade zone, which had an effective weekly capacity of 6,000 TEUs and covered all major international shipping
ports in the East Mediterranean, the Black Sea, China, East and Southeast Asia and India. The Cross-Suez geographic trade zone accounted
for 14% of ZIM’s freight revenues from containerized cargo for the year ended
December 31, 2022.
Atlantic-Europe
geographic trade zone.
The Atlantic-Europe geographic trade zone
serves the Atlantic trade, which covers trade between North America and the Mediterranean, along with Intra-Europe/Mediterranean trade.
ZIM’s services within this geographic trade zone also connect to Intra-Mediterranean and Intra-America regional feeder lines which
provide onward connections to additional ports. Since 2014, ZIM has had a cooperation agreement with Hapag-Lloyd and other companies in
its Atlantic services. In addition, ZIM has terminated its cooperation agreements with MSC in the Intra-Europe/Mediterranean trade and
intends to replace this cooperation with an extension to North Europe on its ISC-Mediterranean independent service. ZIM also has a cooperation
agreement with COSCO in the Intra-Mediterranean trade.
As of
December 31, 2022, ZIM offered 9 services
within this geographic trade zone, with an effective weekly capacity of 8,759 TEUs, covering major international shipping ports in the
East and West Mediterranean, the Black Sea, Northern Europe, the Caribbean, the Gulf of Mexico, and the east and west coasts of North
America. The Atlantic-Europe geographic trade zone accounted for 11% of ZIM’s freight revenues from containerized cargo for the
year ended
December 31, 2022.
Intra-Asia
geographic trade zone.
The Intra-Asia and Asia-Africa geographic
trade zone serves the Intra-Asia trade, which covers trades within regional ports in Asia, including ISC (Indian sub-continent), Africa
and Australia. The Intra-Asia geographic trade zone accounted for 18% of ZIM’s freight revenues from containerized cargo for the
year ended
December 31, 2022. ZIM’s services within this geographic trade zone feed into the global lines of the Pacific and Cross-Suez
trades. This geographic trade zone is characterized by extensive structural changes that ZIM has made to respond to changes in trade and
market conditions.
The Intra-Asia market is highly fragmented
with many active carriers, all with relatively small market shares. Local shipping companies have a significant presence within this trade,
which is primarily serviced by relatively small vessels. However, larger vessels that operate in the intercontinental trade also serve
this trade and call at ports within the region. ZIM has cooperation agreements with several other shipping companies within this trade.
As of
December 31, 2022, ZIM offers 32 services
within this geographic trade zone with an effective weekly capacity of 20,505 TEUs. ZIM’s services within this geographic trade
zone cover major regional ports, including those in China, Korea, Thailand, Vietnam and other ports in Southeast Asia, India, Africa,
Thailand, Vietnam, New Zealand and Australia, and connect to shipping lines within its Cross-Suez and Pacific geographic trade zones.
Latin
America geographic trade zone.
The Latin America geographic trade zone consists
of the Intra-America trade, which covers trade within regional ports in the Americas, as well as trade between the South American east
coast and Asia and trade between the South American east coast and West Mediterranean. The regional services within this geographic trade
zone are linked to ZIM’s Pacific and Atlantic-Europe geographic trade zones. ZIM cooperates with other carriers within the regional
services: ZIM cooperates with Maersk via a vessel sharing agreement in the Asia-East Coast South America, and ZIM cooperates with other
carriers on the Mediterranean- East Coast South America sub-trades mostly by slots purchase.
As of
December 31, 2022, ZIM offers 13 services
within this geographic trade zone as well as a complementary feeder network with an effective weekly capacity of 3,642 TEUs and operated
between major regional ports, including ports in Brazil, Argentina, Uruguay, Mexico, the Caribbean, Central America, China, U.S. Gulf
Coast, U.S. east coast and the West Mediterranean, and connect to ZIM’s Pacific and Atlantic- Europe services. The Latin America
geographic trade zone accounted for 7% of ZIM’s freight revenues from containerized cargo for the year ended
December 31, 2022.
Types
of cargo
The following table sets forth details of
the types of cargo ZIM shipped during the twelve months ended
December 31, 2022 as well as the related quantities and volume of containers
(owned and leased).
|
|
|
|
|
|
|
|
|
|
|
Dry van containers
|
|
Most general cargo, including commodities in bundles, cartons, boxes, loose cargo, bulk cargo and furniture
|
|
|
1,860,853 |
|
|
|
3,131,023 |
|
|
Reefer containers
|
|
Temperature controlled cargo, including pharmaceuticals, electronics and perishable cargo |
|
|
96,200 |
|
|
|
189,610 |
|
|
Other specialized containers
|
|
Heavy cargo and goods of excess height and/or width, such as machinery, vehicles and building |
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
2,005,831 |
|
|
|
3,379,986 |
|
ZIM’s vessel fleet
As of
December 31, 2022, ZIM’s fleet
included 150 vessels (139 container vessels and 11 vehicle transport vessels), of which nine vessels were owned by ZIM and 141 vessels
are chartered-in (including 136 vessels accounted as right-of-use assets under the lease accounting guidance of IFRS 16 and 4 vessels
accounted under sale and leaseback refinancing agreements). As of
December 31, 2022, ZIM’s operating fleet (including both owned
and chartered vessels) had a capacity of 549,278 TEUs. The average size of ZIM’s vessels is approximately 3,952 TEUs, compared to
an industry average of 4,564 TEUs.
During the second half of 2021, ZIM has completed
the purchase transaction of eight secondhand vessels, ranging from 1,100 to 4,250 TEUs each, in several separate transactions, for an
aggregated amount of $355 million with all purchased vessels delivered during 2021 and 2022. ZIM may purchase additional secondhand vessels
if it evaluates that such purchase is more suited to its needs than other available alternatives.
ZIM charters-in vessels under charter party
agreements for varying periods. With the exception of certain vessels for which charter rates were set in connection with a restructuring
arrangement ZIM undertook in 2014, ZIM’s charter rates are fixed at the time of entry into the charter party agreement and depend
upon market conditions existing at that time. As of
December 31, 2022, all of ZIM’s chartered vessels agreements consists of chartering-in
the vessel capacity for a given period of time against a daily charter fee, with 137 vessels chartered while the crewing and technical
operation of the vessel is handled by its owner, including six vessels chartered-in under a time charter from related parties, and four
vessels chartered-in under a
“bareboat charter,” which consists of chartering a vessel for a given period of time against
a charter fee, with the operation of the vessel being handled by ZIM. Subject to any restrictions in the applicable arrangement, ZIM 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. As of
December 31, 2022, the remaining average duration of ZIM’s chartered fleet
was approximately 26 months, based on earliest period of redelivery.
As of
December 31, 2022, ZIM’s fleet
was comprised of vessels of various sizes, ranging from less than 1,000 TEUs to 12,000 TEUs, which allows for flexible deployment in terms
of port access and is optimally suited for deployment in the sub-trades in which ZIM operates. As of
March 1, 2023, ZIM’s fleet
included 149 vessels (138 container vessels and 11 vehicle transport vessels), of which nine vessels are owned by ZIM and 140 vessels
are chartered-in (including four vessels accounted under sale and leaseback refinancing agreements) and ZIM’s owned and chartered
container vessels had a capacity of 559,004 TEUs.
As of
March 1, 2023, this fleet included the
newly built vessel ZIM Sammy Ofer, a modern dual-fuel LNG vessel with a capacity of 15,000 TEUs, which is the first among ten vessels
of this type that ZIM chartered in a long term chartering transaction with Seaspan that are expected to be delivered to ZIM during 2023-2024.
Further, as of
March 1, 2023, approximately
113 of ZIM’s chartered-in vessels are under long-term leases with a remaining charter duration of more than one year, as ZIM continues
to actively manage its asset mix.
The following table provides summary information,
as of
December 31, 2022, about ZIM’s fleet:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessels
owned by ZIM |
|
|
9 |
|
|
|
31,842 |
|
|
|
— |
|
|
|
9 |
|
|
Vessels
chartered from parties related to ZIM |
|
|
5 |
|
|
|
20,660 |
|
|
|
1 |
|
|
|
6 |
|
|
|
|
|
3 |
|
|
|
12,154 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
2 |
|
|
|
8,506 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Vessels
chartered from third parties(2)
|
|
|
125 |
|
|
|
496,776 |
|
|
|
10 |
|
|
|
135 |
|
|
|
|
|
27 |
|
|
|
75,285 |
|
|
|
1 |
|
|
|
28 |
|
|
|
|
|
95 |
|
|
|
408,732 |
|
|
|
9 |
|
|
|
99 |
|
|
|
|
|
3 |
|
|
|
12,759 |
|
|
|
— |
|
|
|
3 |
|
|
Total(3)
|
|
|
139 |
|
|
|
549,278 |
|
|
|
11 |
|
|
|
150 |
|
____________________________________________
| (1) |
Includes 136 vessels accounted as right-of-use assets under the accounting guidance of IFRS 16. |
| (2) |
Includes 130 vessels accounted as right-of-use assets under the accounting guidance of IFRS 16 and 4 vessels accounted under sale
and leaseback refinancing agreements. |
| (3) |
Under ZIM’s time charters, the vessel owner is responsible for operational costs and technical management of the vessel, such
as crew, maintenance and repairs including periodic drydocking, cleaning and painting and maintenance work required by regulations, and
certain insurance costs. Transport expenses such as bunker and port canal costs are borne by ZIM. For some of the vessels that ZIM owns
and for its vessels ZIM charters under “bareboat” terms, ZIM provides its own operational and technical management services
or through a third-party ship management service provider. ZIM’s operational management services include the chartering-in, sale
and purchase of vessels and accounting services, while its technical management services include, among others, selecting, engaging, and
training competent personnel to supervise the maintenance and general efficiency of its vessels; arranging and supervising the maintenance,
drydockings, repairs, alterations and upkeep of its vessels in accordance with the standards developed by ZIM, the requirements and recommendations
of each vessel’s classification society, and relevant international regulations and maintaining necessary certifications and ensuring
that its vessels comply with the law of their flag state. |
Strategic Chartering
Agreements
Long
term charter agreement for LNG-Fueled Vessels from Seaspan Corporation
In February 2021 ZIM and Seaspan Corporation
entered into a strategic agreement for the long-term charter of ten 15,000 TEU liquified natural gas (LNG dual-fuel) container vessels,
expected to be delivered between February 2023 and March 2024. Pursuant to the agreement, ZIM will charter the vessels for a period of
12 years with the option to extend it by additional charter periods. ZIM’s total cost during the term of the agreement will depend
on the charter period and the initial payment ZIM selects to pay. ZIM was further granted by Seaspan a right of first refusal to purchase
the chartered vessels should Seaspan choose to sell them during the charter period, and an option to purchase the vessels at the end of
the charter term. ZIM has stated that it intends to deploy these vessels on its Asia-US East Coast Trade as an enhancement to its service
on this strategic trade.
In addition, in July 2021, ZIM announced a
second strategic agreement with Seaspan for the long-term charter for a consideration in excess of $1.5 billion, of ten 7,000 TEU LNG
dual fuel container vessels with an option for additional five vessels, to serve across ZIM’s various global niche trades, with
vessels expected to be delivered during the fourth quarter of 2023 and throughout 2024. In September 2021, ZIM announced the exercise
of an option granted to it under this agreement to long term charter five additional 7,000 TEU LNG vessels, to be delivered during the
third and fourth quarters of 2024 for an additional consideration in excess of $750 million. Following the exercise of this option, the
total vessels to be chartered under this second strategic agreement is fifteen.
ZIM announced that it expects to incur, in
annualized charter hire costs per vessel, approximately $17 million in respect of the abovementioned 15,000 TEU vessels, and approximately
$13 million in respect of the abovementioned 7,000 TEU vessels, over the term of the agreements.
Long-term
charter agreement for LNG-fueled vessels from a shipping company affiliated with Kenon
In January 2022, ZIM announced that it entered
into a new eight-year charter agreement with a shipping company that is affiliated with Kenon, its largest shareholder, according to which
ZIM will charter three 7,000 TEU LNG dual-fuel container vessels to be deployed in its global niche trades for a total consideration of
approximately $400 million. The vessels will be constructed at Korean-based shipyard, Hyundai Samho Heavy Industries and are scheduled
to be delivered during the first and second quarters of 2024.
Charter
agreement with Navios Maritime Holdings Inc.
In February 2022, ZIM announced that it and
Navios Maritime Holdings Inc. entered into a charter agreement for the charter of thirteen container vessels comprising of five secondhand
vessels and eight newbuild vessels of total consideration of approximately $870 million. The five secondhand vessels’ capacity range
from 3,500 to 4,360 TEUs and were delivered during the first and second quarter of 2022 and deployed across ZIM’s global network.
The eight 5,300 TEU wide beam newbuilds are scheduled to be delivered during the third quarter of 2023 through the fourth quarter of 2024
and are expected to be deployed in trades between Asia and Africa. The charter period of the secondhand vessels is approximately 4.5 years,
whereas the charter duration of the newbuild vessels is approximately five years.
Charter
agreement with MPC Container Ships ASA and MPC Capital AG
In March 2022, ZIM announced that it and MPC
Container Ships ASA and MPC Capital AG entered into a new charter agreement according to which ZIM has announced it will charter a total
of six 5,500 TEU wide beam newbuild vessels for a period of seven years and a total consideration of approximately $600 million. The vessels
will be constructed at a Korean-based shipyard, HJ Shipbuilding & Construction (formally known as Hanjin Heavy Industries & Construction
Co.), and are scheduled to be delivered between May 2023 and February 2024.
ZIM’s containers
In addition to the vessels that it owns and
charters, ZIM owns and charters a significant number of shipping containers. As of
December 31, 2022, ZIM held approximately 537,000 container
units with a total capacity of approximately 936,000 TEUs, of which 37% were owned by ZIM and 63% were leased (including 55% accounted
as right-of-use assets). In some cases, the terms of the leases provide that ZIM will have the option to purchase the container at the
end of the lease term.
Container fleet management
ZIM announced that it aims to reposition empty
containers in the most cost-efficient way in order to minimize its overall empty container moves and container fleet while meeting demand.
Due to a natural imbalance in demand between trade areas, ZIM has said that it seeks to optimize its container fleet by repositioning
empty containers at minimum cost in order to timely and efficiently meet its customers’ demands. ZIM’s global logistics team
oversees the internal management of empty containers and equipment to support this optimization effort. In addition to repairing and maintaining
ZIM’s container fleet, ZIM’s logistics team continuously optimizes the flow of empty containers based on commercial demands
and operational constraints. Below is a summary of ZIM’s logistics initiatives relating to container fleet management:
|
• |
Slot
swap agreements. ZIM enters into agreements with other carriers for the
exchange of vessel space, or “slots,” for repositioning of empty containers. Under these agreements, other carriers offer
ZIM space on their own operated vessels, in exchange for space on its vessels for the purpose of repositioning empty containers. ZIM has
developed this cooperation. ZIM has slot swap agreements with 14 carriers and exchange thousands of TEUs each year. |
|
• |
Slot
sale agreements. ZIM sells slots on board its vessels to transport empty
containers. |
|
• |
One-way
container lease. ZIM uses leasing companies and other shipping liners’
empty containers to move cargo from locations with increased demand to over-supplied locations. ZIM is a global leader in one-way container
volumes. |
|
• |
Equipment
sub-leases. ZIM leases its equipment to other carriers and freight forwarders
in order to reduce its container repositioning and evacuation costs. |
ZIM’s operational
partnerships
ZIM is party to a large number of cooperation
agreements with other shipping companies and alliances, which generally provide for the joint operation of shipping services by vessel
sharing agreements, the exchange of capacity and the sale or purchase of slots on vessels operated by ZIM or other shipping companies.
ZIM does not participate in any alliances, which are a type of vessel sharing agreement that involves joint operations of fleets of vessels
and sharing of vessel space in multiple trades, although ZIM does partner with the 2M Alliance in a strategic cooperation as described
below.
Strategic
Cooperation Agreement with the 2M Alliance
In April 2022, ZIM amended and extended its
agreement with the 2M Alliance to include the extension of its collaboration on the Asia-USEC and Asia-USGC under a full slot exchange
and vessel sharing agreement originally established in September 2018 and August 2019, respectively. The strategic cooperation on the
Asia-USEC currently includes a joint network of 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 agreed to swap slots on all five loops under the agreement and ZIM has the right
to purchase additional slots in order to meet total demand in these trades. The strategic cooperation on the Asia-USGC currently includes
two services, of which one is operated by ZIM, and one is operated by the 2M Alliance. ZIM has replaced its previous cooperation with
the 2M Alliance established in March 2019 on the Asia – Mediterranean and Asia – American Pacific Northwest with ZIM’s
own independent services. Under ZIM’s new collaboration agreement with the 2M, ZIM or the 2M Alliance may terminate the agreement
by providing a six-month prior written notice following the initial 12-month period from the effective date of the agreement, which is
a shorter period compared to the original agreement terms. Furthermore, in January 2023 the members of the 2M Alliance announced the termination
of the 2M Alliance in January 2025. ZIM has stated that it intends to deploy its 15,000 TEU LNG dual fuel vessels expected to be delivered
during 2023-2024 on its operated service, ZCP, as part of its joint Asia-USEC network with the 2M Alliance.
The table below shows ZIM’s operational
partners by geographic trade zone as of
December 31, 2022:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.P.
Moller-Maersk(1)
|
|
✓ |
|
|
|
✓ |
|
|
|
✓ |
|
Mediterranean
Shipping Company(1)
|
|
✓ |
|
|
|
|
|
|
|
✓ |
|
CMA
CGM S.A.
|
|
|
|
|
|
✓ |
|
|
|
|
|
Evergreen
Marine Corporation
|
|
|
|
|
|
✓ |
|
|
|
|
|
Hapag-Lloyd
AG(2)
|
|
|
|
|
|
✓ |
|
✓ |
|
✓ |
|
China
Ocean Shipping Company (COSCO)
|
|
|
|
|
|
✓ |
|
✓ |
|
|
|
ONE
|
|
|
|
|
|
✓ |
|
✓ |
|
|
|
Orient Overseas Container Line Limited (OOCL)
|
|
|
|
|
|
✓ |
|
|
|
|
|
Yang
Ming Marine Transport Corporation
|
|
|
|
|
|
✓ |
|
✓ |
|
|
|
Hyundai
Merchant Marine Co., Ltd.
|
|
|
|
|
|
✓ |
|
|
|
|
|
Others
|
|
|
|
|
|
✓ |
|
|
|
✓ |
_____________________________________
| (1) |
ZIM’s cooperation with Maersk and MSC is under the 2M Alliance framework. However, in the Latin America ZIM also has a separate
bilateral cooperation agreement with MSC, and its separate bilateral cooperation with MSC on the Atlantic terminated effective as of April
2022. ZIM also has a separate bilateral cooperation agreement with Maersk in the Latin America and Intra Asia trades. |
| (2) |
With respect to the Atlantic-Europe trade, ZIM has a swap agreement with THE Alliance member Hapag-Lloyd, supporting ZIM loadings
on THE Alliance service on this trade. ZIM also has a separate bilateral agreement with respect to the Atlantic-Europe trade with Hapag-Lloyd
in its standalone capacity. |
ZIM’s
Customers
In 2022, ZIM had more than 34,000 customers
using its services on a non-consolidated basis. ZIM’s customer base is well-diversified, and it does not depend upon any single
customer for a material portion of its revenue. For the twelve months ended
December 31, 2022, no single customer represented more than
3% of ZIM’s revenues.
ZIM’s customers are divided into
“end-users,”
including exporters and importers, and
“freight forwarders.” Exporters include a wide range of enterprises, from global manufacturers
to small family-owned businesses that may ship just a few TEUs each year. Importers are usually the direct purchasers of goods from exporters,
but may also comprise sales or distribution agents and may or may not receive the containerized goods at the final point of delivery.
Freight forwarders are non-vessel operating common carriers that assemble cargo from customers for forwarding through a shipping company.
End-users generally have long-term commitments that facilitate planning for future volumes, which results in high entry barriers for competing
carriers due to customer loyalty. Freight forwarders have short-term
contracts at renegotiated rates. As a result, entry barriers are
low for competing carriers for this customer base.
During the last five years, end-users have
constituted approximately 26% of ZIM’s customers in terms of TEUs carried, and the remainder of its customers were freight forwarders.
ZIM’s
contracts with its main customers are typically for a fixed term of one year on all trades. ZIM’s
contracts with customers
may be for a certain voyage or period of time and typically do not include exclusivity clauses in our favor. ZIM’s customer mix
varies within each of the markets in which it operates.
For the years ended
December 31, 2022,
2021
and
2020, ZIM’s five largest customers in the aggregate accounted for approximately 10%, 12% and 10% of its freight revenues and
related services, respectively, and 6%, 8% and 7% of ZIM’s TEUs carried for each year.
Suppliers
Vessel
owners
As of
December 31, 2022, ZIM chartered approximately
94.2% of its TEU capacity and 94.0% of the vessels in its fleet. Access to chartered-in vessels of varying capacities, as appropriate
for each of the trades in which ZIM operates, is necessary for the operation of its business. See
“Item
3.D Risk Factors—Risks Related to Operating ZIM’s Vessel Fleet—ZIM
charters-in most of its fleet, which makes it more sensitive to fluctuations in the charter market, and as a result of its dependency
on the vessel charter market, the costs associated with chartering vessels are unpredictable.” ZIM may face a possible shortage
of vessel for hire in the future.
Port
operators
ZIM has Terminal Services Agreements (TSAs)
with terminal operators and contractual arrangements with other relevant vendors to conduct cargo operations in the various ports and
terminals that it uses around the world. Access to terminal facilities in each port is necessary for the operation of ZIM’s business.
Although ZIM believes it has been able to
contract for sufficient capacity at appropriate terminal facilities in the past five years,
possible increase in demand, congestion in ports and terminals and other geopolitical and macroeconomic events may increase its costs
and dependency on berthing windows in terminals.
Bunker
suppliers
ZIM has contractual agreements to purchase
approximately 85%% of its annual bunker estimated requirements with suppliers at various ports around the world. ZIM has been able to
secure sufficient bunker supply under
contract or on a spot basis. For ZIM’s strategic agreement with Shell and risks relating to
the supply of LNG, see
“Item 3.D Risk Factors—Risks Related to Operating ZIM’s Vessel
Fleet—Rising energy and bunker prices (including LNG) may have an adverse effect on ZIM’s results of operations.”
Land
transportation providers
ZIM has services agreements with third-party
land transportation providers, including providers of rail, truck and river barge transport. ZIM is a party to a rail services agreement
with some of the Class-1 service providers to main inland locations in the U.S. and Canada.
ZIM’s Sustainability
and Focus on ESG
Through its core value of sustainability,
and in accordance with its Code of Ethics, ZIM aims to uphold and advance a set of principles regarding ethical, social and environmental
concerns, and with ZIM’s supplier code of conduct, it aims to withhold a strong, secure and responsible supply chain. ZIM’s
goal is to work resolutely to eliminate corruption risks, promote diversity among its teams and continuously reduce the environmental
impact of its operations, both at sea and onshore. Furthermore, ZIM has elected to enter into long term charter transactions of LNG dual-fuel
vessels to reduce pollutant emissions as a result of bunker consumption, and five of these vessels are also able to be powered by ammonia
in the event it will become a feasible
“cleaner” fuel. In addition to actively working to reduce accidents and security risks
in its operations, ZIM also endeavors to eliminate corruption risks as a member of the Maritime Anti-Corruption Network, with a vision
of a maritime industry that enables fair trade. ZIM also fosters quality throughout the service chain, by selectively working with qualified
partners to advance its business interests. Finally, ZIM promotes diversity among its teams, with a focus on developing high-quality training
courses for all employees. ZIM has invested efforts and resources in promoting diversity in
the company, such as monitoring gender diversity
of
the company on an annual basis, collaborating with .nonprofit organization to increase the hiring of employees from diverse backgrounds
and with disabilities, participating in special events to raise awareness to diversity and globally communicating its efforts, both internally
and externally. As ZIM continues to grow, sustainability remains a core value. ZIM expects ESG regulation will intensify in the future.
ZIM’s Competition
ZIM competes with a large number of global,
regional and niche shipping companies to provide transport services to customers worldwide. In each of its key trades, ZIM competes primarily
with global shipping companies. The market is significantly concentrated with the top three carriers — A.P. Moller-Maersk Line,
MSC and COSCO — accounting for approximately 46.3% of global capacity, and the remaining carriers together contributing 53.7% of
global capacity as of February 2023, according to Alphaliner. As of February 2023, ZIM controlled approximately 2.0% of the global cargo
shipping capacity and ranked 10th
among shipping carriers globally in terms of TEU operated capacity, according to Alphaliner.
In addition to the large global carriers,
regional carriers generally focus on a number of smaller routes within a regional market and typically offer services to a wider range
of ports within a particular market as compared to global carriers. Niche carriers are similar to regional carriers but tend to be even
smaller in terms of capacity and the number and size of the markets in which they operate. Niche carriers often provide an intra-regional
service, focusing on ports and services that are not served by global carriers.
ZIM’s Seasonality
ZIM’s business has historically been
seasonal in nature. As a result, ZIM’s average freight rates have reflected fluctuations in demand for container shipping services,
which affect the volume of cargo carried by ZIM’s fleet and the freight rates which ZIM charges for the transport of such cargo.
ZIM’s income from voyages and related services are typically higher in the third and fourth quarters than the first and second quarters
due to increased shipping of consumer goods from manufacturing centers in Asia to North America in anticipation of the major holiday period
in Western countries. The first quarter is affected by a decrease in consumer spending in Western countries after the holiday period and
reduced manufacturing activities in China and Southeast Asia due to the Chinese New Year. However, operating expenses such as expenses
related to cargo handling, charter hire of vessels, fuel and lubricant expenses and port expenses are generally not subject to adjustment
on a seasonal basis. As a result, seasonality can have an adverse effect on ZIM’s business and results of operations.
Recently, as a result of the continuing volatility
within the shipping industry, seasonality factors have not been as apparent as they have been in the past. As global trends that affect
the shipping industry have changed rapidly in recent years, including trends resulting from the COVID-19 pandemic, it remains difficult
to predict these trends and the extent to which seasonality will be a factor impacting ZIM’s results of operations in the future.
ZIM’s Legal Proceedings
For information on ZIM’s legal proceedings,
see Note 27 to ZIM’s audited consolidated financial statements that have been
incorporated by reference herein. In respect of the
alleged patent infringement claim against ZIM, as disclosed in Note 27(h) to ZIM’s audited consolidated financial statements, in
March 2022, the plaintiff voluntarily withdrew the claim and the proceeding has been terminated.
ZIM’s Regulatory
Matters
Environmental
and other regulations in the shipping industry
Government regulations and laws significantly
affect the ownership and operation of ZIM’s vessels. ZIM is subject to international conventions and treaties, national, state and
local laws and national and international regulations in force in the jurisdictions in which ZIM’s vessels operate or are registered
relating to the protection of the environment. Such requirements are subject to ongoing developments and amendments and relate to, among
other things, the storage, handling, emission, transportation and discharge of hazardous and non-hazardous substances, such as sulfur
oxides, nitrogen oxides and the use of low-sulfur fuel or shore power voltage, and the remediation of contamination and liability for
damages to natural resources. These laws and regulations include OPA 90, CERCLA, the CWA, the U.S. Clean Air Act of 1970 (including its
amendments of 1977 and 1990) (CAA), and regulations adopted by the IMO, including the International Convention for Prevention of Pollution
from Ships (MARPOL), and the International Convention for Safety of Life at Sea (the SOLAS Convention), as well as regulations enacted
by the European Union and other international, national and local regulatory bodies. Compliance with such requirements, where applicable,
entails significant expense, including vessel modifications and implementation of certain operating procedures. If such costs are not
covered by ZIM’s insurance policies, ZIM could be exposed to high costs in respect of environmental liability damages, administrative
and civil penalties, criminal charges or sanctions, and could suffer substantive harm to its operations and goodwill to the extent that
environmental damages are caused by its operations. ZIM instructs the crews of its vessels on environmental requirements and it operates
in accordance with procedures that are intended to ensure compliance with such requirements. ZIM also insures its activities, where effective
for ZIM to do so, in order to hedge its environmental risks.
In July 2021 the European Commission presented
its ‘Fit for 55’ package, which includes, among others, a legislative proposal to apply the EU emissions Trading System (ETS)
on maritime shipping. ETS are market-based “cap and trade” scheme in which entities trade emissions rights within an area
under a cap placed on the quantity of specified pollutants. ZIM expects to incur additional expenses as a result if and when this proposal
becomes effective, and ZIM may not be able to recover or minimize its additional costs by increasing its fees ZIM collects from its customers.
ZIM has been, and continues to be, subject
to investigations and party to legal proceedings relating to competition concerns. In recent years, a number of liner shipping companies,
including ZIM, have been the subject of antitrust investigations in the U.S., the EU and other jurisdictions into possible anti-competitive
behavior. Furthermore, the recent spike in freight rates and related charges during the past two years has resulted in increased scrutiny
by governments and regulators around the world, including U.S. President Biden’s administration and the U.S. FMC in the U.S., and
the ministry of transportation in China. FMC in the U.S., and the ministry of transportation in China. In the U.S., the Ocean Shipping
Reform Act of 2022 (OSRA) signed into law in June 2022 requires ZIM and all other carriers to immediately implement certain requirements
in detention and demurrage invoices, which if not included will eliminate any obligation of the charged party to pay the charge, including
certifying that all detention and demurrage invoices are issued in compliance with the FMC’s Interpretive Rule on Detention and
Demurrage of
May 18, 2020. These requirements in detention and demurrage invoices may affect ZIM’s ability to effectively collect
these fees from its customers, heighten the risk of civil litigation and adversely affect its financial results. OSRA further mandates
a series of rule-making projects by FMC, including: (i) defining prohibited practices by common carriers and other industry players when
assessing detention and demurrage; (ii) defining what is an
“unreasonable” refusal of cargo space, as well as unfair or unjustly
discriminatory methods; (iii) defining what is
“unreasonable refusal” to deal or negotiate with respect to vessel space, and
(iv) authorizing the FMC to determine
“essential terms” that are deemed by FMC necessary to be included in maritime shipping
service. Any new rule issued by the FMC addressing these topics or other related matters may have an adverse effect on ZIM’s business
and financial results, including on its ability to negotiate commercial terms with its customers in its favor and its ability to collect
its fees in exchange for ZIM’s services. If ZIM is found to be in violation of the applicable regulation, ZIM could be subject to
various sanctions, including monetary sanctions. Specifically, in September 2022 an FMC complaint was filed against ZIM claiming ZIM overcharged
detention and demurrage fees in violation of the FMC’s interpretive Rule on Detention and Demurrage of
May 18, 2020, and is currently
in preliminary stages.
ZIM’s operations involving the European
Union are subject to E.U. competition rules, particularly Articles 101 and 102 of the Treaty on the Functioning of the European Union,
as modified by the Treaty of Amsterdam and Lisbon. Article 101 generally prohibits and declares void any agreement or concerted actions
among competitors that adversely affects competition. Article 102 prohibits the abuse of a dominant position held by one or more shipping
companies. However, certain joint operation agreements in the shipping industry such as vessel sharing agreements and slot swap agreements
are block exempted from certain prohibitions of Article 101 by Commission Regulation (EC) No 906/2009 as amended by Commission Regulation
(EU) No 697/2014 and in effect until April 2024. This regulation permits joint operation of services among competitors under certain conditions,
with the exception of price fixing, capacity and sales limitation and allocation of markets and customers, under certain conditions. During
2022, the European Union launched a legal review of the CBER to decide whether to renew, modify or allow the CBER to lapse. A similar
review was initiated by the UK competition authority as well. The EU competition authority, or the DG Competition, is expected to publish
its conclusions on the future of the CBER following a call for evidence published to industry stakeholders, with most of the responses
received arguing for either modification or non-renewal of the CBER. 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 ZIM’s ability to enter into cooperation arrangements
with other shipping companies and effectively compete with other carriers, which could adversely affect ZIM’s business, financial
condition and results of operations. In addition, the non-renewal or modification of the existing CBER is expected to adversely affect
the review and renewal processes of similar block exemptions regulations in other jurisdictions, and the uncertainty of the future of
the CBER may contribute to the shortening of block exemption regulation effective periods in other jurisdictions. See “Item
3.D Risk Factors—Risks Related to Regulation—ZIM is subject to
competition and antitrust regulations in the countries where it operates, and has been subject to antitrust investigations by competition
authorities. Moreover, the sharp increase in freight rates and related charges during 2021 and the first half of 2022 has resulted in
increased scrutiny by regulators around the world and ZIM may face antitrust investigations.”
MARPOL Annex IV was amended effective as of
November 1, 2022 and requires vessels to improve their energy efficiency and greenhouse gas emissions (GHG). See
“Item
3.D Risk Factors—Risks Related to Regulation—Regulations relating
to ballast water discharge may adversely affect ZIM’s results of operation and financial condition.”
ZIM’s Special State
Share
When the State of Israel sold 100% of its
interest in ZIM in 2004 to IC, ZIM ceased to be a
“mixed company” (as defined in the Israeli Government Companies Law, 5735-1975)
and issued a Special State Share to the State of Israel whose terms were amended as part of
the Company’s 2014 debt restructuring.
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 a time of emergency
or for national security purposes and (iii) prevent parties hostile to the State of Israel or parties liable to harm the State of Israel’s
interest in ZIM or its foreign or security interests or its shipping relations with foreign countries, from having influence on its management.
The key terms and conditions of the Special State Share include the following requirements:
|
• |
ZIM must be, at all times, a company incorporated and registered in Israel, with its headquarters and
principal and registered office domiciled in Israel. |
|
• |
Subject to certain exceptions, ZIM must maintain a minimal fleet of 11 seaworthy vessels that are fully
owned by ZIM, either directly or indirectly through its subsidiaries, at least three of which must be capable of carrying general cargo.
Subject to certain exceptions, any transfer of vessels in violation thereof shall be invalid unless approved in advance by the State of
Israel pursuant to the mechanism set forth in ZIM’s amended and restated articles of association. Currently, as a result of waivers
received from the State of Israel, ZIM owns fewer vessels than the minimum fleet requirement. |
|
• |
At least a majority of the members of ZIM’s board of directors, including the chairperson of the
board and ZIM’s chief executive officer, must be Israeli citizens. |
|
• |
The State of Israel must provide prior written consent for any holding or transfer or issuance of shares
that confers possession of 35% or more of ZIM’s issued share capital, or that provides control over ZIM, including as a result of
a voting agreement. |
|
• |
Any transfer of shares that confers its owner with a holding of more than 24% but not more than 35% of
ZIM’s issued share capital will require an advance notice to the State of Israel which will include full details regarding the proposed
transferor and transferee, the percentage of shares to be held by the transferee after the transfer and relevant details regarding the
transaction, including voting agreements and agreements for the appointment of directors (if any). If the State of Israel shall be of
the opinion that the transfer of shares may possibly harm the security interests of the State of Israel or any of its vital interests
or that it has not received the relevant information for the purpose of reaching its decision, the State of Israel shall be entitled to
serve notice, within 30 days, that it objects to the transfer, giving reason for its objection. In such circumstances, the party requesting
the transfer may initiate proceedings in connection with this matter with the competent court, which will consider and rule on the matter.
|
|
• |
The State of Israel must consent in writing to any winding-up, merger or spin-off, except for certain
mergers with subsidiaries that would not impact the Special State Share or the minimal fleet. |
|
• |
ZIM must provide governance, operational and financial information to the State of Israel similar to
information that ZIM provides to its ordinary shareholders. In addition, ZIM must provide the State of Israel with particular information
related to ZIM’s compliance with the terms of the Special State share and other information reasonably required to safeguard the
State of Israel’s vital interests. |
|
• |
Any amendment, review or cancellation of the rights afforded to the State of Israel by the Special State
Share must be approved in writing by the State of Israel prior to its effectiveness. |
Other than the rights enumerated above, the
Special State Share does not grant the State any voting or equity rights. The full provisions governing the rights of the Special State
Share appear in ZIM’s amended and restated
articles of association. ZIM reports to the State of Israel on an ongoing basis in accordance
with the provisions of ZIM’s amended and restated
articles of association. Certain asset transfer or sale transactions that in ZIM’s
opinion require approval, have received the approval of the State (either explicitly or implicitly by not objecting to ZIM’s request).
Kenon’s ownership of ZIM’s shares
is subject to the terms and conditions of the Special State Share, which limit Kenon’s ability to transfer its equity interest in
us to third parties. The holder of ZIM’s Special State Share has granted a permit (the “Permit”), to Kenon and Mr. Idan
Ofer, individually and collectively referred to in this paragraph as a “Permitted Holder” of ZIM’s shares, pursuant
to which the Permitted Holders may hold 24% or more of the means of control of ZIM (but no more than 35% of the means of control of ZIM),
and only to the extent that this does not grant the Permitted Holders control in ZIM. The Permit further stipulates that it does not limit
the Permitted Holder from distributing or transferring ZIM’s shares. However, the terms of the Permit provide that the transfer
of the means of control of ZIM is limited in instances where the recipient is required to obtain the consent of the holder of ZIM’s
Special State Share, or is required to notify the holder of ZIM’s Special State Share of its holding of ZIM’s ordinary 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 Permit provide that, if Mr. Idan Ofer’s holding interest
in Kenon, directly or indirectly, falls below 36% or if Mr. Idan Ofer ceases to be the sole controlling shareholder of Kenon, then the
shares held by Kenon will not grant Kenon any right in respect of its ordinary shares that would otherwise be granted to an ordinary shareholder
holding more than 24% of ZIM’s ordinary shares (even if Kenon holds a greater percentage of ZIM’s ordinary shares), until
or unless the State of Israel provides its consent, or does not object to, such decrease in holding interest or control in Kenon. “Control,”
for the purposes of the Permit, shall bear the meaning ascribed to it in the Permit 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. Idan Ofer, or ZIM. According to the Permit,
the obligations of the Permitted Holder under the Permit will apply only for as long as the Permitted Holder holds more than 24% of ZIM’s
shares.
Discontinued Operations — Inkia Business
Sale
of the Inkia Business
Share Purchase Agreement
In November 2017, Kenon, through its
subsidiaries
Inkia and IC Power Distribution Holdings Pte. Ltd. (
“ICPDH”), entered into a share purchase agreement with Nautilus Inkia
Holdings LLC which is an entity controlled by I Squared Capital, pursuant to which Inkia and ICPDH agreed to sell all of their interests
in power generation and distribution companies in Latin America and the Caribbean (the
“Inkia Business”). The sale was completed
in December 2017.
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, which was repaid (prior to scheduled maturity) in October 2020. The consideration
was subject to post-closing adjustments which were not significant. The buyer also assumed Inkia’s obligations under Inkia’s
$600 million 5.875% Senior Unsecured Notes due 2027.
The consideration that Inkia received in the
transaction was before estimated transaction costs, management compensation, advisor fees, other expenses and taxes, were in the aggregate
approximately $263 million, of which $27 million comprised 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.
Indemnification
In 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 specified
deductibles, caps and time limitations, the sellers 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 in July 2019 (or December 2020 in the case of representations relating to environmental
matters), a breach of any of the sellers’ representations and warranties (other than fundamental representations) up to a maximum
amount of $176.55 million; |
|
• |
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 sellers’ covenants or agreements set forth in the share purchase agreement; |
|
• |
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 sellers’ fundamental representations
(including representations relating to due authorization, ownership title, and capitalization). |
The sellers’ obligation to indemnify
Nautilus Inkia Holdings LLC shall not exceed the base purchase price. The sellers’ indemnification obligations for any claims under
the share purchase agreement that were agreed between the buyer and the sellers, or that were subject to a final non-appealable judgment,
were supported by the following:
|
• |
Kenon’s pledge of OPC shares representing 29% of OPC’s outstanding shares as of March 31,
2021, which pledge was agreed to expire on December 31, 2021; and |
|
• |
to the extent any obligations remain outstanding after the exercise of the above-described pledge (or payments of amounts equal to
the value of the pledge), a corporate guarantee from Kenon which guarantee is now expired. |
The indemnification obligations were previously
also supported by a deferred payment agreement owing from the buyers to the sellers, which was, however, repaid in October 2020 (prior
to scheduled maturity).
Pledge Agreement with respect to OPC Shares
In connection with the sale of the Inkia Business,
IC Power (which was the holder of Kenon’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 (at the time representing 25% of OPC’s outstanding shares)
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, IC Power transferred all of its shares in OPC to Kenon. As a result, Kenon and the buyer entered into
an amended pledge agreement, pursuant to which Kenon became the pledgor and assumed IC Power’s obligations under the pledge agreement.
The pledge agreement was further amended in October 2020 in connection with the early repayment of the deferred payment agreement to increase
the amount of pledged shares and the term of the pledge, and the pledged shares represented 29% of the outstanding shares of OPC as of
February 27, 2022. Following the amendment of the pledge agreement in October 2020, Kenon had pledged 55 million shares of OPC. In accordance
with the pledge agreement, 53.5 million shares of OPC were released from the pledge, and 1.5 million shares of OPC remain pledged in light
of an indemnity claim relating to a tax assessment claim in the amount of $11 million.
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 or its
subsidiaries have rights.
The claims 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 (which it has done, as described below). Kenon may also sell its rights under or
the rights to proceeds resulting from claims.
Bilateral Investment Treaty (“BIT”)
Claims Relating to Peru
In June 2017 and November 2018, IC Power and
Kenon respectively sent Notices of Dispute to the Republic of Peru under the Free Trade Agreement between Singapore and the Republic of
Peru, or the FTA, relating to two disputes described below, based on events that occurred while Kenon, through IC Power, owned and operated
their Peruvian
subsidiaries Kallpa and Samay I, later sold as part of the Inkia sale. In April 2019, IC Power and Kenon notified the Republic
of Peru of their intent to submit the disputes to arbitration pursuant to the FTA. In June 2019, IC Power and Kenon submitted the disputes
to arbitration before the International Centre for Settlement of Investment Disputes. In June 2020, IC Power and Kenon submitted a Memorial
on the Merits, claiming compensation in excess of $200 million. In February 2021, Peru submitted a Counter-Memorial on the Merits and
a Memorial on Jurisdiction. After a further exchange of written pleadings, the final oral hearing was held virtually from 13 to 20 December
2021. There is no fixed deadline for the issuance of the award. 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. Security 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.
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 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 in 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.
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, from August 2016 until
July 2019 on an exclusive basis, independently of its declared 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 (the “Resolution”). Under the Resolution, the firm base SFR provider can only render the SFR
service when it is programmed in the daily electricity dispatch based on its declared generation costs. This retroactive amendment to
PR 22 withdrew Kallpa’s exclusive right to provide the firm base SFR service that had been awarded to it in April 2016. Kenon and
IC Power suffered losses as a result.
Transmission
Tolls Claim
Until July 2016, the responsibility for the
payment for the use of the secondary and complementary transmission systems was apportioned between generators based on the use of each
transmission line. OSINERGMIN identified the generators that made use of particular transmission 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 companies, including Electroperu, to the detriment
of Kenon and IC Power’s Peruvian
subsidiaries, causing significant losses to Kenon and IC Power.
Entitlement
to Payments in Respect of Certain Proceedings and Claims
As discussed below, certain of our
subsidiaries
are pursuing claims or are entitled to receive certain payments from the buyer of the Inkia Business in connection with certain 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.
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 Relating to Peru—Transmission Tolls 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 Relating to Peru—Secondary
Frequency Regulation 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.
| C. |
Organizational Structure |
The chart below represents a summary of our
organizational structure, excluding intermediate holding companies, as of
December 31, 2022. This chart should be read in conjunction
with the explanation of our ownership and organizational structure above.
| D. |
Property, Plants and Equipment |
For information on our property, plants and
equipment, see “Item 4.B Business Overview.”
| ITEM
4A. |
Unresolved Staff Comments |
Not Applicable.
| ITEM 5. |
Operating and Financial Review and Prospects |
This section should be read in conjunction
with our audited consolidated financial statements, and the related notes thereto, for the years ended
December 31, 2022,
2021 and
2020,
included elsewhere in this annual report. Our financial statements have been prepared in accordance with IFRS.
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.
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 primarily comprise the financial results of each of its businesses. The following table sets forth the method of accounting
for our businesses for each of the two years ended
December 31, 2022 and our ownership percentage as of
December 31, 2022:
| |
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|
|
|
Treatment in Consolidated
Financial Statements
|
|
OPC
|
54.7%(1)
|
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Consolidated |
|
Consolidated |
|
ZIM
|
20.7%(2)
|
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Equity |
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Share in profits of associated company, net of tax |
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Other
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_______________________________________
| (1) |
In 2021 and 2022, OPC has issued new shares in public and private and Kenon has participated in some of these share offerings. See
details below. |
|
• |
In January 2021, OPC issued 10,300,000 million ordinary shares for total gross proceeds of NIS 350 million (approximately $107 million),
and as results a result, Kenon’s interest in OPC decreased from 62.1% to 58.2%. |
|
• |
In September 2021, OPC issued 13 million new shares in a rights offering to fund the development and expansion of OPC’s activity
in the U.S. for total gross proceeds of approximately NIS 329 million (approximately $102 million). Kenon purchased approximately 8 million
shares in the rights offering for total consideration of approximately NIS 206 million (approximately $64 million), which included its
pro rata share and additional rights it purchased during the rights trading period plus the cost to purchase these additional rights.
|
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• |
In July 2022, OPC issued 9,443,800 new shares for total gross proceeds of NIS 331 million (approximately $94 million). Kenon purchased
3,898,000 shares in this offering for total consideration of NIS 136 million (approximately $39 million). |
|
• |
In September 2022, OPC issued 12,500,000 new shares for total gross proceeds of NIS 500 million (approximately $141 million).
|
As a result of the share issuance and Kenon’s
participation as described above, Kenon holds approximately 54.7% of the outstanding shares of OPC.
| (2) |
In February 2021, ZIM completed an initial public offering of its shares on the New York Stock Exchange and, as a result of the offering,
our interest in ZIM decreased from 32% to 27.8%. Between September and November 2021, Kenon sold approximately 1.2 million ZIM shares
for total consideration of approximately $67 million. As a result of the sales, Kenon held a 26% interest in ZIM (25.6% on a fully diluted
basis). In March 2022, Kenon sold 6 million ZIM shares for total consideration of $463 million. As a result of the sale, Kenon now holds
a 20.7% interest in ZIM and remains the largest shareholder in ZIM. |
The results of ZIM are included in Kenon’s
statements of profit and loss as share in profits of associated company, net of tax, for the years set forth below, except as otherwise
indicated.
The following tables set forth selected financial
data for Kenon’s reportable segments for the periods presented:
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(in millions of USD, unless otherwise indicated) |
|
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Revenue
|
|
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517 |
|
|
|
57 |
|
|
|
— |
|
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|
— |
|
|
|
574 |
|
|
Depreciation
and amortization |
|
|
(47 |
) |
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
|
|
(63 |
) |
|
Financing
income |
|
|
10 |
|
|
|
25 |
|
|
|
— |
|
|
|
10 |
|
|
|
45 |
|
|
Financing
expenses |
|
|
(42 |
) |
|
|
(7 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
(50 |
) |
|
Share in
profit of associated companies |
|
|
— |
|
|
|
85 |
|
|
|
1,033 |
|
|
|
— |
|
|
|
1,118 |
|
|
Losses
related to ZIM |
|
|
— |
|
|
|
— |
|
|
|
(728 |
) |
|
|
— |
|
|
|
(728 |
) |
|
Profit
/ (Loss) before taxes |
|
|
24 |
|
|
|
61 |
|
|
|
305 |
|
|
|
(2 |
) |
|
|
388 |
|
|
Income
tax (expense)/benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit / (Loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets(2)
|
|
|
1,504 |
|
|
|
553 |
|
|
|
— |
|
|
|
636 |
|
|
|
2,693 |
|
|
Investments
in associated companies |
|
|
— |
|
|
|
652 |
|
|
|
427 |
|
|
|
— |
|
|
|
1,079 |
|
|
Segment
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________________________
| (1) |
Includes the results of Kenon’s, Qoros’ and IC Power’s holding company (including assets and liabilities) and general
and administrative expenses. |
| (2) |
Excludes investments in associates. |
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(in millions of USD, unless otherwise indicated) |
|
|
Revenue
|
|
|
437 |
|
|
|
51 |
|
|
|
— |
|
|
|
— |
|
|
|
488 |
|
|
Depreciation
and amortization |
|
|
(44 |
) |
|
|
(13 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
(58 |
) |
|
Financing
income |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
Financing
expenses |
|
|
(119 |
) |
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
(144 |
) |
|
Losses
related to Qoros |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(251 |
) |
|
|
(251 |
) |
|
Share in (losses)/profit of associated companies |
|
|
— |
|
|
|
(11 |
) |
|
|
1,261 |
|
|
|
— |
|
|
|
1,250 |
|
|
(Loss)
/ Profit before taxes |
|
|
(57 |
) |
|
|
(61 |
) |
|
|
1,261 |
|
|
|
(263 |
) |
|
|
880 |
|
|
Income
tax benefit/(expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / Profit from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets(2)
|
|
|
1,512 |
|
|
|
431 |
|
|
|
— |
|
|
|
227 |
|
|
|
2,170 |
|
|
Investments
in associated companies |
|
|
— |
|
|
|
545 |
|
|
|
1,354 |
|
|
|
— |
|
|
|
1,899 |
|
|
Segment
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
| (1) |
Includes the results of Kenon’s, Qoros’ and IC Power’s holding company (including assets and liabilities) and general
and administrative expenses. |
| (2) |
Excludes investments in associates. |
OPC
The following table sets forth summary financial
information for OPC (including CPV) for the years ended
December 31, 2022 and
2021:
| |
|
|
|
|
|
|
|
Revenue
|
|
|
574 |
|
|
|
488 |
|
|
Cost of Sales (excluding depreciation and amortization)
|
|
|
(417 |
) |
|
|
(337 |
) |
|
Net Profit/(Loss)
|
|
|
65 |
|
|
|
(94 |
) |
|
Adjusted EBITDA(1)
|
|
|
77 |
|
|
|
91 |
|
|
Proportionate share of EBITDA of associated companies(1)
|
|
|
168 |
|
|
|
106 |
|
|
Total Debt(2)
|
|
|
1,163 |
|
|
|
1,215 |
|
| (1) |
OPC defines “EBITDA” for each period as earnings (losses) before depreciation and amortization, financing expenses or
income and taxes on income, and “Adjusted EBITDA” for each period as earnings (losses) after adjustments in respect of changes
in fair value of derivative financial instruments and items not in the ordinary course of OPC’s business and/or having a non-recurring
nature.
EBITDA and Adjusted EBITDA are 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 and Adjusted EBITDA are 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 and Adjusted EBITDA present 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 loss, such as finance expenses, taxes and depreciation and amortization. |
| (2) |
Includes short-term and long-term debt. |
The following table sets forth a reconciliation
of OPC’s net profit/loss to its Adjusted EBITDA and proportionate share of net profit to share of EBITDA of its associated companies
for the periods presented. Other companies may calculate EBITDA and Adjusted EBITDA differently, and therefore this presentation of EBITDA
and Adjusted EBITDA may not be comparable to other similarly titled measures used by other companies:
| |
|
|
|
|
|
|
|
Net profit/(loss) for the period
|
|
|
65 |
|
|
|
(94 |
) |
|
Depreciation and amortization
|
|
|
63 |
|
|
|
57 |
|
|
Financing expenses, net
|
|
|
14 |
|
|
|
141 |
|
|
Income tax expense/(benefit)
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
|
|
|
|
|
|
|
Share in (profits)/losses of associated companies, net
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
Share in profits/(losses) of associated companies, net
|
|
|
85 |
|
|
|
(11 |
) |
|
Share of depreciation and amortization
|
|
|
44 |
|
|
|
39 |
|
|
Share of financing expenses, net
|
|
|
39 |
|
|
|
78 |
|
|
Proportionate share of EBITDA of associated
companies |
|
|
168 |
|
|
|
106 |
|
Qoros
In April 2020, we have reduced our interest
in Qoros to 12%. Since that date, we no longer account for Qoros pursuant to the equity method of accounting. In 2021, we wrote down the
value of Qoros to zero. We have agreed to sell our remaining interest in Qoros to the Majority Shareholder but that shareholder has not
complied with its purchase obligations and we have initiated legal proceedings with respect to this matter.
ZIM
ZIM’s results of operations for the
years ended
December 31, 2022 and
2021 are reflected in Kenon’s share in profits of associated companies, net of tax.
Material
Factors Affecting Results of Operations
OPC
Set forth below is a discussion of the material
factors affecting the results of operations of OPC for the periods under review. OPC acquired CPV in January 2021. The discussion below
refers to OPC without giving effect to CPV business except where expressly indicated.
Revenue
– 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. Changes in the electricity generation tariff have material effect on OPC’s results of operations.
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.
2022 EA Tariffs
In February 2022, the EA generation component
tariff increased by approximately 13.6% from NIS 0.253 per kWh to NIS 0.287 per kWh. In May 2022, due to a reduction in excise tax on
use of coal, an additional update to the electricity tariff became effective for the remaining 2022. The generation component after the
reduction was NIS 0.276 per MWh being a reduction of 3.7% from the tariff determined in February 2022. On
August 1, 2022, the electricity
tariff was further updated to NIS 0.314 per kWh for the remainder of 2022, being an increase of 13.6% over the tariff that came into effect
in May 2022 and of 9.4% of the tariff determined in February 2022. This tariff update was made against the background of the sharp increase
in the coal prices index due to the worldwide energy crisis along with the increase in the dollar/shekel exchange rate and the CPI.
2023 EA Tariffs
On
January 1, 2023, an annual update of the tariff
for 2023 came into effect for the IEC’s electricity consumers with generation component decreasing to NIS 0.312 per kWh, an 0.6%
decrease compared to the generation component that applied in the last few months of 2022. On
February 1, 2023, a decision of the EA entered
into effect to update the costs recognized to the Electricity Company and the Systems Operators and the tariffs to the electricity consumers.
Pursuant to the decision, an additional update to the generation component for 2023 entered into effect whereby the generation component
is NIS 0.3081 per kWh, a decrease of 1.2% compared to the tariff set on
January 1, 2023 due to extension of the excise tax on fuel order,
which calls for a decrease in the purchase tax and excise tax applicable to the coal. In March 2023, a hearing was published for the revision
of the costs recognized to the IEC and the tariffs paid by electricity consumers, following a 30% decline in coal prices compared to the
price on which the latest tariff revision was based, and increase in other costs. The tariff will be reduced by approximately 1% from
the tariff set in February 2023.
2023 Gas price
In January 2023, the gas price was equal to
the Minimum Price, and later in 2023, if no changes take place in the generation component, OPC-Rotem’s gas price is expected to
be higher than the Minimum Price; as a result, OPC’s exposure to changes in the NIS to USD exchange rate may decrease compared to
the exposure in the event that the gas price is equal to or lower than the Minimum Price.
At the end of August 2022, the EA revised
decision in respect of the time of use (“TOU”) demand categories for purposes of adjusting the TAOZ structure for integration
of solar energy and storage. An update of the TOU demand categories is expected to encourage steering consumption to the noon hours wherein
there is higher generation of renewable energy as opposed to consumption in the peak evening demand hours – this being by means
of, among other things, raising the tariff in the demand hours and applying the following main updates: (i) moving the peak hours from
the noon hours to the evening hours; (ii) expanding the number of months wherein the peak hours apply in the summer season to 4 months
in place of 2 months; (iii) increase of the gap between the peak hours and the low demand hours; and (iv) definition of a maximum of two
TOU categories for every day of the year. Change of the TOU categories and the updated tariff structure entered into effect upon update
of the tariff to the consumer in 2023. These changes increased the tariffs paid by household consumers and reduced the tariffs paid by
TAOZ consumers.
In addition, in August 2022, the EA published
a decision for hearing that is primarily aimed at making of adjustments to a number of arrangements relating to generation facilities
that are impacted by changes in the tariff structure (including an arrangement for cogeneration facilities). In 2022, the EA decided,
among other things, not to make the adjustments included as part of the hearing to the cogeneration facilities. OPC is taking actions
to adjust the mix of its sales in Israel to the structure of the updated demand-hours categories.
For more discussion, see “Item
4.B Business Overview—Our Businesses—OPC—Industry Overview—Overview of Israeli Electricity Generation Industry.”
Market
model for generation and storage facilities connected to or integrated into the distribution network
In September 2022, the EA published a decision
that governs the activities of the generation and storage facilities in the distribution network and provides the possibility for them
to sell electricity directly to the suppliers, commencing from January 2024. As part of the decision, the EA revised formula for acquisition
of electricity through a virtual supplier. This decision opens the supply sector to further competition by removing the quotas previously
set for this matter. OPC believes, that on a short run, the decision reduces the viability of the virtual supplier activities and in the
long run the decision encourages increased competition in the supply area while integrating solar generation facilities and storage facilities.
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.
Natural Gas
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 OPC-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. In addition, for OPC-Hadera, the effect on profit margins depends on the USD/NIS exchange rate fluctuations.
OPC-Hadera’s
and OPC-Rotem’s gas prices were at the minimum price until January 2022 (OPC-Rotem) and February 2022 (OPC-Hadera), and were above
the minimum price for the remainder of 2022. Therefore, such increase in the EA generation component (see discussion above) had a positive
impact on OPC’s profits in 2022. 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’s Israel Operations—OPC’s profitability depends on the EA’s electricity rates.”
According to the annual update of the production
component for 2023, the price of gas (of both OPC-Rotem and OPC-Hadera) is expected to be above the minimum price by the end of 2023 as
the generation component is unlikely to change in 2023.
Transmission, Distribution and System Services
Costs
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.
Maintenance Costs
OPC-Rotem: Under the maintenance agreement
with Mitsubishi for the OPC-Rotem power plant, maintenance work for the OPC-Rotem power plant is scheduled every 12,000 work hours (about
18 months). The next maintenance is scheduled to be performed in Spring 2024, during which the power plant and related energy generation
activity will be shut down for an estimated period of 15 days. During the maintenance period scheduled for Spring 2024, the supply of
electricity to the customers of the OPC-Rotem power plant will continue as usual, based on the covenants published by the EA and OPC-Rotem’s
PPA with the IEC. This timetables could change as a result of various factors, among others, the scope of operation of the power plant
or revision of the scheduled works with the maintenance contractor or the COVID-19 related delays. The power plant’s activities
during maintenance will be suspended, which may adversely affect OPC’s operating results.
OPC-Hadera: Under the maintenance agreement
with General Electric International Ltd., or GEI, and GE Global Parts & Products GmbH, or GEGPP these two companies 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: (i) the date on which all of the covered units (as defined in the service agreement)
have reached the end-date of their performance and (ii) 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.
Energy
margins
The increase in energy margin in the period
year of the report compared to the corresponding period last year stems mainly from an increase in the generation component tariff that
gave rise to an increase in the electricity prices and the natural gas prices. The natural gas prices were also impacted by an increase
in the U.S. Dollar to NIS exchange rate (which led to an increase of about NIS 11 million in the cost of the natural gas).
Changes
in Exchange Rates
Fluctuations in the exchange rates between
currencies in which certain of OPC’s agreements are denominated (such as the U.S. Dollar) 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. For example, the price of the natural gas paid by OPC-Hadera is denominated in dollars and,
therefore, it has full exposure to changes in the currency exchange rate. In addition, the price set forth in the Energean Agreements
is fully linked to the U.S. Dollar.
Furthermore, OPC is indirectly influenced
by changes in the U.S. Dollar to NIS exchange rate, including as a result of the following factors (i) OPC’s investment in CPV which
operates in the US, (ii) the expected investment in CPV’s existing project backlog and (iii) the IEC electricity tariff is partially
linked to increases in fuel prices (mainly coal and gas) that are denominated in U.S. Dollars. In general, CPV believes that a decline
in the exchange rate of the U.S. Dollar exchange rate may have a positive effect on OPC’s operating activities, and on the other
hand an adverse effect on the investment in OPC’s activities. From time to time and based on the business considerations, OPC makes
use of currency forwards. Nonetheless, the above does not provide full protection from such exposures, and OPC could incur costs due to
said hedging transactions.
In addition, Kenon’s functional currency
is the U.S. Dollar, so Kenon reports OPC’s NIS-denominated results of operations 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 USD/NIS exchange rate impact Kenon’s reported results for OPC.
In 2022, the U.S. Dollar was stronger versus
the NIS as compared to 2021.
Macroeconomic
Environment
In 2022, macroeconomic trends, both globally
and in Israel, led to a sharp increase in prices, due to, among other things, geopolitical events, including the war in Ukraine, which
triggered a sharp increase in energy and electricity prices, continued disruption to the supply chain and the long-term effects of the
COVID-19 pandemic. These and other factors led to a significant increase in inflation rates in the U.S. and Israel, and to an increase
in interest rates.
These trends have had a significant effect
on the macroeconomic environment in Israel and globally and on economic growth as a whole, as well as on the business environment in which
OPC operates, which is affected, among other things, by prices of energy, electricity and natural gas, tariffs in the Israeli electricity
sector, cost of construction of projects, finance costs, among others. During 2022, the Israeli Consumer Price Index increased by approximately
5.3%, and the Bank of Israel raised its interest rate a number of times in 2022, with the interest rate reaching a level of 3.25%. Subsequent
to the date of the report, the CPI in Israel rose to 4.25%. In the United States, during the 2022, the US Consumer Price Index increased
by approximately 6.5%, and the U.S. Federal Bank raised the dollar interest rate a number of times in 2022, with the interest rate reaching
a level of 4.50%-4.75%.
Availability
and cost of financing
Changes in the cost of financing and its availability
and the amount of credit available in the bank and non-bank systems affect OPC’s operations as well as the energy sector and its
profitability. An economic downturn in Israel and around the world, or a decline in the scope in the economic activity might impact the
availability and costs of credit in the market, and accordingly have an adverse effect on OPC’s liquidity. Due to the structural
reforms implemented in the Israeli capital market in recent years, the share of bank credit out of the total credit for the business sector
has decreased and a non-bank credit market developed as an alternative for project financing and investments. The Israeli capital market
is also a source for raising funds to finance and expand OPC’s business activity, by issuing debentures and raising capital, and
accordingly –OPC is affected by changes and accessibility to the capital market, by macroeconomic and other factors that affect
the liquidity of the capital market as a whole, and by the energy sector in particular.
Changes
in the CPI and changes in the interest rate
A portion of the liabilities of OPC and of
its
subsidiaries is linked to the CPI, including OPC’s Debentures (Series B), and some of the loans of OPC-Hadera are linked to
the CPI, such that changes in the CPI impact OPC’s finance expenses and its outstanding debt. Changes in the CPI may affect OPC
through other parameters as well.
As of
December 31, 2022, OPC has a transaction
in derivatives, intended to hedge some of the risks related to changes in the Consumer Price Index in connection with the Hadera loans,
that are partly linked to the Consumer Price Index, and that OPC chose to designate as accounting hedging.
In addition, Tzomet’s loans bear variable
interest such that a change in the interest rate will impact Tzomet’s finance expenses and its outstanding debt after the commercial
operation date. During the financial year and through Tzomet’s commercial operation date, the finance expenses have been capitalized
to the asset and profit and loss data as per OPC’s financial statements have not been affected.
Loans in connection with the active projects
and a project under construction in the U.S. bear interest based on LIBOR interest plus a margin, such that a change in this interest
rate will impact their finance expenses and debt balances. The SOFR interest is expected to replace the LIBOR interest in 2023, and accordingly
changes in this interest rate may affect the finance costs and debt balances. CPV Group enters into hedge transactions in respect of the
interest rates; however, those transactions do not fully mitigate the exposure.
Global
trends in commodity and raw material prices
Natural gas is the main fuel in OPC’s
active power plants in Israel and in the United States. Therefore, OPC is affected by changes in the natural gas market (including prices,
availability, competition, demand, regulation) in each of the markets in which it operates. Furthermore, in recent years the introduction
of renewable energies has been on the rise, in view of, among other things, the setting of targets by regulators, and the setting of incentives
and ESG trends that affect the demand for renewable energies. Moreover, in recent years, there has been an increasing awareness among
investors – mainly around the world but also in Israel – as well as among other stakeholders such as customers, employees,
credit providers, etc., regarding the climate and environmental impacts of various activities. As part of this trend, existing and potential
investors, and other stakeholders, take into account ESG considerations relating to environmental, social and corporate governance aspects,
as part of their investment and business policies, including in relation to the provision of credit. This trend may manifest itself in
various ways, including subjecting investments and/or provision of credit to compliance with ESG standards, investors’ implementing
a policy of refraining from advancing debt or making investments in OPC, especially in the capital market, due to its natural gas activity;
increase in finance costs; difficulty in recruiting employees, and more. In addition, the imposition of various regulatory provisions
in this area, particularly regarding the environment, may cause
the company to incur significant costs. These trends might have an adverse
effect on OPC’s business and financial position, including loss of customers, impairment of some of its assets, increase in the
price of its debt, and difficulty to raise capital.
Regulation
Electricity and energy activities are regulated
and supervised by the relevant regulators in each country. Different regulatory processes in the countries OPC operates have a significant
impact on OPC’s operations and results. For example, in Israel OPC’s results are derived significantly from the generation
component determined by the EA, and OPC’s activity in this field is affected by the provisions of the law relevant to this field,
including the resolutions of the EA. The operations of the CPV Group in the electricity generation area in the U.S. (including using renewable
energy and natural gas) are subject to the provisions of the US law, to compliance with the terms and conditions of the licenses granted
to CPV’s projects and power plants, to obtaining approvals, and to local, state and federal regulatory arrangements (including in
connection with the holding, acquisition and/or transfer of rights in
the Company and/or in the CPV Group). In addition, regulatory processes
affect the electricity grid and natural gas infrastructure (including connection to infrastructures). In recent years there has been a
trend of developing incentives for renewable energies by regulators in OPC’s operating markets, which affect the projects under
development and the competition in OPC’s business environment. These regulatory arrangements may also apply in the context of the
encouragement of competition in this area. Changes in regulation, in the regulators’ policies or their approach to the interpretation
of regulation may have different effects on the power plants owned by the Group or on the power plants that the Group intends to develop
as well as on the viability in the construction of new power plants. Furthermore, the Group’s activities in Israel and the US are
subject to and affected by legislation and regulation aimed at increasing environmental protection and mitigating damage from environmental
hazards, including reducing emissions.
Impact
of COVID-19
In March 2020, the World Health Organization
declared COVID-19 to be a worldwide pandemic. Despite taking preventative measures in order to reduce the risk of spread of the virus,
the virus continued to spread, including different variants that developed, and it caused significant business and economic uncertainty.
The restrictions on movement (travel) and carrying on of business and trade in OPC’s areas of activity were lifted. In light of
the dynamic nature of the virus (development of additional variants) and the consequences of ongoing events that are related to the virus
(such as an increase in the prices of raw materials and transport costs, outbreak of the virus and imposition of restrictions in countries
that are central to the global economy, such as China), there are still broad-sweeping impacts of the COVID-19 crisis, on the markets
and factors relating OPC’s activities. However, OPC believes most of the current impacts of the virus are long-term impacts.
In 2021 and the year of the report, due to
high global demand for raw materials and transport and dispatch, the trend of a significant increase in the costs of the raw materials
and inputs continued, along with a sharp rise in the rates of inflation in the 2022, and delays in the generation and supply chain are
visible. Accordingly, global delays have been caused in the equipment supply dates along with an increase in the prices of raw materials
and equipment used for construction and maintenance of OPC’s generation facilities and power plants. This trend impacted the construction
and/or maintenance costs of OPC’s projects in its activity markets and the timetables for their completion. In addition, the impact
of this trend is particularly visible in connection with development projects (including energy generation facilities) and with respect
to availability and prices of solar panels for solar projects in the development stage or under construction of the CPV Group. There is
no certainty with respect to the continuation of the trend and the scope of the impact thereof on the Group’s activities.
Activities in the U.S.
Electricity
and natural gas prices
The natural gas price is significant in the
determination of the price of the electricity in most of the regions in which the power plants of the CPV Group operate that are powered
by natural gas.
In the estimation of the CPV Group, in general,
in the existing production mix, over time, to the extent the natural‑gas prices are higher, the marginal energy prices will also
be higher, and will have a positive impact on the energy margins of the CPV Group due to the high efficiency of the power plants it owns
(the impact could be different among the projects taking into account their characteristics and the area (region) in which they are located).
This impact could be offset, in whole or in part, by programs hedging electricity margins in the natural‑gas powered power plants
of the CPV Group, which are intended to reduce volatility in the CPV Group’s electricity margins due to changes in the commodity
prices in the energy market.
Natural
gas prices
Natural gas prices are impacted by a large
number of variables, including demand in the industrial, residential and electricity sectors, production and supply of natural gas, natural‑gas
production costs, changes in the pipeline infrastructure, international trade and the financial profile and the hedging profile of the
natural‑gas customers and producers. The price for import of liquid natural gas impacts the natural gas and electricity prices,
in the winter months in New England and New York, where high prices of liquid natural gas had a positive impact on the profits of the
Fairview and Valley power plants during the winter months.
Set forth below are the average natural gas
in each of the main markets in which the power plants of the CPV Group operate (the prices are denominated in dollars per MMBtu)*:
| |
|
Year Ended |
|
|
Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
TETCO M3 (Shore, Valley) |
|
|
6.80 |
|
|
|
3.40 |
|
|
|
100 |
% |
|
Transco Zone 5 North (Maryland) |
|
|
8.55 |
|
|
|
3.91 |
|
|
|
119 |
% |
|
TETCO M2 (Fairview) |
|
|
5.53 |
|
|
|
3.08 |
|
|
|
80 |
% |
|
Dominion South (Valley) |
|
|
5.51 |
|
|
|
3.06 |
|
|
|
80 |
% |
|
Algonquin (Towantic) |
|
|
9.15 |
|
|
|
4.51 |
|
|
|
103 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Source: The Day‑Ahead prices at gas Midpoints as reported in Platt’s Gas Daily. The actual gas prices of the power plants
of the CPV Group could be significantly different. |
The natural gas prices in CPV’s activity
markets increased significantly in 2022 and in the fourth quarter, compared to the corresponding periods last year. In the estimation
of the CPV Group, the said increase stems from, among other things, an increase in demand for electricity in the U.S., a strengthening
of the global demand for natural gas, inventory levels of natural gas that are lower than in the past, and a limited increase in production
of natural gas.
Since the beginning of 2023, there has been
a significant decline in the natural gas prices, mainly due to warm winter in the regions where CPV operates along with high seasonal
natural gas levels.
Electricity
prices
The following table summarizes the average
electricity prices in each of the main markets in which power plants of the CPV Group are active (the prices are denominated in dollars
per MWh):
| |
|
Year Ended |
|
|
Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
PJM West (Shore and Maryland) |
|
|
73.09 |
|
|
|
38.92 |
|
|
|
88 |
% |
|
PJM AD Hub (Fairview) |
|
|
69.42 |
|
|
|
38.35 |
|
|
|
81 |
% |
|
NYISO Zone G (Valley) |
|
|
82.21 |
|
|
|
40.74 |
|
|
|
102 |
% |
|
ISO‑NE Mass Hub (Towantic) |
|
|
85.56 |
|
|
|
45.92 |
|
|
|
86 |
% |
Based on Day‑Ahead prices as published by the relevant
ISO. The actual gas prices of the power plants of the CPV Group could be significantly different.
The increase in the electricity prices in
2022 and in the fourth quarter compared to the corresponding periods last year, stems mainly from the increase in the natural gas prices
as detailed above, and this situation became more severe due to the premium on the natural gas price in the northwest region in the market
areas referred to.
Since the beginning of 2023, there has been
a significant decline in the natural gas prices – present and future, as detailed above.
Capacity
Payments
The PJM market
In the PJM market, capacity payments vary
between sub-zones in the market, as a function of local supply and demand and transmission capabilities. Below are the capacity rates
in the sub-zones relevant to the projects of the CPV Group and in the general market (prices are denominated in USD for megawatt per day).
|
Sub-zone |
CPV power plants2
|
2024/2025 |
2023/20243
|
2022/2023 |
2021/2022 |
|
PJM – RTO |
-- |
28.92 |
34.13 |
50 |
140 |
|
PJM COMED |
Three Rivers |
28.92 |
34.13 |
- |
- |
|
PJM MAAC |
Fairview, Maryland, Maple Hill |
49.49 |
49.49 |
95.79 |
140 |
|
PJM EMAAC |
Shore |
54.95 |
49.49 |
97.86 |
165.73 |
Source: PJM.
The NYISO market
Similar to the PJM market, in the NYISO market,
capacity payments are made as part of a centralized capacity purchase mechanism. The NYISO market has a number of sub-markets, which may
have different capacity requirements as a function of local supply and demand and transmission capacities. NYISO holds seasonal tenders
every spring for the coming summer (May to October), and in the fall for the coming winter (November to April). In addition, monthly supplementary
tenders are held for the unsold capacity in the seasonal tenders. The power plants are permitted to guarantee the capacity payments in
the seasonal and monthly tenders or through bilateral sales. The Valley power plant is located in Zone G (Lower Hudson Valley).
2
The Three Rivers project, which is under construction, will be eligible for capacity payments as from its commercial operation date, subject
to the completion of the construction.
3
As stipulated in the capacity tenders which took place in June 2022.
Below are the capacity prices set in the seasonal
tenders held on the NYISO market. It should be noted that the actual capacity prices for Valley are affected by seasonal and monthly tenders
and SPOT prices, with variable monthly capacity prices and bilateral agreements with energy suppliers on the market (prices are denominated
in USD for Kilowatt per month).
|
Sub-zone |
CPV power plants |
Winter 2022/2023 |
Summer 2022 |
Winter 2021/2022 |
|
NYISO Rest of the Market |
- |
1.18 |
3.40 |
1.00 |
|
Lower Hudson Valley |
Valley |
1.31 |
4.65 |
1.01 |
Source: NYISO.
The ISO-NE market
Similar to the PJM market, in the ISO-NE market
capacity payments are made in the framework of a central mechanism for acquisition of capacity. The ISO-NE market has a number of sub-markets,
which may have different capacity requirements as a function of local supply and demand and transmission capacities. Forward capacity
tenders are held three years ahead for a given capacity year. In addition, monthly supplementary tenders are held for the unsold capacity
in the forward tenders. When Towantic entered the capacity market, the project ensured a fixed capacity payment for seven years given
to new players. The capacity payment as stated above shall apply through May 2025. In respect of June 2025 to May 2026 and June 2026 to
May 2027, Towantic took part in the annual capacity tenders, that were closed at USD 2.59 per kW/month in the area in which the project
is located.
|
Sub-area |
CPV power plants |
2026/2027 |
2025/2026 |
|
ISO-NE Rest of the market |
Towantic |
2.59 |
2.59 |
The actual capacity payments for the Towantic
power plant are impacted by forward tenders, supplemental annual tenders, monthly tenders with variable capacity prices in every month
and bilateral agreements with the energy suppliers in the market.
Hedging
In general, with the current generation mix,
the higher the gas prices – the higher the marginal energy prices, having a positive effect on the energy margin of the CPV Group,
in view of the efficiency of the power plants it owns (the effect may vary between different projects due to their characteristics and
location). This effect may be partially or fully offset by hedging plans in respect of some of the electricity and capacity margins, with
the aim of moderating the volatility in the commodities market in general and the energy and natural gas prices in particular, and with
the aim of locking margins that it believes to be high both in historical terms and in view of the analysis of the current (SPOT) and
future market. The purpose of these hedging plans is to fix the energy and capacity margin by entering into hedging agreements or future
sale of electricity, RECs and gas (that is to say, the electricity margin), and the capacity, in accordance with the relevant characteristics
of each power plant for which hedging is carried out; the agreements are normally for short periods, mostly up to 12 months for natural
gas-fired projects and are for longer periods for renewable energy projects. During the reporting period, hedging agreements and future
sale agreements are in place in Keenan, Maple Hill, Stagecoach, Shore, Maryland, Fairview and Towantic, and as from the third quarter
of 2022 – also Valley. In addition to the current hedging plans as stated above, CPV Group has Revenue Put Option (RPO) agreements,
that were signed by some of the CPV Group’s power plants in order to ensure minimum cash flow available for debt service; those
agreements are not expected to be in effect or renewed beyond their original expiry dates. The CPV Group holds energy hedging agreements
ensure the energy margins as well as the capacity margin for the nominal hedged capacity of the facility (approximate, in percentage).
The
Inflation Reduction Act
In August 2022, the Inflation Reduction Act
of 2022 was signed by the President of the U.S. and it became law which, among other things, grants significant tax credits for renewable
energies and technologies for carbon capture, and one of the targets of the IRA is to lead to an increase of the generation of renewable
energies and the regulatory stability in the area. The following are key arrangements set forth in the IRA that may be relevant for CPV
Group’s activities.
Renewable energies
The IRA includes, a number of benefits for
renewable energy projects. The IRA extends the ITC and the PTC in renewable energy projects the construction of which is started prior
to
January 1, 2025. The base level for the ITC is 6% and the base level for the PTC is 0.3 cents per kilowatt (adjusted for inflation).
Projects that meet customary earnings and registration requirements should be entitled to ITC of up to 30% or PTC of up to 1.5 cents per
kilowatt (adjusted for inflation). It is possible to earn additional bonus credits, which increase the PTC by 10% or 10% points for the
ITC, to the extent the relevant project meets the local steel, iron and product manufacturing requirements. It is possible to earn additional
bonus credits, which increase the PTC by 10% or 10% points for the ITC, to the extent the relevant project is located in special designated
energy communities, such as: (i) Brownfield sites; (ii) locations with unemployment in excess of the natural average and contributions
to direct employment in the oil, gas or coal industry or local tax income above the levels determined; and (iii) a population region that
is proximate to regions wherein a coal mine or coal powered power plant were closed after
December 31, 2009. The said tax credits may
be transferred to unrelated entities.
CPV Group is examining the impact of the IRA
on Maple Hill. The CPV Group believes the project meets the conditions for ITC at the rate of an additional 10% (and in total 40%). In
addition, the CPV Group is analyzing the impacts of the IRA on Stagecoach and Rogue’s Wind and the economic feasibility that will
derive from its choice of the ITC or the PTC benefit for the project, as well as the project’s entitlement to additional bonus tax
benefits.
Projects for generation of electricity that
start their activities after
December 31, 2024, that emit zero or less greenhouse gases, are entitled to ITC or PTC neutral technology
under the IRA, in accordance with the same credit levels described above for the existing ITC or PTC. These tax credits to gradual decline
commencing from the later of 2032 or when emissions of greenhouse gases in the U.S. from generation of electricity will be equal to or
less than 25% of the emission levels from generation of electricity for 2022. Project entitled to these tax credits will also be entitled
to five-year accelerated depreciation for the project’s assets.
Natural gas with reduced
emissions
In addition, IRA includes a tax credit for
electricity generation facilities having carbon capture capability at the rate of about 75% of the emission. The rate of the credit
will be $60 per ton of carbon for carbon removed by injection into active oil wells (Enhanced Oil Recovery) and $85 per ton of carbon
for carbon interred in a permanent manner. This benefit is granted as a direct payment during the first five years and as a tax credit
during an additional seven years.
In the estimation of the CPV Group, the
IRA is expected to have a favorable impact on the renewable energy initiation, development and construction projects, including Maple
Hill and Stagecoach and, among other things, an increase in the value of the tax credits that is expected to be received compared to the
situation prior to passage of the law. It is noted that even though some of the regulatory arrangements have not yet been finalized, there
is a possible positive impact on the entitlement of some of the Group’s renewable energy projects to a higher tax credit due to
their location (for example, on areas that were former coal mines), including the Maple Hill project. The CPV Group estimates that
it will choose tax benefits of the ITC type for the Maple Hill project and for an additional project that is presently in the advanced
development stages and it is examining the economic feasibility of ITC or PTC benefits for Stagecoach and Rogue’s projects, taking
into the arrangements provided. Also, the possibility of selling the tax credits is expected to increase the Group’s ability to
realize part of the value of the tax credits of its renewable projects and to improve the investment conditions.
Carbon capture projects
The IRA broadens the available PTC to capture
and/or use of carbon dioxide. For electricity generation facilities that install carbon capture technology with the capability of capturing
75% or more of the generation base of the carbon dioxide, the said generation tax credit for the first 12 years after commencement of
activities if the relevant electricity generation facility captures at least 18,750 metric tons of carbon dioxide per year. The amount
of the base credit is $17 per metric ton of carbon dioxide captured and separated and $12 per metric ton of carbon dioxide invested in
intensified restoration of fuel oil (EOR) or is used in another generation process. Similar to the ITC and PTC for renewable energies,
PTC for carbon capture can be increased if the project meets the usual earnings and registration processes. The ceiling for the credit
for separated carbon dioxide is $85 per metric ton and the ceiling for the EOR credit and other beneficial re uses (recycling) is $60
per metric ton. In addition, the tax credit permits direct payment up to the first five years on carbon capture equipment that is placed
into service after
December 31, 2022.
With reference to the projects of the CPV
Group that are in the development stage, and that integrate technologies for carbon capture, the IRA is expected to have a positive impact
in all that relating to the technological benefits for carbon capture provided in the IRA. The full impacts of the IRA have not yet been
finally clarified, and they are expected to be clarified upon formulation of the detailed arrangements (regulations).
ZIM
Kenon had a 21% equity interest in ZIM as
of
December 31, 2022 (following completion of ZIM’s IPO in February 2021 and share sales of approximately 1.2 million ZIM shares
between September and November 2021). ZIM’s results of operations for the years ended
December 31, 2022 and
2021 are reflected in
Kenon’s share in losses/(profit) of associated companies, net of tax, pursuant to the equity method of accounting.
Market
Volatility. The container shipping industry continues to be characterized
in recent years by volatility in freight rates, charter rates and bunker prices, accompanied by significant uncertainties in the global
trade (including the implications of the ongoing military conflict between Russia and Ukraine, the rise of inflation in certain countries,
or the continuing trade restrictions between the US and China). Market conditions impact during 2022 was positive, resulting in the ZIM’s
improved results and strengthened capital structure, mainly driven by increased freight rates, although decreasing following the peak
levels in the first quarter, partially offset by the impact of increased charter hire and bunker costs.
Volume
of cargo carried. The volume of cargo that ZIM carries affects its
income and profitability from voyages and related services and varies significantly between voyages that depart from, or return to, a
port of origin. The vast majority of the containers ZIM carries are either 20 or 40 foot containers. ZIM measures its performance in terms
of the volume of cargo it carries in a certain period in 20 foot equivalent units carried, or TEUs carried. ZIM’s management uses
TEUs carried as one of the key parameters to evaluate ZIM’s performance, used in real-time and take actions, to the extent possible,
to improve performance.
Additionally, ZIM’s management monitors
TEUs carried from a longer-term perspective, to deploy the right capacity to meet expected market demand. Although the volume of cargo
that ZIM carries is principally a function of demand for container shipping services in each of its trade routes, it is also affected
by factors such as:
|
• |
local shipping agencies’ effectiveness in capturing such demand; |
|
• |
level of customer service, which affects ZIM’s ability to retain and attract customers; |
|
• |
ability to effectively deploy capacity to meet such demand; |
|
• |
operating efficiency; and |
|
• |
ability to establish and operate existing and new services in markets where there is growing demand.
|
The volume of cargo that ZIM carries is also
impacted by its participation in strategic alliances (in which we currently do not participate) and other cooperation agreements. In periods
of increased demand and increased volume of cargo, ZIM adjusts capacity by chartering-in additional vessels and containers and/or purchasing
additional slots from partners, to the extent feasible. During these periods, increased competition for additional vessels and containers
may increase its costs. ZIM may deploy its capacity through additional vessels and containers in existing services, through new services
that ZIM operates independently or through the exchange of capacity with vessels operated by other shipping companies or other cooperative
agreements. In periods of decreased volumes of cargo, ZIM may adjust capacity to demand by electing to reduce its fleet size in order
to reduce operating expenses mainly by redelivering chartered-in vessels and not renewing their charters, or by cancelling specific voyages
(which are referred to as “blank sailings”). ZIM may also elect to close existing services within, or exit entirely from,
less attractive trades. As a substantial portion of its fleet is chartered-in, ZIM retains a relatively high level of flexibility even
though it is less so when it concerns vessels that are long-term chartered.
Freight
rates. Freight rates are largely established by the freight market
and ZIM has a limited influence over these rates. ZIM uses average freight rate per TEU as one of the key parameters of its performance.
Average freight rate per TEU is calculated as revenues from containerized cargo during a certain period, divided by total TEUs carried
during that period. Container shipping companies have generally experienced volatility in freight rates. Freight rates vary widely as
a result of, among other factors:
|
• |
cyclical demand for container shipping services relative to the supply of vessel and container capacity;
|
|
• |
competition in specific trades; |
|
• |
the particular dominant leg on which the cargo is transported; |
|
• |
average vessel size in specific trades; |
|
• |
the origin and destination points selected by the shipper; and |
|
• |
the type of cargo and container type. |
As a result of some of these factors, including
cyclical fluctuations in demand and supply, container shipping companies have experienced volatility in freight rates. For example, the
comprehensive Shanghai (Export) Containerized Freight Index (SCFI) increased from 818 points on
April 23, 2020, with the global outbreak
of COVID-19, to 5,047 as of
December 31, 2021, but since then decreased to 1,108 as of
December 30, 2022. Freight rates have significantly
declined in 2022 as a result of reduced demand as well as the easing of both COVID-19 restrictions and congestion in ports. Furthermore,
rates within the charter market, through which ZIM sources most of its capacity, may also fluctuate significantly based upon changes in
supply and demand for shipping services. The severe shortage of vessels available for hire during 2021 and the first half of 2022 has
resulted in increased charter rates and longer charter periods dictated by owners. Since September 2022, charter hire rates have been
normalizing, with vessel availability for hire still very low. In addition, according to Alphaliner, global container ship capacity is
expected to increase by 8.2% in 2023, with a vessel order book of 7.5 million TEU, the highest since 2010, while demand for shipping services
is projected to increase only by 1.4%. Therefore, the increase in ship capacity is expected to be more than the increase in demand for
container shipping.
There are cargo segments which require more
expertise; for example, ZIM charges a premium over the base freight rate for handling specialized cargo, such as refrigerated, liquid,
over-dimensional, or hazardous cargo, which require more complex handling and more costly equipment and are generally subject to greater
risk of damage. ZIM believes that its commercial excellence and customer centric approach across its network of shipping agencies enable
us to recognize and attract customers who seek to transport such specialized types of cargo, which are less commoditized services and
more profitable. ZIM has stated that it intends to focus on growing the specialized cargo transportation portion of its business: the
portion of dangerous and hazardous cargo out of its total TEU carried grew by approximately 3% during 2022 compared to 2021, and the portion
of reefer cargo out of its total TEU carried grew by approximately 8% during 2022 compared to 2021. ZIM also charges a premium over the
base freight rate for global land transportation services ZIM provides. Further, from time to time ZIM imposes surcharges over the base
freight rate, in part to minimize its exposure to certain market-related risks, such as fuel price adjustments, exchange rate fluctuations,
terminal handling charges and extraordinary events, although usually these surcharges are not sufficient to recover all of its costs.
Amounts received related to these adjustment surcharges are allocated to freight revenues.
Cargo
handling expenses. Cargo handling expenses represent the most significant
portion of ZIM’s operating expenses. Cargo handling expenses primarily include variable expenses relating to a single container,
such as stevedoring and other terminal expenses, feeder services, storage costs, balancing expenses arising from repositioning containers
with unutilized capacity on the non-dominant leg, and expenses arising from inland transport of cargo. ZIM manages the container repositioning
costs that arise from the imbalance between the volume of cargo carried in each direction using various methods, such as triangulating
its land transportation activities and services. If ZIM is unable to successfully match requirements for container capacity with available
capacity in nearby locations, it may incur balancing costs to reposition its containers in other areas where there is demand for capacity.
Cargo handling accounted for 41.6%, 48.1% and 50.5% of ZIM’s operating expenses and cost of services for the years ended December
31, 2022, 2021 and 2020.
Bunker
expenses. Fuel expenses, in particular bunker fuel expenses, represent
a significant portion of ZIM’s operating expenses. As a result, changes in the price of bunker or in ZIM’s bunker consumption
patterns can have a significant effect on ZIM’s results of operations. Bunker price has historically been volatile, can fluctuate
significantly and is subject to many economic and political factors that are beyond ZIM’s control. Bunker prices have been relatively
low during 2020, have increased during 2021, and have increased further during 2022, partially due to the outbreak of the Russian-Ukraine
conflict and inflation. ZIM has entered into a sale and purchase agreement with Shell to supply LNG for its 15,000 TEU LNG dual fuel vessels
expected to be delivered during 2023-2024, and ZIM relies on other LNG suppliers for the purchase and supply of LNG for the remaining
of its LNG dual fuel fleet to be delivered. ZIM’s bunker fuel consumption is affected by various factors, including the number of
vessels being deployed, vessel size, pro forma speed, vessel efficiency, weight of the cargo being transported and sea state. ZIM’s
fuel expenses, which consist primarily of bunker expenses, accounted for 30.1%, 18.9% and 12.8% of its operating expenses and cost of
services for the years ended December 31, 2022, 2021 and 2020, respectively.
Vessel
charter portfolio. Most of ZIM’s capacity is chartered in. As of December
31, 2022, ZIM chartered-in 141 vessels (including 136 vessels accounted as right-of-use assets under the lease accounting guidance of
IFRS 16 and four vessels accounted under sale and leaseback refinancing agreements), which accounted for 94.2% of ZIM’s TEU capacity
and 94.0% of the vessels in ZIM’s fleet. Of such vessels, all are under a “time charter,” which consists of chartering-in
the vessel capacity for a given period of time against a daily charter fee, and 137 of which are with the owner handling the crewing and
technical operation of the vessel, including 6 vessels chartered-in from related parties. Four of ZIM’s vessels are chartered-in
under a “bareboat charter,” which consists of chartering a vessel for a given period of time against a charter fee, with ZIM
handling the operation of the vessel. Under these arrangements, both parties are committed for the charter period; however, vessels temporarily
unavailable for service due to technical issues will qualify for relief from charges during such period (off hire). Further to the implementation
of IFRS 16 (‘Leases’) on January 1, 2019, vessel charters with an expected term exceeding one year, are accounted through
depreciation and interest expenses. Accordingly, the composition of our charter fleet in respect of expected term, affects the classification
of our costs related to vessel charters. ZIM also purchases “slot charters,” which involve the purchase of slots on board
of another company’s vessel. Generally, these rates are based primarily on demand for capacity as well as the available supply of
container ship capacity. As a result of macroeconomic conditions affecting trade flow between ports served by container shipping companies
and economic conditions in the industries which use container shipping services, bareboat, time and slot charter rates can, and do, fluctuate
significantly and are generally affected by similar factors that influence freight rates. ZIM’s results of operations may be affected
by the composition of its general chartered-in vessels portfolio. Slots purchase and charter hire of vessels (other than those recognized
as right-of-use-assets) accounted for 8.4%, 13.6% and 17.6%, of its operating expenses and cost of services for the years ended December
31, 2022, 2021 and 2020, respectively.
Adjusted EBIT and Adjusted
EBITDA
Adjusted EBIT is a non-IFRS financial measure
that we define as net income (loss) adjusted to exclude financial expenses (income), net and income taxes, in order to reach our results
from operating activities, or EBIT, and further adjusted to exclude impairment of assets, non-cash charter hire expenses, capital gains
(losses) beyond the ordinary course of business and expenses related to legal contingencies. Adjusted EBITDA is a non-IFRS financial measure
that we define as net income (loss) adjusted to exclude financial expenses (income), net, income taxes, depreciation and amortization
in order to reach EBITDA, and further adjusted to exclude impairments of assets, non-cash charter hire expenses, capital gains (losses)
beyond the ordinary course of business and expenses related to legal contingencies.
We present Adjusted EBIT and Adjusted EBITDA
in this annual report because each is a key measure used by our management and board of directors to evaluate our operating performance.
Accordingly, we believe that Adjusted EBIT and Adjusted EBITDA provide useful information to investors and others in understanding and
evaluating our operating results and comparing our operating results between periods on a consistent basis, in the same manner as our
management and board of directors.
Adoption of New Accounting
Standards in 2022
For information on the impact of the adoption
of new accounting standards, see Note 3 to our financial statements included in this annual report.
Impairment
Tests of ZIM
For the purposes of Kenon’s impairment
assessment of its investment, ZIM is considered one CGU, which consists of all of ZIM’s operating assets. The recoverable amount
is based on the higher of the value-in-use and the fair value less cost of disposal (“FVLCOD”).
Kenon did not identify any objective evidence
that its net investment in ZIM was impaired as at
December 31, 2021 and therefore, in accordance with IAS 28, no assessment of the recoverable
amount of ZIM was performed.
Kenon identified indicators of impairment
in accordance with IAS 28 as a result of a significant decrease in ZIM’s market capitalization towards the end of 2022. Therefore,
the carrying value of Kenon’s investment in ZIM was tested for impairment in accordance with IAS 36.
Kenon assessed the fair value of ZIM to be
its market value as at
December 31, 2022 and also assessed that, based solely on publicly available information within the current volatile
shipping industry, no reasonable VIU calculation could be performed. As a result, Kenon concluded that the recoverable amount of its investment
in ZIM is the market value. ZIM is accounted for as an individual share making up the investment and that no premium is added to the fair
value of ZIM. Kenon measures the recoverable amount based on FVLCOD, measured at Level 1 fair value measurement under IFRS 13.
Given that market value is below carrying
value, Kenon recognized an impairment of $929 million.
Sale
of ZIM shares
In March 2022, Kenon sold approximately 6
million ZIM shares at an average price of $77 per share for total consideration of approximately $463 million. As a result of the sale,
Kenon recognized a gain on sale of approximately $205 million in its consolidated financial statements.
Recent Developments
Kenon
Dividend
In March 2023, Kenon’s board of directors approved a cash dividend of approximately
$150 million ($2.79 per share), payable to Kenon’s shareholders of record as of the close of trading on
April 10, 2023, for payment
on or about
April 19, 2023.
Share repurchase plan
In March 2023, Kenon’s board of directors authorized a share repurchase plan of
up to $50 million. Repurchases may be made from time to time through open market purchases on the TASE or the NYSE or by way of off-market
purchases in accordance with an equal access scheme, or by other means that comply with applicable laws. Repurchases may be made using
trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934 and the similar safe harbor under Israeli
law and Israel Securities Authority guidelines, in accordance with applicable securities laws and other restrictions.
To implement the share repurchase plan, Kenon has entered into an initial repurchase
mandate for repurchases of up to $12 million of shares through open market purchases on the TASE only, to be implemented by a broker who
will have discretion as to repurchases pursuant to irrevocable instructions which include parameters as to price and volume set by Kenon,
within the safe harbor from insider trading liability pursuant to the
“Israel Securities Authority Opinion 199-8.” Such initial
mandate will expire on
May 25, 2023, shortly before the expected date of Kenon’s forthcoming AGM (the
“2023 AGM”).
Kenon will seek approval at the 2023 AGM to renew its authority to enter into further mandates and, subject to such shareholder approval,
expects to enter into such further mandates to make purchases to implement the share repurchase plan for up to $50 million. Share repurchases
under the share repurchase plan will be funded through available cash. The considerations for implementing the share repurchase plan include
enhancing shareholder value while taking into account Kenon’s available funds.
Pursuant to the terms of the share purchase authorization which was renewed at the AGM
held on
May 19, 2022 (the
“2022 AGM”), the board of directors is authorized to repurchase up to 5% of issued and outstanding
shares as at the date of that AGM (excluding any shares which were held as treasury shares, or which were held by a subsidiary of the
Company under Sections 21(4B) or 21(6C) of the Companies Act 1967 of Singapore (the
“Companies Act”), as at that date). Kenon
intends to seek shareholder approval at the 2023 AGM to increase this limit (from the current 5%) to up to 10% of its issued and outstanding
shares as of that date (excluding any shares which are held as treasury shares, or which are held by a subsidiary of
the Company under
Sections 21(4B) or 21(6C) of the Companies Act, as at that date).
The implementation of the share repurchase plan is subject to the authority of the share
purchase authorization which was renewed by shareholders at the 2022 AGM (and which will, unless varied or revoked by our shareholders
at a general meeting, continue in force until the earlier of the date of the 2023 AGM or the date by which the 2023 AGM is required by
law to be held) or, as the case may be, any subsisting share purchase authorization in force at the time of the share repurchases (including
the share repurchase authorization which will be proposed for shareholder approval at the 2023 AGM). The share repurchase plan may be
suspended for periods, modified or discontinued at any time and may not be completed up to the full amount of the share repurchase plan.
Any ordinary shares acquired or purchased will be deemed cancelled immediately upon purchase or acquisition, unless held as treasury shares.
AGM resolution regarding share dividend
Kenon intends to seek shareholder approval at the 2023 AGM to alter its constitution
to facilitate payment of its cash dividends in the form of new shares, or a combination of cash and new shares, at the election of shareholders,
in accordance with such scheme as may be adopted by Kenon from time to time.
OPC
Acquisition of four operating wind-powered
electricity power plants in Maine, U.S.
On
January 4, 2023, OPC’s subsidiary,
CPV Group LP, through a 100% owned subsidiary, entered into an agreement to acquire four operating wind-powered electricity power plants
in Maine, United States, with an aggregate capacity of approximately 81.5 MW.
The plants operate in the ISO-NE market in
the United States, and started commercial operations between 2008 and 2017. These plants are expected to sell their entire electricity
output and green energy certificates (RECs), under existing PPAs over the next 13 to 19 years.
The purchase price for the acquisition is
$172 million, subject to adjustments and the terms and conditions set forth in the agreement. CPV intends to finance approximately 50%
of the purchase price using external financing, including senior debt including collaterals of and equity rights in the projects. The
acquisition is subject to conditions, including the receipt of regulatory approvals.
ZIM
On
March 13, 2023, ZIM’s board of
directors declared a cash dividend of approximately $769 million, or $6.40 per ordinary share, resulting in a cumulative annual dividend
amount of approximately 44% of 2022 net income, to be paid on
April 3, 2023, to holders of the ordinary shares as of
March 24, 2023. Since
the foregoing declared dividend amount per ordinary share constitutes more than 25% of the ZIM’s ordinary share price on the declaration
date (
March 13, 2023), per the instructions of the NYSE, the ex-dividend date with respect to this dividend distribution will be
April
4, 2023. Kenon expects to receive $159 million ($151 million net of tax).
Our consolidated financial statements for
the years ended
December 31, 2022 and
2021 are comprised of OPC, and the results of our associated company.
The following tables set forth summary information
regarding our operating segment results for the years ended
December 31, 2022 and
2021.
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
|
(in millions of USD, unless otherwise indicated) |
|
|
Revenue
|
|
|
517 |
|
|
|
57 |
|
|
|
— |
|
|
|
— |
|
|
|
574 |
|
|
Depreciation and amortization
|
|
|
(47 |
) |
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
|
|
(63 |
) |
|
Financing income
|
|
|
10 |
|
|
|
25 |
|
|
|
— |
|
|
|
10 |
|
|
|
45 |
|
|
Financing expenses |
|
|
(42 |
) |
|
|
(7 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
(50 |
) |
|
Share in profit of associated companies
|
|
|
— |
|
|
|
85 |
|
|
|
1,033 |
|
|
|
— |
|
|
|
1,118 |
|
|
Profit / (Loss) before taxes
|
|
|
24 |
|
|
|
61 |
|
|
|
305 |
|
|
|
(2 |
) |
|
|
388 |
|
|
Income tax (expense)/benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit / (Loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets(2)
|
|
|
1,504 |
|
|
|
553 |
|
|
|
— |
|
|
|
636 |
|
|
|
2,693 |
|
|
Investments in associated companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________________________________
| (1) |
Includes the results of Kenon’s, Qoros’ and IC Power’s holding company (including assets and liabilities) and general
and administrative expenses. |
| (2) |
Excludes investments in associates. |
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(in millions of USD, unless otherwise indicated) |
|
|
Revenue
|
|
|
437 |
|
|
|
51 |
|
|
|
— |
|
|
|
— |
|
|
|
488 |
|
|
Depreciation and amortization
|
|
|
(44 |
) |
|
|
(13 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
(58 |
) |
|
Financing income
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
Financing expenses
|
|
|
(119 |
) |
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
(144 |
) |
|
Losses related to Qoros
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(251 |
) |
|
|
(251 |
) |
|
Share in (losses)/profit of associated companies
|
|
|
— |
|
|
|
(11 |
) |
|
|
1,261 |
|
|
|
— |
|
|
|
1,250 |
|
|
(Loss) / Profit before taxes
|
|
|
(57 |
) |
|
|
(61 |
) |
|
|
1,261 |
|
|
|
(263 |
) |
|
|
880 |
|
|
Income tax benefit/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / Profit from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets(2)
|
|
|
1,512 |
|
|
|
431 |
|
|
|
— |
|
|
|
227 |
|
|
|
2,170 |
|
|
Investments in associated companies
|
|
|
— |
|
|
|
545 |
|
|
|
1,354 |
|
|
|
— |
|
|
|
1,899 |
|
|
Segment liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________________________________
| (1) |
Includes the results of Kenon’s, Qoros’ and IC Power’s holding company (including assets and liabilities) and general
and administrative expenses. |
| (2) |
Excludes investments in associates. |
Currency fluctuations in the USD/NIS exchange
rate on the translation of OPC’s results from NIS into USD did not have a significant impact on the results of 2022 versus 2021
discussed below.
Revenues
The table below sets forth OPC’s revenue
for 2022 and 2021, broken down by country.
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|
|
|
| |
|
|
|
|
|
|
| |
|
|
|
|
Israel
|
|
|
517 |
|
|
|
437 |
|
|
U.S.
|
|
|
57 |
|
|
|
488 |
|
|
Total
|
|
|
574 |
|
|
|
488 |
|
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 tariffs generally affect the prices paid under PPAs by customers of OPC-Rotem and OPC-Hadera. The
weighted-average generation component tariff effective
February 1, 2022, as published by the EA, was NIS 0.2869 per kWh, which was approximately
13.6% higher than the weighted-average generation component tariff in 2021 of NIS 0.2526 per kWh.
In April 2022, due to a reduction in excise
tax on use of coal and to combat the high cost of living, the EA published a new weighted average generation component tariff effective
May 1, 2022 of NIS 0.2764 per kWh, which is approximately 3.7% lower than the rate effected on
February 1, 2022. Subsequent to that, in
August 2022, as a result of rising energy cost exacerbated by the conflict in Ukraine, the EA published a new weighted average generation
component tariff effective
August 1, 2022 of NIS 0.314 per kWh, which is approximately increase of 13.6% as compared to the rate effected
on
May 1, 2022.
|
• |
Revenue
from sale of energy to private customers in Israel – Excluding the
impact of exchange rate fluctuations, such revenues increased by $73 million primarily as a result of (i) an $49 million increase in the
generation component tariff and (ii) $24 million as a result of an increase in customer consumption. |
|
• |
Other
revenue in Israel – Revenue from the commencement of operations of
Gnrgy amounted to $12 million in 2022 and reflects the commencement of operations of Gnrgy, which is engaged in the business of charging
services for electric vehicles. |
Cost of Sales and Services
(excluding Depreciation and Amortization)
Our cost of sales (representing OPC’s
cost of sales) increased by $80 million to $417 million for the year ended
December 31, 2022, as compared to $337 million for the year
ended
December 31, 2021.
The following table sets forth OPC’s
cost of sales for 2022 and 2021.
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|
|
|
| |
|
|
|
|
|
|
| |
|
|
|
|
Israel
|
|
|
385 |
|
|
|
312 |
|
|
U.S.
|
|
|
32 |
|
|
|
25 |
|
|
Total
|
|
|
417 |
|
|
|
337 |
|
|
• |
Natural
gas and diesel oil consumption in Israel – Excluding the impact of
exchange rate fluctuations, such costs increased by $11 million primarily as a result of (i) an $18 million increase due to the increase
in gas prices as a result of an increase in the generation component tariff and movements in the USD/NIS exchange rate and (ii) compensation
paid in 2021 (reducing costs in that year) to OPC-Rotem and OPC-Hadera of $5 million due to the delay in the commercial operation of the
Karish reservoir. These increases were partially offset by a decrease of $11 million due to lower consumption of natural gas as a result
of maintenance at the OPC-Rotem power plant. |
|
• |
Expenses
for acquisition of energy in Israel— Excluding the impact of exchange
rate fluctuations, such cost of sales increased by $57 million in 2022, as compared to 2021 primarily as a result of (i) a $37 million
increase reflecting the commencement of virtual supply in 2021 and (ii) a $20 million increase due to maintenance at the OPC-Rotem power
plant. |
|
• |
Other
expenses — Cost from the commencement of operations of Gnrgy amounted
to $9 million in 2022. |
Depreciation and Amortization
Our depreciation and amortization expenses
(representing OPC’s depreciation and amortization expenses) increased by $5 million to $63 million for the year ended
December 31,
2022 from $53 million for the year ended
December 31, 2021.
Selling, General and
Administrative Expenses
Our selling, general and administrative expenses
consist of payroll and related expenses, depreciation and amortization, and other expenses. Our selling, general and administrative expenses
(excluding depreciation and amortization) increased to $100 million for the year ended
December 31, 2022, as compared to $76 million for
the year ended
December 31, 2021. This increase was primarily driven by an increase in OPC’s selling, general and administrative
expenses.
OPC’s selling, general and administrative
expenses increased by $22 million, or 34%, to $86 million for the year ended
December 31, 2022 from $64 million for the year ended
December
31, 2021 primarily reflecting an increase in expenses for wages in respect of projects in Israel, in the amount of about $5 million (including
an increase of about $2 million in respect of non-cash equity remuneration expenses), in light of, among other things, expansion of OPC’s
activities.
Financing Expenses, Net
Our financing expenses, net, decreased by
$136 million to $5 million for the year ended
December 31, 2022, as compared to $141 million for the year ended
December 31, 2021. This
decrease was primarily driven by a decrease in OPC’s financing expenses, net.
OPC’s financing expenses, net decreased
by approximately $127 million to $14 million in 2022 from $141 million in 2021.
Finance expenses, net decreased by $127 million
in 2022, as compared to 2021 primarily due to (i) a non-recurring interest expense in 2021 of $75 million as a result of early repayment
of OPC-Rotem’s project financing debt in October 2021, (ii) a $16 million decrease in interest expense in respect of OPC-Rotem’s
senior debt, (ii) non-recurring interest expense in 2021 of $12 million due to the purchase of the remaining minority stake in a CPV subsidiary
and (iv) an increase of about $30 million from financing income from bank deposits.
Share in Losses/(Profit)
of Associated Companies, Net of Tax
Our share in profit of associated companies,
net of tax decreased to approximately $1,118 million for the year ended
December 31, 2022, compared to share of profit of associated companies,
net of tax of approximately $1,250 million for the year ended
December 31, 2021. Set forth below is a discussion of losses/(profit) for
our associated companies, net of tax.
ZIM
The following table sets forth summary information
regarding the results (100%) of operations of ZIM, our equity-method business for the periods presented:
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|
|
|
|
|
|
| |
|
(in millions of USD) |
|
|
Revenue
|
|
|
12,562 |
|
|
|
10,729 |
|
|
Operating
expenses and cost of services |
|
|
4,765 |
|
|
|
3,906 |
|
|
Operating
profit |
|
|
6,136 |
|
|
|
5,816 |
|
|
Profit
before taxes on income |
|
|
6,027 |
|
|
|
5,659 |
|
|
Income
tax expense |
|
|
|
|
|
|
|
|
|
Profit
for the period
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(1)
|
|
|
7,541 |
|
|
|
6,597 |
|
|
Share
of Kenon in total comprehensive income
|
|
|
1,024 |
|
|
|
1,261 |
|
|
Book
value of ZIM investment in Kenon’s books
|
|
|
427 |
|
|
|
1,354 |
|
_______________________________________
| (1) |
Adjusted EBITDA is a non-IFRS financial measure that ZIM defines as net profit adjusted to exclude financial expenses (income), net,
income taxes, depreciation and amortization in order to reach EBITDA, and further adjusted to exclude non-cash charter hire expenses,
capital gains (losses) beyond the ordinary course of business and expenses related to contingencies. Adjusted EBITDA is a key measure
used by ZIM’s management and board of directors to evaluate ZIM’s operating performance. Accordingly, ZIM believes that Adjusted
EBITDA provides useful information to investors and others in understanding and evaluating ZIM’s operating results and comparing
its operating results between periods on a consistent basis, in the same manner as ZIM’s management and board of directors. The
table below sets forth a reconciliation of ZIM’s net profit, to Adjusted EBITDA for each of the periods indicated. |
| |
|
|
|
|
|
|
| |
|
(in millions of USD) |
|
|
Net
profit
|
|
|
4,629 |
|
|
|
4,649 |
|
|
Financing
expenses, net |
|
|
109 |
|
|
|
157 |
|
|
Income
tax expense |
|
|
1,398 |
|
|
|
1,010 |
|
|
Depreciation
and amortization |
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
Non-cash
charter hire expenses(1)
|
|
|
— |
|
|
|
(1 |
) |
|
Capital
gains, beyond the ordinary course of business |
|
|
(1 |
) |
|
|
— |
|
|
Expenses
related to contingencies |
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
|
|
7,541 |
|
|
|
6,597 |
|
__________________________________________
| (1) |
Mainly related to amortization of deferred charter hire costs, recorded in connection with the 2014 restructuring. Following the
adoption of IFRS 16 on January 1, 2019, part of the adjustments are recorded as amortization of right-of-use assets. |
Pursuant to the equity method of accounting,
our share in ZIM’s results of operations was a profit of approximately $1,033 million and $1,261 million for the years ended
December
31, 2022 and
2021. Set forth below is a summary of ZIM’s consolidated results for the year ended
December 31, 2022 and
2021:
The number of TEUs carried for the year ended
December 31, 2022 decreased by 101 thousand TEUs, or 2.9%, from 3,481 thousand TEUs for the year ended
December 31, 2021 to 3,380 thousand
TEUs for the year ended
December 31, 2022, primarily driven by increased number of blank voyages across all trades, mainly due to port
congestion. On the other hand, the above was partially offset by changes in the operation mode of the lines (an increase in Intra-Asia
and Cross Suez trades, partially offset by a decrease in the Pacific and Atlantic trades) and an increase in vessel utilization (an increase
in Intra-Asia and Latin America trades, partially offset by a decrease in the other trades). . The average freight rate per TEU carried
for the year ended
December 31, 2022, increased by $454, or 16.3%, from $2,786 for the year ended
December 31, 2021 to $3,240 for the
year ended
December 31, 2022.
ZIM’s revenues increased by $1.9 billion,
or 17.8%, from $10.7 billion for the year ended
December 31, 2021 to $12.6 billion for the year ended
December 31, 2022, primarily driven
by an increase in revenues from containerized cargo, reflecting increases in both freight rates.
ZIM’s operating expenses and cost of
services for the year ended
December 31, 2022 increased by $0.9 billion, or 22.0%, from $3.9 billion for the year ended
December 31, 2021
to $4.8 billion for the year ended
December 31, 2022, primarily driven by (i) an increase of $695.0 million (94.0%) in bunker expenses,
(ii) an increase of $103.6 million (40.5%) in port expenses (iii) an increase of $101.6 million (5.4%) in cargo handling expenses, and
(iv) an increase of $45.2 million (26.4%) in cost of related services and sundry, partially offset by (v) a decrease of $131.7 million
(24.8%) in slot purchases and hire of vessels and containers.
CPV
As a result of the completion of the acquisition
of CPV in January 2021, Kenon’s share of results in CPV’s associated companies was a profit of approximately $85 million for
the year ended
December 31, 2022 compared to loss of approximately $11 million for the year ended
December 31, 2021. The table below sets
forth OPC’s share of profit of associated companies, net, which consists of the six operating plants in which CPV has interests,
which are accounted for as associated companies.
| |
|
|
|
| |
|
|
|
|
|
|
| |
|
(in
millions of USD) |
|
|
Share in profits/(losses) of associated companies, net
|
|
|
85 |
|
|
|
(11 |
) |
The result for the year includes losses on
changes in fair value of derivative financial instruments totaling $2 million. As at
December 31, 2022, OPC’s proportionate share
of net debt (including interest payable) of CPV associated companies was approximately $865 million.
For further details of the performance of
associated companies of CPV, refer to OPC’s immediate report published on the TASE on
March 19, 2023 and the convenience English
translations furnished by Kenon on Form 6-K on
March 19, 2023. Such report published on the TASE is not
incorporated by reference herein.
Income Tax Expenses
Profit For the Year
As a result of the above, our profit for the
year from continuing operations amounted to $350 million for the year ended
December 31, 2022, compared to $875 million for the year ended
December 31, 2021.
| B. |
Liquidity and Capital Resources |
Kenon’s Liquidity
and Capital Resources
As of
December 31, 2022, Kenon had approximately
$638 million in cash on a stand-alone basis and no material debt. Kenon’s stand-alone cash position includes cash and cash
equivalents and other treasury management instruments. Kenon seeks to generate attractive returns on its cash and cash equivalents, and
seeks to use treasury products with credit ratings that are at least rated investment grade.
Kenon’s sources of liquidity include
dividends from and sales of interests in its
subsidiaries and associated companies. Accordingly, the dividend policies of and dividends
paid by ZIM and OPC impact Kenon’s liquidity.
ZIM Dividends
ZIM has announced a dividend policy, which was recently amended in August 2022, to distribute
a dividend to shareholders on a quarterly basis at a rate of approximately 30% of the net income derived during such fiscal quarter with
respect to the first three fiscal quarters of the year, while the cumulative annual dividend amount to be distributed by ZIM (including
the interim dividends paid during the first three fiscal quarters of the year) will total 30-50% of the annual net income, and provided
that such distribution would not be detrimental to ZIM’s cash needs or to any plans approved by ZIM’s board of directors.
ZIM has stated that any dividends would take into account various factors including, inter alia, ZIM’s profits, investment plan,
financial position, the progress relating to ZIM’s strategy plan, the conditions prevailing in the market and additional factors
it deems appropriate. While ZIM has indicated that it initially intends to distribute 30-50% of its annual net income, the actual payout
ratio could be anywhere from 0% to 50% of its net income, and may fluctuate depending on its cash flow needs and such other factors.
During 2022, ZIM paid cash dividends of approximately $3.30 billion for the first three
quarters of the year, and in March 2023, ZIM declared a Q4 divided in respect of 2022 of $769 million, payable on
April 3, 2023, pursuant
to which Kenon expects to receive $151 million (net of taxes). During 2021, ZIM paid a special cash dividend of approximately $237 million,
and a cash dividend of approximately $299 million.
In 2022, Kenon received approximately $766
million in cash dividends from ZIM (excluding the Q4 dividend which was declared in March 2023), compared to dividends of $141 million
in 2021. In addition, Kenon expects to receive $151 million in respect of the Q4 dividend declared in March 2023, which is payable on
April 3, 2023.
OPC Dividends
In 2021 and 2022, OPC did not distribute dividends
to its shareholders. As of
December 31, 2022, OPC had no balance of distributable earnings. According to OPC’s dividend policy,
adopted in July 2017, a dividend will be distributed that is equal to at least 50% of OPC’s after-tax net income in the calendar
year preceding the dividend distribution date. In addition, the financing arrangements the OPC’s group companies (including CPV)
also include restrictions on the distribution by the OPC’s investees.
Dividends Paid by Kenon
In November 2021, Kenon’s board of
directors approved a cash dividend of $3.50 per share (an aggregate amount of approximately $189 million) to Kenon’s shareholders
of record as of the close of trading on
January 19, 2022, paid on
January 27, 2022.
In 2022, we received the requisite shareholder
approval and the approval of the High Court of the Republic of Singapore to return share capital amounting to approximately $552 million
to shareholders ($10.25 per share). The distribution was paid on
July 5, 2022. Following this capital reduction, Kenon’s share capital
is approximately $50 million.
In March 2023, Kenon’s board of directors
approved an interim cash dividend of approximately $150 million ($2.79 per share) relating to the year ending
December 31, 2023, payable
to Kenon’s shareholders of record as of the close of trading on
April 10, 2023, to be paid on or about
April 19, 2023.
Share Repurchase Plan
In March 2023, Kenon’s board of directors authorized a share repurchase plan of
up to $50 million. For more details on the share repurchase plan, see “Item 5. Operating and Financial
Review and Prospects—Recent Developments—Kenon—Share repurchase plan.”
Kenon’s Liquidity Requirements
Kenon’s liquidity requirements include
investments in its businesses, including OPC, and other investments it may make, as well as holding company costs, as well as dividend
payments.
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, as well as for investments in our businesses, which in 2022 and 2021 mainly consisted of investments
in OPC. OPC’s strategy contemplates continuing development of projects, particularly at CPV, and potentially further acquisitions
which will require significant financing, via equity or debt facilities, to further its development. We may, in furtherance of the development
of our businesses, make further investments, via debt or equity financings, in our businesses and we may make investments in new businesses.
See “
Item 4.B—Information on the Company—Business Overview”.
The cash resources on Kenon’s balance sheet may not be sufficient to fund additional
investments that we deem appropriate in our businesses. As a result, Kenon may seek additional liquidity from its businesses (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).
Consolidated Cash Flow
Statement
Set forth below is a discussion of our cash
and cash equivalents and our cash flows as of and for the years ended
December 31, 2022 and
2021.
Cash and cash equivalents increased to approximately
$535 million for the year ended
December 31, 2022, as compared to approximately $475 million for the year ended
December 31, 2021, primarily
as a result of improved results in ZIM. The following table sets forth our summary cash flows from our operating, investing and financing
activities for the years ended
December 31, 2022 and
2021:
| |
|
|
|
| |
|
|
|
|
|
|
| |
|
(in
millions of USD) |
|
|
Continuing operations |
|
|
|
|
|
|
|
Net cash flows provided by operating activities |
|
|
|
|
|
|
|
OPC
|
|
|
63 |
|
|
|
119 |
|
|
Other
|
|
|
708 |
|
|
|
121 |
|
|
Total
|
|
|
771 |
|
|
|
240 |
|
|
Net cash
flows used in investing activities |
|
|
(203 |
) |
|
|
(205 |
) |
|
Net cash
flows provided by financing activities |
|
|
(494 |
) |
|
|
147 |
|
|
Net change
in cash from continuing operations |
|
|
74 |
|
|
|
182 |
|
|
Cash—opening
balance |
|
|
475 |
|
|
|
286 |
|
|
Effect of exchange rate fluctuations on balances of cash and cash
equivalents |
|
|
|
|
|
|
|
|
|
Cash—closing
balance
|
|
|
535 |
|
|
|
475 |
|
Cash Flows Provided by Operating Activities
Net cash flows from operating activities increased
to $771 million for the year ended
December 31, 2022 compared to $240 million for the year ended
December 31, 2021. The increase is primarily
driven by dividends received from associated companies, offset with a decrease in OPC’s cash provided by operating activities as
discussed below.
Cash flows provided by OPC’s operating
activities decreased to $63 million for the year ended
December 31, 2022 from $119 million for the year ended
December 31, 2021, primarily
as a result of decrease in OPC’s working capital of $31 million, decrease in the current operating activities of $11 million and
a decrease in dividend income from associated companies of $9 million.
Cash Flows Used in Investing Activities
Net cash flows used in our investing activities
decreased to approximately $203 million for the year ended
December 31, 2022, compared to cash flows used in investing activities of approximately
$205 million for the year ended
December 31, 2021. This decrease in cash flow used was primarily driven by Kenon’s purchase of other
investments of $651 million. This is offset primarily by the proceeds from sales of interest in ZIM of $464 million and an increase in
OPC’s investing activities as discussed below.
Cash flows used in OPC’s investing activities
increased to $329 million for the year ended
December 31, 2022 from $256 million for the year ended
December 31, 2021, primarily as a
result of acquisition of intangible assets of $9 million, an increase in investments in projects in Israel of $35 million and short-term
deposits made of $36 million.
Cash Flows Provided by the Financing Activities
Net cash flows used in financing activities
of our consolidated businesses was approximately $494 million for the year ended
December 31, 2022, compared to cash flows provided by
financing activities of approximately $147 million for the year ended
December 31, 2021. The net outflow in 2022 was primarily driven
by Kenon’s capital reduction amounting to $10.25 per share ($552 million in total) to Kenon’s shareholders of record as of
the close of trading on
June 27, 2022, paid on
July 5, 2022 and dividend of $3.50 per share (an aggregate amount of approximately $189
million), to Kenon’s shareholders of record as of the close of trading on
January 19, 2022, paid on
January 27, 2022, offset with
OPC’s inflow, as described below.
Cash flows provided by OPC’s financing
activities decreased to $286 million for the year ended
December 31, 2022, as compared to $311 million used for the year ended
December
31, 2021, primarily as a result of repayments of loans and debentures of $76 million. The decrease was partly offset by cash provided
to OPC from the investments and loans from holders of non-controlling interests in CPV Group of $46 million.
Kenon’s
Commitments and Obligations
As of
December 31, 2022, Kenon had consolidated
liabilities of $1.5 billion, primarily consisting of OPC liabilities.
Other than loans from
subsidiaries at the
Kenon level, we have no outstanding indebtedness or financial obligations and are not party to any credit facilities or other committed
sources of external financing.
The following discussion sets forth the liquidity
and capital resources of each of our businesses.
OPC’s Liquidity
and Capital Resources
OPC’s principal sources of liquidity
have traditionally consisted of cash flows from operating activities, short- and long-term borrowings under loan facilities, bond issuances
and public and private equity offerings.
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 expenditures 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 has financed the development of its projects
and its acquisitions through equity and debt financing. Set forth below is an overview of equity issuances from 2019 to 2022 and a description
of OPC’s loan facilities and bonds.
OPC’s Share Issuances from 2019 to
2022
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 75.8%
stake.
In 2019, 2020, 2021 and 2022, OPC issued new
shares in multiple offerings:
|
• |
In 2019, OPC issued a total of 11,028,240 new ordinary shares (representing approximately 8% of OPC’s
issued and outstanding share capital at the time on a fully diluted basis) in two share issuances, for total cash consideration net of
issuance expenses of approximately NIS 272 million (approximately $76 million). As a result of these share issuances, Kenon’s interest
in OPC decreased from 75.8% to 69.8%. |
|
• |
In October 2020, OPC issued 11,713,521 new ordinary shares (representing approximately 7.5% of OPC’s
issued and outstanding share capital at the time on a fully diluted basis) for total (gross) consideration of NIS 350 million (approximately
$103 million) to two institutional investors in a private placement in connection with the acquisition of CPV. |
|
• |
Also in October 2020, OPC issued 23,022,100 new ordinary shares (representing approximately 14.8% of
OPC’s issued and outstanding share capital at the time on a fully diluted basis) for a total (gross) consideration of NIS 737 million
(approximately $217 million) in a public offering. Kenon was allocated 10,700,200 shares in the public offering for a total purchase price
of approximately $101 million. |
|
• |
In January 2021, OPC issued 10,300,000 ordinary shares (representing approximately 5.5% of OPC’s
issued and outstanding share capital at the time on a fully diluted basis) in a private placement for a total (gross) consideration of
NIS 350 million (approximately $107 million). |
|
• |
In September 2021, OPC issued rights to purchase approximately 13 million OPC shares to fund the development
and expansion of OPC’s activity in the U.S., with investors purchasing approximately 99.7% of the total shares offered in the rights
offering. The gross proceeds from the offering amounted to approximately NIS 329 million (approximately $102 million). Kenon exercised
rights for the purchase of approximately 8 million shares for total consideration of approximately NIS 206 million (approximately $64
million), which included its pro rata share and additional rights it purchased during the rights trading period plus the cost to purchase
these additional rights. |
|
• |
In July 2022, OPC issued 9,443,800 ordinary shares of NIS0.01 par value per share to the public as part
of the shelf offering. Gross issuance proceeds amounted to NIS 331 million (approximately $94 million). Kenon took part in the issuance
and was issued 3,898,000 ordinary shares for a gross amount of NIS 136 million (approximately $39 million). |
|
• |
In September 2022, OPC offered 12,500,000 ordinary shares of NIS 0.01 par value per share to qualified
investors as part of private offering. Gross issuance proceeds amounted to NIS 500 million (approximately $141 million). |
As a result of these share issuances, Kenon’s
interest in OPC is now 54.7%.
OPC’s
Material Indebtedness
As of
December 31, 2022, OPC had cash and
cash equivalents of $241 million (excluding restricted cash), restricted cash (used for debt service reserves) of $14 million, and total
outstanding consolidated indebtedness of $1,163 million, consisting of $39 million of short-term indebtedness, including the current portion
of long-term indebtedness, and $1,124 million of long-term indebtedness.
Israel
The following table sets forth selected information
regarding OPC’s principal outstanding short-term and long-term debt, as of
December 31, 2022 (excluding CPV):
| |
|
|
Interest Rate
($ millions) |
|
|
|
|
| |
|
OPC-Hadera: |
|
|
|
|
|
|
|
|
Financing agreement(1)
|
194 |
|
2.4%-3.9%, CPI linked (2/3 of the loan) 3.6%-5.4% (1/3 of the loan) |
|
September 2037 |
|
Quarterly principal payments to maturity, commencing 6 months following commercial operations of OPC-Hadera
power plant |
|
Tzomet: |
|
|
|
|
|
|
|
|
Financing agreement(2)
|
150 |
|
CPI or USD-linked with interest equal to prime plus margin of 0.5-1.5% - agreement includes provisions
for conversion of interest from variable to CPI-linked debenture interest plus margin of 2-3% |
|
Earliest of 19 years from commercial operations date of Tzomet power plant and 23 years from the signing
date, but no later than December 31, 2042 |
|
Quarterly principal payments to maturity, commencing close to the end of the first or second quarter following
commercial operations of the Tzomet power plant |
|
OPC4:
|
|
|
|
|
|
|
|
|
Bonds (Series B)(3)
|
272 |
|
2.75% (CPI-Linked) |
|
September 2028 |
|
|
|
Bonds (Series C)(4)
|
242 |
|
2.5% |
|
August 2030 |
|
12 semi-annual payments (which repayment amounts vary, and range from 5% up to 16% of the total issued
amount) commencing in February 2024 |
|
|
|
|
|
|
|
|
|
________________________________________
| * |
Includes interest payable, net of expenses. |
| (1) |
Represents NIS 681 million converted into USD at the exchange rate for NIS into USD of NIS 3.52 to $1.00. All debt has been
issued in NIS, of which 2/3 is linked to CPI and 1/3 is not linked to CPI. |
| (2) |
Represents NIS 528 million converted into U.S. Dollars at the exchange rate for NIS into U.S. Dollar of NIS 3.52 to $1.00. All debt
has been issued in NIS, part of which is linked to CPI and part of which is not linked to CPI. |
| (3) |
In April 2020, OPC completed an offering of NIS 400 million (approximately $113 million) of Series B bonds on the TASE, at an annual
interest rate of 2.75%. In October 2020, OPC issued 555,555 units of NIS 1,000 Series B bonds, totaling gross proceeds of NIS 584 million
($171 million). The offering was an extension of the existing Series B bonds previously issued by OPC. The proceeds of the additional
Series B issuance were used to redeem Series A bonds (NIS 313 million ($92 million)) and in part to fund the CPV acquisition. |
| (4) |
In September 2021, OPC issued Series C debentures at a par value of NIS 851 million (approximately $266 million), bearing annual
interest of 2.5%. The Series C bonds are repayable over 12 semi-annual payments (which repayment amounts vary, and range from 5% up to
16% of the total issued amount) commencing in February 2024 with the final payment in August 2030. OPC used the proceeds from the Series
C bonds for the early repayment of project financing debt of OPC-Rotem as described below. |
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 relevant testing date 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 14 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. In October 2021, OPC-Rotem repaid the project financing debt in the amount NIS 1,292 million (approximately $400 million) (including
early repayment fees). As part of the early repayment, OPC-Rotem recognized a one-off expense totaling NIS 244 million (approximately
$75 million), in respect of an early repayment fee of approximately NIS 188 million (approximately $58 million), net of tax. OPC and the
minority investor in OPC-Rotem extended to OPC-Rotem loans (pro rata to their ownership) to finance the early repayment totaling (principal)
NIS 1,130 million (approximately $363 million). A significant portion of OPC’s portion of NIS 904 million (approximately $280 million)
was funded by the issuance of Series C debentures as described below.
OPC-Hadera Financing
Agreement
In July 2016, OPC-Hadera entered into a NIS
1 billion (approximately $311 million) 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 March 2020, the lenders under this agreement granted OPC-Hadera’s request to extend the COD under the agreement
to June 2020.
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.
The loans under the facility agreement 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 which will commence approximately half a year following the commencement of commercial operation of the OPC-Hadera 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. The senior facility agreement also contains certain restrictions and
limitations, including:
|
• |
minimum projected DSCR, average projected DSCR (in relation to long-term loans at the commercial operation
date of the power plant) and LLCR (at the commercial operation date of the power plant): 1.10 – on the withdrawal dates the ratio
must be at least 1.20; |
|
• |
maintenance of minimum amounts in the reserve accounts in accordance with the agreement; 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, 2022, following the full
investment of the project’s equity contribution, OPC-Hadera has made drawings in the aggregate amount of NIS 669 million (approximately
$190 million) under the NIS 1 billion (approximately $284 million) loan agreement relating to the project.
Tzomet Financing Agreement
In December 2019, Tzomet entered into a NIS
1.4 billion (approximately $435 million) senior facility agreement with a syndicate of lenders led by Bank Hapoalim Ltd, or Bank Hapoalim,
to finance the construction of Tzomet’s power plant. Pursuant to the agreement, the lenders undertook to provide Tzomet with financing
in several facilities (including a term loan facility, a standby facility, a 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 and operating periods), and a working capital facility (for the operation period only)).
The loans under the facility agreement 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 at the earliest of 19 years from the commencement of commercial operation of the
Tzomet plant and 23 years from the signing date of the facility agreement, but no later than December 31, 2042, in accordance with the
provisions of the agreement.
In connection with the facility agreement,
OPC’s shares in Tzomet (including any shares that OPC acquires from the minority shareholders) certain OPC and Tzomet rights were
pledged in favor of Bank Hapoalim, as collateral agent on behalf of the lenders. The facility agreement also contains certain restrictions
and limitations, including:
|
• |
minimum projected average debt service coverage ratio (ADSCR), average projected ADSCR and LLCR: 1.05
– on the withdrawal dates, Tzomet is required to comply with a minimum contractual ADSCR (i.e., the lowest contractual ADSCR of
all the contractual ADSCRs up to the date of final repayment) an average contractual ADSCR (i.e., the average contractual ADSCR of all
the contractual ADSCRs up to the date of final repayment), and a contractual LLCR on the commencement date of the commercial operation
of at least 1.3; |
|
• |
maintenance of minimum amounts in the reserve accounts in accordance with the agreement; and |
|
• |
other non-financial covenants and limitations such as restrictions on dividend distributions, repayments
of shareholder loans, asset sales, pledge investments and incurrence of debt. |
As of
December 31, 2022, Tzomet has made drawings
in the aggregate amount of NIS833 million (approximately $237 million) under the facility agreement.
OPC Bonds (Series B)
In April 2020, OPC issued NIS 400 million
(approximately $113 million) of bonds (Series B), which were listed on the TASE. The bonds bear annual interest at the rate of 2.75% and
are repayable every six months, commencing on
September 30, 2020 (on March 31 and September 30 of every calendar year) through
September
30, 2028. In addition, an unequal portion of principal is repayable every six months. The principal and interest are linked to an increase
in the Israeli consumer product index of March 2020 (as published on
April 15, 2020). The bonds have received a rating of A3 from
Midroog and A- from S&P Global Ratings Maalot Ltd.
In October 2020, OPC issued NIS 584 million
($171 million) of Series B bonds. The offering was an extension of the existing Series B bonds previously issued by OPC. The proceeds
of the additional Series B issuance were used to redeem OPC’s Series A bonds (NIS 310 million ($90 million)) and in part to fund
the CPV acquisition (approximately NIS 250 million (approximately $78 million)). The outstanding principal amount (net of expenses) as
of
December 31, 2022 is NIS 956 million (approximately $272 million).
The bonds are unsecured and the trust deed
includes limitations on OPC’s ability to impose a floating lien on its assets and rights in favor of a third party.
The trust deed contains customary clauses
for calling for the immediate redemption of the bonds, including events of default, insolvency, liquidation proceedings, receivership,
stay of proceedings and creditors’ arrangements, certain types of restructuring, material downturn in the position of OPC. The bondholders’
right to call for immediate redemption also arises upon: (i) the occurrence of certain events of loss of control by Kenon; (ii) the call
for immediate repayment of other debts (or guarantees) of OPC or of a consolidated subsidiary in certain predefined minimum amounts; (iii)
a sale of one or more assets of
the company which constitutes more than 50% of the value of company’s assets, in less than 12 consecutive
months, or a change in the area of operation of OPC such that OPC’s main area of activity is not in the energy sector, including
electricity generation in power plants and with renewable energy sources; (iv) a rating being discontinued over a certain period of time;
(v)
the company breaching its covenant obligations under the deed of trust and executes an extraordinary transaction with the controlling
shareholders (as these terms are defined under the Israeli Companies Law-1999); (vi)
the company’s financial reports containing
a going concern notice addressing
the company itself, for two consecutive quarters; and (vii) a suspension of trading for a certain time
period if the bonds are listed for trade on the main list of the stock exchange.
The trust deed includes covenants on the basis
of OPC’s stand-alone financial statements: coverage ratio between net financial debt deducting financial debt of projects yet to
produce EBITDA, and Adjusted EBITDA of no more than 13, minimum equity of NIS 250 million (approximately $71 million) and an equity-to-balance
sheet ratio of at least 17%.
The trust deed also includes an undertaking
by OPC to monitor the rating by a rating agency.
Furthermore, restrictions are imposed on distributions
and payment of management fees to the controlling shareholder, including compliance with certain covenants and certain legal restrictions.
The terms of the bonds also provide for the
possible raising of the interest rate in certain cases of lowering the rating and in certain cases of breach of financial covenants. 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 (and as long as they are not secured), such bonds will not have preference over the bonds (Series B) upon liquidation.
Should OPC raise additional bonds that are secured, these will not have preference over the bonds (Series B) upon liquidation, except
with respect to the security.
OPC Bonds (Series C)
In September 2021, OPC issued a series of
bonds at a par value of approximately NIS 851 million, with the proceeds of the issuance designated, among other things, for early repayment
of OPC-Rotem’s financing (Series C). The bonds are listed on the TASE. The bonds are not CPI-linked and bear annual interest of
2.5%. The bonds are repayable in twelve semi-annual and unequal installments (on February 28 and August 31) as set out in the amortization
schedule, starting on
February 28, 2024 through
August 31, 2030 (the first interest payment was due
February 28, 2022). The bonds are
rated A- by Maalot. The issuance expenses amounted to about NIS 9 million.
The bonds are unsecured and the trust deed
includes limitations on OPC’s ability to impose a floating lien on its assets and rights in favor of a third party without fulfilling
the conditions in the Bond C deed of trust. OPC has the right to make early repayment pursuant to the conditions in the trust certificate.
The Bonds C deed of trust includes customary
causes for calling for the immediate repayment (subject to stipulated remediation periods), including as a result of, among others, events
of default, liquidation proceedings, receivership, suspension of proceedings and creditors’ arrangements, merger under certain conditions
without obtaining bondholders’ approval or statement by the survivor entity, material deterioration in the position of OPC, and
failure to publish financial statements in a timely manner.
Furthermore, a bondholders’ right to
call for immediate repayment arises, among others, upon the following circumstances: (i) the call for immediate repayment of another series
of bonds (traded on the TASE or on the TACT Institutional system) issued by OPC; or of another financial debt (or a number of cumulative
debts) of OPC and its consolidated companies (except in the case of a non-recourse debt), including forfeiture of a guarantee (that secures
payment of a debt to a financial creditor) that OPC or investee companies made available to a creditor, in an amount not less than $75
million; (ii) upon breach of financial covenants on two consecutive review dates or on one review date; (iii) failure to obtain prior
approval of the bondholders by special resolution in the case of an extraordinary transaction with a controlling shareholder, excluding
transactions to which the Companies Regulations (Expedients in Transactions with an Interested Party), 2000 apply; (iv) if an asset or
a number of assets of OPC are sold in an amount representing over 50% of the value of its assets according to OPC’s consolidated
financial statements during a period of 12 consecutive months, or if a change is made to the main operations of OPC, except where the
consideration of the sale is intended for the purchase of an asset or assets within OPC’s main area of operations (such as energy,
including electricity generation in power plants and from renewable energies); (v) upon the occurrence of certain events leading to a
loss of control; (vi) if a rating is discontinued over a certain period of time (except due to reasons not under the control of OPC);
(vii) if trading in the bonds is suspended for a certain period of time or if the bonds are delisted; (viii) if OPC ceases to be a reporting
corporation; (ix) if
the company’s financial reports contain a going concern notice addressing
the company itself, for two consecutive
quarters; (x) if OPC breaches its undertaking not to place a general floating charge on its current and future assets and rights, in favor
of any third party, without the criteria set in the Bond C deed of trust being met; and (xi) distribution in breach of the provisions
of the Bond C deed of trust.
Furthermore, the Bond C deed of trust includes
an undertaking by OPC to comply with financial covenants and restrictions (including restrictions as to distribution, expansion of series
without, among other things, maintaining the same rating of the bonds subsequent to such expansion, and provisions as to interest adjustment
in the event of change in rating or non-compliance with financial covenants). The financial covenants include maintaining the ratio between
net consolidated financial debt (less the financial debt designated for the construction of projects that have not yet started generating
EBITDA) and Adjusted EBITDA at no more than 13 (and for the purpose of distribution as defined in the Bond C deed of trust - not more
than 11), minimum equity (standalone) of NIS 1 billion (and for the purpose of distribution - NIS 1.4 billion), equity to asset
ratio (standalone) of no less than 20% (and for the purpose of distribution - no less than 30%), and equity to (consolidated) balance
sheet ratio of no less than 17%. As at
December 31, 2022, OPC met the following financial covenants: (i) the ratio between the net consolidated
financial debt, less the financial debt earmarked for the construction of projects that have not yet started generating EBITDA, and the
Adjusted EBITDA is 5.6; (ii) OPC’s equity amounts to NIS 3,507 million; (iii) OPC’s equity to total assets ratio is 65%; and
(iv) the equity to balance sheet (consolidated) ratio is 46%.
Master agreements for
purchase of gas and electricity surpluses and intercompany agreements
OPC’s
operating companies in Israel are assessing the option to enter into credit facility agreements for the purchase of electricity or transfer
of customers and natural gas with each other, subject to any applicable regulations. These agreements aim to create a platform for mutual
purchase of natural gas and electricity between them. If such agreements are signed, they will be subject, among other things, to the
approval of the financing entities (as the case may be), and if any other approvals are required by law.
United
States
Each active CPV project company and Three
Rivers (which is under construction) has taken out senior debt under similar structures, i.e., project, asset level financing, on non-recourse
terms subject to specific terms set for each project. On financial closing of each loan, debt and equity capital is committed in an amount
sufficient to cover the project’s projected capital costs during construction, along with ancillary credit facilities. The ancillary
credit facilities are provided by a subset of the project’s lenders and are comprised of letters of credit, which support collateral
obligations under the financing arrangements and commercial arrangements, and a working capital revolver facility, which supports the
project’s ancillary credit needs. The senior credit facilities are generally structured such that, subject to certain conditions
precedent, they are converted from facilities to finance the construction phase to long-term facilities (term loans) with maturity dates
generally tied to the term of the commercial agreements anchoring expected operating cash flows of each project. For the Energy Transition
projects, the term loans generally span the construction period plus 5-7 years after launch of commercial operation (a “mini-perm
financing”). The mini-perm financing is repaid based on a combination of (i) predetermined amounts per project in accordance with
set quarter end repayment dates, and (ii) result-based metrics, which result in partial or full application of free cash flow to term
loan repayment on such quarter-end dates (cash sweeps), which in the aggregate, result in partial repayment during the loan term, with
a balance payable or refinanced upon final repayment date.
CPV seeks to take advantage of opportunities
to recycle its credit according to market conditions and, in any case, prior to the scheduled final repayment date. The credit facilities
in place during construction are sourced from a consortium of international lenders (10-20 for each gas-fired project, fewer for renewable
energy projects with lower capital needs) and executed in the “Term Loan A” market, which is substantially comprised of commercial
banks, investment banks, institutional lenders, insurance companies, international funds, and equipment suppliers’ credit affiliates.
CPV project companies have refinanced loans for gas-fired projects on both the Term Loan A market and the Term Loan B market, which includes
mainly institutional lenders, international funds, and a number of commercial bank.
While the credit facility terms and conditions
have certain provisions specific to the project being financed, an overwhelming majority of the standard key terms and conditions (first
lien security, covenants, events of default, equity cure rights, distribution restrictions, reserve requirements, etc.) are similar across
the CPV project Term Loan A refinancing, while the Term Loan B market refinancing terms are slightly less restrictive, as customary in
this market. In each market and often within each project loan, lenders extended loans to the CPV Group’s projects either according
to a credit margin based on the LIBOR, variable base interest rate or fixed interest. To minimize exposure to potential interest rate
risk, CPV executes interest rate hedges for the main exposure at each project level, whereby the CPV project companies pay the major financial
institutions fixed interest and receive variable interest payments for certain terms, according to the terms and conditions of the project
and loan. For most existing LIBOR-based credit facilities, the credit agreements and interest rate hedging arrangements include market-standard
provisions to accommodate the replacement of LIBOR by SOFR as a benchmark interest rate. Remaining LIBOR rates will be discontinued after
June 30, 2023. The Alternative Reference Rates Committee (
“ARRC”) has identified SOFR as the rate that represents best practices
for use in certain new USD derivatives and other financial
contracts. The projects of the CPV Group are expected to enter into amendments
to reflect the transfer to SOFR based interest rate. The CPV Group has commenced processes for revision of the credit agreements and the
agreements hedging the interest rate for transfer (replacement) of all the LIBOR-based financed to SOFR-based financed under every specific
project financing agreement. All of the said transfers are slated to take place prior to
June 30, 2023, the date on which the LIBOR interest
will be discontinued. All such transitions are expected to conclude prior to the
June 30, 2023, LIBOR discontinuation date New variable
credit facilities and refinancing of future debt bearing variable interest of the CPV Group project companies are expected to have the
SOFR as their benchmark interest rate (with United States prime rate as an alternative, in a manner that corresponds to the existing credit
facilities of the CPV Group project companies).Such amendments are still pending execution.
The table below sets forth summaries of the
key commercial terms of the senior credit facilities associated with each CPV project financing. The term loan commitment amounts are
referenced as of the date noted and once drawn and repaid, may not be drawn again, while ancillary credit facilities and working capital
facilities are revolving in nature. The events of default consist of customary events of default, including, among others: breach of commitments
and representations having a material adverse effect, failure of equity contributing party to fund during construction, nonpayment events,
failure to adhere to certain covenants, various insolvency events, termination of the project’s activities or of significant parties
in the project (as defined in the agreement), various events in connection with its regulatory status and maintenance of government approvals,
certain changes in ownership of the project company, certain events in connection with the project, existence of legal proceedings in
connection with the project, and the project not having the right to receive payments for its capacity and electricity – all of
this in accordance with and subject to the terms, definitions and cure periods as stated in the relevant credit agreement.
|
|
|
|
|
Total
Commitment (approximately in $millions) |
|
Total
Outstanding/ Issued (approximately in $millions) as of Dec. 31, 2022 |
|
|
|
|
|
|
|
Fairview |
|
|
|
710 |
|
503(1)
|
|
|
|
LIBOR plus margin of 2.5%
|
|
Distribution is subject to the project company’s compliance with several terms
and conditions, including compliance with a minimum debt service coverage ratio of 1.2 during the 4 quarters that preceded the distribution,
compliance with reserve requirements (pursuant to the terms of the financing agreement), compliance with the debt balances target defined
in the agreement, and that no ground for repayment or breach event exists (as defined in the financing agreement). |
|
Towantic |
|
|
|
753 |
|
556(3)
|
|
|
|
LIBOR plus margin of 3.1%
|
|
Similar to Fairview (see above) |
|
Maryland |
|
|
|
450 |
|
340(4)
|
|
|
|
LIBOR plus margin of 3.6%
|
|
Historical debt service coverage ratio of 1:1 during the last 4 quarters. As of March
19, 2023, Maryland is in compliance with the covenant. Execution of a distribution is conditional on the project company complying with
several terms and conditions, including, compliance with a reserve requirements (as provided in the agreement), and that no ground for
repayment or breach event exists in accordance with the financing agreement. |
|
Shore
|
|
December 2018 |
|
545 |
|
459(5)
|
|
|
|
Term Loan: LIBOR plus margin of 3.5%
|
|
Historic rolling 4 quarter debt service coverage ratio of 1:1. CPV is currently in
compliance with this covenant. Distribution is subject to, among others, certain reserve requirements, and having no existing default
or event of default. |
|
|
|
|
|
Total
Commitment (approximately in $millions) |
|
Total
Outstanding/ Issued (approximately in $millions) as of Dec. 31, 2022 |
|
|
|
|
|
|
|
Valley
|
|
|
|
680 |
|
502(6)
|
|
|
|
LIBOR plus margin of 3.8%
|
|
Distribution is subject to the project company
meeting conditions, including compliance with a minimum debt service coverage ratio of 1.2 during the 4 quarters that preceded the
distribution, compliance with reserve requirements (pursuant to the terms of the financing agreement), compliance with requirements for
receipt of a certain permit, compliance with the debt balances target defined in the agreement, and that no ground for repayment or default
event exists (as defined in the financing agreement).
Valley is in discussions with the lenders
to extend the loan for at least an additional 2 years. The terms for extension, all of which are subject to negotiation, include extension
fees, increase in interest margins, credit spread increases, and debt reduction, which is expected to include equity contribution in a
range, estimated by CPV, of $40 million to $100 million (of which the CPV Group’s share is 50%) as a condition to extension. As
of March 19, 2023, the parties are still in discussion and there is no certainty as to the execution of such extension or its terms. In
case such extension is not agreed, Valley will be required to repay the loan on the original repayment date of June 30, 2023. |
|
Keenan II |
|
August 2021 |
|
120 |
|
102(7)
|
|
|
|
LIBOR + margin 1.1%
|
|
Execution of a distribution is subject to the project company’s compliance with
several terms and conditions, including compliance with a minimum debt service coverage ratio of 1.15 during the 4 quarters that preceded
the distribution, and that no grounds for repayment or breach event exist (as defined in the financing agreement) |
|
|
|
|
|
Total
Commitment (approximately in $millions) |
|
Total
Outstanding/ Issued (approximately in $millions) as of Dec. 31, 2022 |
|
|
|
|
|
|
|
Three Rivers (under construction) |
|
|
|
875 |
|
823(8)
|
|
|
|
LIBOR plus margin of 3.6%
|
|
Similar to Fairview (see above) |
_________________________________________
| (1) |
Consisting of Term Loan (Variable): $375 million, Term Loan (Fixed, 5.78%): $101 million, Ancillary Facilities (Working Capital Loan:
$0; Letters of Credit/LC Loans: approximately $27 million). |
| (2) |
The rate and scope of repayment of loan principal varies until final repayment, in accordance with integration of amortization and
cash sweep repayment mechanisms (“mini perm” financing) |
| (3) |
Consisting of Term Loan (Variable): $478 million, Ancillary Facilities (Working Capital Loan: $0; Letters of Credit/LC Loans: $78
million). |
| (4) |
Consisting of Term Loan (Variable): $306 million, Ancillary Facilities ($34 million). |
| (5) |
Consisting of Term Loan (Variable): $379 million, Ancillary Facilities ($80 million). |
| (6) |
Consisting of Term Loan (Variable): $424 million, Ancillary Facilities (Working Capital Loan: $0; Letters of Credit/LC Loans: $78
million (of which approximately $25 million was withdrawn re: debt service reserve as of December 31, 2022)). In April 2021, Valley received
certain concessions on the ancillary facilities in exchange for a $10 million aggregate capital commitment from the project sponsors ($5
million from CPV). The concessions waive the annual, mandatory full repayment of the working capital loans through June 29, 2022 and release
$5 million of working capital capacity that is currently restricted due to the Title V permit matter. Valley is holding discussions with
the lenders on extension of the Loan for at least an additional 2 years. The terms for extension, all of which are subject to negotiation,
include extension fees, credit spread increases, and debt reduction which is expected to include equity contribution in a range estimated
by CPV of $40 to $100 million) as conditions to extension. Currently, the parties are still in discussions and there is no certainty as
to the execution of such extension or its terms. In case such extension will not be agreed Valley will be required to repay the loan on
June 30, 2023. |
| (7) |
Consisting of Term Loan (Variable): $88 million, Ancillary Facilities (Working Capital Loan: $0; Letters of Credit/LC Loans: $14
million). The amortization schedule of the term loan is based on the December 2030 maturity date, with a 100% cash sweep mechanism starting
March 2027, so that the term loan is expected to be repaid in full by the December 2028 maturity date. |
| (8) |
Consisting of: Term Loan (Variable): $632 million, Term Loan (Fixed, 4.5%): $100 million; Ancillary Facilities (Working Capital Loan:
$0; Letters of Credit/LC Loans: $91 million). |
During 2022, the CPV Group entered to several
LC arrangements with banking institutions in an aggregate scope of approximately $24 million (which were withdrawn). Such LCs were used
mainly for collaterals to development projects and the Valley hedging transaction. The LC’s are secured by collateral as required
by the issuing corporations (including a guarantee by CPV or cash deposit, as the case may be).
Qoros’
Liquidity and Capital Resources
Qoros has three major credit facilities, being
its RMB 3 billion, RMB 700 million and RMB 1.2 billion loan facilities. Qoros did not make payments under these loan facilities, and as
a result, the lenders under these facilities accelerated these loans. These loans remain in default and accelerated.
Kenon paid approximately $16 million to satisfy
its guarantee obligations to Chery in respect of Qoros debt and has no further guarantee obligations. Kenon has pledged substantially
all of its interest in Qoros to secure the RMB 1.2 billion loan facility.
Kenon understands Qoros has also taken loans
and other advances from parties related to the Majority Shareholder.
ZIM’s Liquidity
and Capital Resources
ZIM operates in the capital-intensive container
shipping industry. Its principal sources of liquidity are cash inflows received from operating activities, generally in the form of income
from voyages and related services. ZIM’s principal needs for liquidity are operating expenses, expenditures related to debt service
and capital expenditures. ZIM’s long-term capital needs generally result from its need to fund its growth strategy. ZIM’s
ability to generate cash from operations depends on future operating performance which is dependent, to some extent, on general economic,
financial, legislative, regulatory and other factors, many of which are beyond its control, as well as the other factors discussed in
“Risk factors—Risks Related to our Interest in ZIM.”
ZIM’s cash and cash equivalents were
$1,022 million and $1,543 million, and $570.4 million as of
December 31, 2022,
2021 and
2020, respectively. In addition, ZIM’s bank
deposits and other investment instruments amounted to $3,588.6 million, $2,306.5 million and $55.8 million as of
December 31, 2022,
2021
and
2020, respectively.
ZIM’s total outstanding indebtedness
as of
December 31, 2022 consisted of $2,855 million in long-term debt and $1,477 million in current installments of long-term debt and
short-term borrowings. ZIM’s long-term debt is mostly comprised of lease liabilities, related to vessels and equipment.
The weighted average interest rate paid per
annum as of
December 31, 2022 under all of ZIM’s indebtedness was 7.7%.
During the years ended
December 31, 2022,
2021, and
2020, ZIM’s capital expenditures were $345.5, $1,005.0 and $42.7 million, respectively. Such expenditures, which do not
include additions of leased assets, were mainly related to investments in equipment and vessels, as well as in its information systems.
ZIM’s projected capital expenditures for the next 12 months are aimed to support its ongoing operational needs.
For further information on the risks related
to ZIM’s liquidity, see “Item 3.D Risk Factors—Risks
Related to our Interest in ZIM.” Its leverage may make it difficult for ZIM to operate its business, and ZIM may be unable
to meet related obligations, which could adversely affect its business, financial condition, results of operations and liquidity.
| C. |
Research and Development, Patents and Licenses, Etc. |
Not applicable.
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
Israel—On
February 1, 2023, a decision
of the EA entered into effect to update the costs recognized to the Electricity Company and the Systems Operator and the tariffs to the
electricity consumers. Pursuant to the decision, an additional update to the generation component for 2023 entered into effect whereby
the generation component is NIS 0.3081 per kWh, a decrease of 1.2% compared to the tariff set on
January 1, 2023, resulting from extension
of the excise tax on fuel order, which calls for a decrease in the purchase tax and excise tax applicable to the coal. In March 2023,
a hearing was published for the revision of the costs recognized to the IEC and the tariffs paid by electricity consumers, following a
30% decline in coal prices compared to the price on which the latest tariff revision was based, and increase in other costs. The tariff
will be reduced by approximately 1% from the tariff set in February 2023. For further information, see
“Item
5. Operating and Financial Review and Prospects—Material Factors Affecting Results of Operations—OPC—Revenue—EA
Tariffs.” In August 2022, the EA published a decision to revise, the time of use (TOU) demand categories for purposes of
adjusting the structure of the load and time tariffs (TAOZ) for a significant integration of solar energy and storage. Pursuant to the
publication, the update of the TOU demand categories is expected to encourage steering consumption to the noon hours where there is higher
generation of renewable energy as opposed to consumption in the peak evening demand hours. Change of the TOU categories in accordance
with the decision is expected to increase the tariffs paid by household consumers and reduce the tariffs paid by TAOZ consumers. Based
on the decision, the updated tariff structure will enter into effect upon update of the tariff to the consumer in 2023. In addition, the
decision provides that in light of the frequent sectorial changes and the need to express the correct sec0torial cost, the TOU categories
will be updated more frequently. As result of the decision, OPC is taking actions to adjust the mix of its sales in Israel, to the extent
possible, to the structure of the updated demand hours categories. Update of the demand hours categories is expected to have a negative
impact on OPC’s results, since, in general, the consumption profile of OPC’s customers, which are mostly industrial and commercial
customers, has low consumption volatility during the day. See
“Item 5. Operating and Financial
Review and Prospects—Material Factors Affecting Results of Operations—OPC—Revenue—EA Tariffs.”
United
States—The energy sector in the United States is affected by global
and domestic trends. Disruptions to the supply chain, government levies, exchange and interest rates and federal and state policies all
affect the activity of the energy sector, as well as the pace and direction of the change trends to the energy infrastructures and the
energy markets.
The price of natural gas is significant in
setting the price of electricity in most territories where CPV has projects (the main fuel of the natural gas-fired power plants of CPV).
The natural gas prices are impacted by numerous variables, including demand in the industrial, residential and electricity sectors, productivity
and supply of the natural gas, natural gas production costs, changes in the pipeline infrastructure, international trade and the financial
profile and the hedging profile of natural gas customers and producers. The price of imported liquefied natural gas affects the natural
gas prices during the winter in New England and New York, which has a direct effect on the Towantic and Valley power plants.
Accordingly, electricity and natural gas prices
are key factors in the profitability of CPV, as well as capacity prices in the operating areas of the power plants of CPV. A number of
variables impact the profitability of the natural gas-fired power plants of CPV Group, including the price of various fuels, the weather,
load increases, and unit capacity, which cumulatively affect the gross margin and the profitability of CPV Group. Electricity prices in
the PJM market (PJM Western Hub) were 88% higher in 2022, compared to 2021. Electricity prices in the ISO-NE (NEPOOL Hub) and NYISO (Zone
G) markets were 86% and 102% higher in 2022, respectively, compared to 2021. In 2022, average Henry Hub natural gas prices were 67% higher
compared to 2021. The increase in electricity stems mainly from the increase in natural gas prices and exacerbated by the northeast gas
price premium in these three market areas.
|
|
|
|
|
|
|
|
|
|
|
PJM
West
(Shore, Maryland) |
|
$54.39 |
|
$38.92 |
|
$68.74
|
|
$73.09
|
|
PJM AD Hub (Fairview) |
|
$51.88 |
|
$38.35 |
|
$64.70
|
|
$69.42
|
|
NYISO Zone G (Valley) |
|
$51.33 |
|
$40.74 |
|
$73.04
|
|
$82.21
|
|
ISO-NE Mass Hub (Towantic) |
|
$59.88 |
|
$45.92 |
|
$76.92
|
|
$85.56
|
The average 24x7 power prices are based on
day-ahead settlement prices as published by the respective ISOs. Natural gas prices in the markets in which the CPV Group operates increased
in 2022 significantly compared to last year. CPV believes the increase arises, among other things, from the increase in demand for electricity
in the United States, stronger global demand for natural gas, inventory levels which are lower compared to the past, and a limited increase
in natural gas production. Since the beginning of 2023, spot and forward natural gas prices decreased significantly, mainly due to mild
winter and strong seasonal natural gas storage levels.
ZIM
Total global container shipping demand totaled
approximately 236.8 million TEUs in 2022 (including inland transportation) according to Drewry Container Forecaster (Drewry) as of December
2022. Global container demand has seen steady and resilient growth equaling a 5.6% CAGR since 2000 accordingly to Drewry, driven by multiple
factors. These include economic drivers such as GDP growth, containerization and industrial production, as well as other non-economic
drivers such as geopolitics, consumer preferences and demographic changes.
The breakout of the COVID-19 pandemic has
led to the second crisis in the container shipping industry since 2000, (with the first crisis occurring during 2009 following the 2008
financial crisis). 2020 commenced with lockdowns and reduced exports from China, reduction of shipping capacity, however during the second
half of 2020 manufacturing capacity increased, together with a spike in e-commerce and goods sales, and inventory restocking.
Following the supply chain disruptions experienced
in 2021, which were a factor driving significant upgrades to freight rates, supply chains have been normalizing during 2022, mainly due
to a shift in consumer spending.
According to Drewry, demand is expected to
achieve an approximately 1.8% CAGR from 2021 to 2025. See also “—Material Factors Affecting
Results of Operation.”
| E. |
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:
|
• |
allocation of acquisition costs; |
|
• |
long-term investment (Qoros); |
|
• |
Recoverable amount of cash-generating unit that includes goodwill (CPV); and |
|
• |
Recoverable amount of cash-generating unit of investment in equity-accounted companies (ZIM). |
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.
| ITEM 6. |
Directors, Senior Management and Employees |
| A. |
Directors and Senior Management |
Board of Directors
The following table sets forth information
regarding our board of directors:
|
|
|
|
|
|
|
Original Appointment Date |
|
|
|
|
|
Antoine Bonnier |
|
40 |
|
Board Member |
|
2016 |
|
2021 |
|
2022 |
|
Laurence N. Charney |
|
76 |
|
Chairman of the Audit Committee, Compensation Committee Member, Board Member, ESG Committee Member
|
|
2014 |
|
2021 |
|
2022 |
|
Barak Cohen |
|
41 |
|
Board Member |
|
2018 |
|
2021 |
|
2022 |
|
Cyril Pierre-Jean Ducau |
|
44 |
|
Chairman of the Board, Nominating and Corporate Governance Committee Chairman, ESG Committee Member
|
|
2014 |
|
2021 |
|
2022 |
|
N. Scott Fine |
|
66 |
|
Audit Committee Member, Compensation Committee Chairman, Board Member |
|
2014 |
|
2021 |
|
2022 |
|
Bill Foo |
|
65 |
|
Board Member, Nominating and Corporate Governance Committee Member |
|
2017 |
|
2021 |
|
2022 |
|
Aviad Kaufman |
|
52 |
|
Compensation Committee Member, Board Member, Nominating and Corporate Governance Committee Member
|
|
2015 |
|
2021 |
|
2022 |
|
Arunava Sen |
|
62 |
|
Board Member, Audit Committee Member, ESG Committee Chairman |
|
2017 |
|
2021 |
|
2022 |
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
|
|
|
|
|
|
|
|
|
50 |
|
Chief Executive Officer |
|
Mark Hasson |
|
47 |
|
Chief Financial Officer |
Biographies
Directors
Antoine
Bonnier. Mr. Bonnier is the Chief Executive Officer of Quantum Pacific
(UK) LLP and serves as a member of the board of directors of Club Atletico de Madrid SAD, of CPVI, OPC, Cool Company Ltd and Ekwater SA,
each of which may be associated with the same ultimate beneficiary, Mr. Idan Ofer. Mr. Bonnier was previously a Managing Director of Quantum
Pacific (UK) LLP. 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 37-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 Marvel Entertainment, Inc. (through December 2009) 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 at Quantum Pacific (UK) LLP
and a board member of Qoros, 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 IC since 2008 most recently as IC’s Senior Director of Business
Development and Investor Relations. Prior to joining IC, 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.
Cyril
Pierre-Jean Ducau. Mr. Ducau is the Chief Executive Officer of Ansonia
and the Chief Executive Officer of Eastern Pacific Shipping Pte Ltd, a leading shipping company based in Singapore. He is a member of
the board of directors of Ansonia as well as other private companies, each of which may be associated with the same ultimate beneficiary,
Mr. Idan Ofer. He is also currently the Chairman of Cool Company Ltd, a NYSE-listed shipping company and an independent director of the
Singapore Maritime Foundation and of the Global Centre for Maritime Decarbonisation Limited, which were established by the Maritime and
Port Authority of Singapore. He is also a member of the board of directors of Gard P&I (Bermuda) Ltd, a leading maritime insurer.
He was previously Head of Business Development of Quantum Pacific Advisory Limited in London and acted as Director and then Chairman of
Pacific Drilling SA until 2018. Prior to joining Quantum Pacific Advisory Limited in 2008, Mr. Ducau was Vice President in the Investment
Banking Division of Morgan Stanley & Co. International Ltd. In London. 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 an Executive Director
of Cyclo Therapeutics, Inc., a biotechnology company focused on developing novel therapeutics based on cyclodextrin technologies. 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. Recently, Mr. Fine
served as Vice Chairman and Chairman of the Restructuring Committee of Pacific Drilling SA from 2017 to 2018 where he successfully led
the Independent Directors to a successful reorganization. He also served as Sole 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. He and his wife, Cathy are also the Executive Producers of “The Concert
for Newtown” with Peter Yarrow of Peter, Paul, and Mary. Mr. Fine has been a guest lecturer at Ohio State University’s Moritz
School of Law and Fordham University Law School.
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 Investible Funds VCC as well as the Salvation Army and James Cook University Singapore 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 Executive Officer of One Globe Business
Advisory Ltd, the chairman of IC, and a board member of ICL Group Ltd., OPC and other private companies, each of which may be associated
with Mr. Idan Ofer. From 2017 until July 2021, Mr. Kaufman served as the Chief Executive Officer of Quantum Pacific (UK) LLP and from
2008 until 2017 as Chief Financial Officer of Quantum Pacific (UK) LLP (and its predecessor Quantum Pacific Advisory Limited). From 2002
until 2007, Mr. Kaufman 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 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 on the investment committees of SUSI Asia Energy Transition Fund and Armstrong SE Asia Clean Energy Fund. 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.
Senior
Management
Robert
Rosen. Mr. Rosen has served as CEO of Kenon since September 2017 and
is a board member of OPC. Prior to becoming CEO, Mr. Rosen served as General Counsel of Kenon upon joining Kenon in 2014. Prior to joining
Kenon, Mr. Rosen spent 15 years in private practice with top tier law firms, including Linklaters LLP and Milbank LLP. 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 since
October 2017. 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).
We pay our directors compensation for serving
as directors, including per meeting fees.
For the year ended
December 31, 2022, the
aggregate compensation accrued (comprising remuneration and the aggregate fair market value of equity awards granted) for our directors
and executive officers was approximately $3 million.
For further information on Kenon’s Share
Incentive Plan 2014 and Share Option Plan 2014, see “Item 6.E Share Ownership.”
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.
Nonetheless, 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.
Board of Directors
Our constitution gives our board of directors
general powers to manage our business. The board of directors, which consists of eight 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 us. 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 all of our board of directors is independent according to the NYSE’s listing
standards. Our board of directors has affirmatively determined that each of Antoine Bonnier, Arunava Sen, Aviad Kaufman, Barak Cohen,
Bill Foo, Cyril Pierre-Jean Ducau, Laurence N. Charney and N. Scott Fine, representing all of our eight 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.”
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 four 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, the compensation committee and the ESG 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.
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 firm; |
|
• |
the performance of our internal audit function; |
|
• |
our compliance with legal and regulatory requirements; and |
|
• |
review of related party transactions. |
All three 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.
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. Nonetheless, we have determined that all three members of our nominating and corporate governance committee,
Cyril Pierre-Jean Ducau, Bill Foo and Aviad Kaufman are independent directors as defined under the applicable rules of the NYSE.
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 Chief Executive Officer and other senior executives;
|
|
• |
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 Chief Executive
Officer and other senior executives, including evaluating their performance in light of such goals and objectives; and |
|
• |
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 three members of our compensation committee, N. Scott Fine, Laurence N. Charney 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.
ESG
Committee
We have established an ESG committee to carry
out the responsibilities delegated by the board of directors regarding the oversight of Kenon’s risks, opportunities, strategies,
goals, and policies and procedures related to environmental, social, and governance. Specifically, our ESG committee’s responsibilities
include: monitoring and advising the board of directors on our risks and opportunities related to ESG matters; reviewing and discussing
with management our goals, strategies, and policies and procedures to address ESG risks and opportunities; reviewing and advising the
board of directors on our performance related to the ESG goals, strategies, and policies and procedures; reviewing and approving policies
and procedures used to prepare ESG-related statements and disclosures, including statements and disclosures to be furnished or filed with
the SEC; monitoring disclosure requirements under applicable laws, regulations and stock exchange rules and overseeing our plans and processes
to comply with such disclosure requirements; overseeing our ESG-related engagement efforts with shareholders, other key stakeholders and
reviewing and advising the board of directors on ESG-related shareholder proposals; reviewing our government relations strategies and
activities, including any political activities and contributions and lobbying activities; and reviewing our charitable programs and community
investment activities.
The members of our ESG committee are Arunava
Sen, Cyril Pierre-Jean Ducau, and Laurence N. Charney. Our ESG committee operates under a written charter.
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.
|
Company |
|
|
|
|
OPC(1)
|
|
|
281 |
|
|
Kenon
|
|
|
|
|
|
Total
|
|
|
|
|
_____________________________________
| (1) |
This table includes CPV’s employees. |
OPC
As of
December 31, 2022, OPC employed 281
employees (including 131 CPV employees). For further information on OPC’s employees, see
“Item
4.B Business Overview—Our Businesses—OPC—OPC’s Description of Operations—Employees.”
ZIM
As of
December 31, 2022, ZIM employed 6,530
employees worldwide (including
contract workers), including 830 employees based in Israel.
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’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.”
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, 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 2022, with a value of $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).
| ITEM 7. |
Major Shareholders and Related Party Transactions |
The following table sets forth information
regarding the beneficial ownership of our ordinary shares as of
March 29, 2023, by each person or entity beneficially owning 5% or more
of our ordinary shares, based upon the 53,894,413 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
March 29, 2023.
As of
March 29, 2023, 53,891,434 of our shares
(99.99%) were held by one holder of record in the United States, Cede & Co., as nominee for the Depository Trust Company, which indirectly
holds our shares traded on the NYSE and the TASE. 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. Our remaining shares were held by
9 shareholders of record as of that date.
All of our ordinary shares have the same voting
rights.
|
Beneficial Owner (Name/Address) |
|
|
|
|
Percentage of
Ordinary Shares |
|
|
Ansonia Holdings Singapore B.V.(1)
|
|
|
32,497,569 |
|
|
|
60.3 |
% |
|
Gilad Altshuler(2)
|
|
|
3,615,360 |
|
|
|
6.7 |
% |
|
Laurence N. Charney
|
|
|
49,180 |
(3) |
|
|
* |
(4) |
|
Bill Foo
|
|
|
16,420 |
(3) |
|
|
* |
(4) |
|
Arunava Sen
|
|
|
16,420 |
(3) |
|
|
* |
(4) |
|
Nathan Scott Fine
|
|
|
1,804 |
(3) |
|
|
* |
(4) |
|
Directors and Senior Management (Executive Officers)(5)
|
|
|
— |
|
|
|
* |
(4) |
__________________________________________
| (1) |
Based solely on the Schedule 13-D/A (Amendment No. 5) filed by Ansonia Holdings Singapore B.V. with the SEC on July 7, 2021. A discretionary
trust, in which Mr. Idan Ofer is the beneficiary, indirectly holds 100% of Ansonia Holdings Singapore B.V. |
| (2) |
Based solely on the Schedule 13-G filed by Gilad Altshuler with the SEC on February 21, 2023. According to the Schedule 13-G, the
3,615,360 ordinary shares consists of (i) 3,325,657 ordinary shares by provident and pension funds managed by Altshuler Shaham Provident
& Pension Funds Ltd., a majority-owned subsidiary of Altshuler-Shaham Ltd., (ii) 277,203 ordinary shares held by mutual funds managed
by Altshuler Shaham Mutual Funds Management Ltd., also a majority-owned subsidiary of Altshuler-Shaham Ltd, and (iii) 12,4,500 ordinary
shares held by hedge funds managed by Altshuler Shaham Owl, Limited Partnership, an affiliate of Altshuler-Shaham Ltd. |
| (3) |
Based solely on Exhibit 99.3 to the Form 6-K furnished by Kenon with the SEC on April 27, 2022. |
| (4) |
Owns less than 1% of Kenon’s ordinary shares. |
| (5) |
Excludes shares held by Laurence N. Charney, Bill Foo, Arunava Sen and Nathan Scott Fine. |
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.
| 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 several related party transactions
with certain of our affiliates. Set forth below is a summary of these transactions. For further information, see Note 27 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 are considered to be related parties, including the ORL Group. OPC-Rotem recorded revenues from related parties in
the amount of $252 million in the year ended
December 31, 2022.
OPC-Rotem
and OPC-Hadera Financing Agreements
OPC-Rotem and OPC-Hadera have entered into
financing agreements for the financing of their power plant projects, see “Item 5.B Liquidity and
Capital Resources—OPC’s Liquidity and Capital Resources—OPC’s Material Indebtedness—OPC-Hadera Financing
Agreement” and “Item 5.B Liquidity and Capital Resources—OPC’s Liquidity
and Capital Resources—OPC’s Material Indebtedness—OPC-Rotem Financing Agreement.” One of the lenders under
both of these agreements is a financial institution that is an OPC related party.
| C. |
Interests of Experts and Counsel |
Not applicable.
| ITEM 8. |
Financial Information |
| 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 20 to our financial
statements included in this annual report. For information on our dividend policy, see “Item 10.B
Constitution.”
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.”
| ITEM 9. |
The Offer and Listing |
| A. |
Offer and Listing Details |
Kenon’s ordinary shares are listed on
the TASE (trading symbol: KEN), our primary host market, and the NYSE (trading symbol: KEN), our principal market outside our host market.
Not applicable.
Our ordinary shares are listed on each of
the NYSE and the TASE under the symbol “KEN.”
Not applicable.
Not applicable.
Not applicable.
| ITEM 10. |
Additional Information |
Not applicable.
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 six months after our financial year end, being December 31); or |
|
• |
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 2021 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 under section 160 of the Insolvency, Restructuring
and Dissolution Act 2018; 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 (i) in the case of a member or members who in aggregate
hold(s) more than 50% of the total number of our issued and paid-up shares (excluding treasury shares), not less than ten days, or (ii)
in the case of a member or members who in aggregate hold(s) more than 5% 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 (iii) are qualified to attend
and vote at the meeting for which such notice is given, and (iv) have held shares representing the prescribed threshold in (i) or (ii)
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.
Shareholders’ Meetings
We are required to hold an annual general
meeting each year. Annual general meetings must be held within six months after 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:
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• |
14 days’ written notice to be given by Kenon of a general meeting to pass an ordinary resolution;
and |
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• |
21 days’ written notice to be given by Kenon of a general meeting to pass a special resolution,
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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, 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. 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 stand-alone
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 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.
Takeovers
The Singapore Code on Take-overs and Mergers,
the Singapore Companies Act and the Securities and Futures Act 2001 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:
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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; |
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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); |
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• |
a company and its pension funds and employee share schemes; |
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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; |
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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; |
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• |
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; |
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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.
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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 Kenon, 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.
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, interest, 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, willful 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.
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Delaware |
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Singapore—Kenon Holdings Ltd. |
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Board of Directors |
A typical certificate of incorporation and bylaws would provide that the number of
directors on the board of directors will be fixed from time to time by a vote of the majority of the authorized directors. Under Delaware
law, a board of directors can be divided into classes and cumulative voting in the election of directors is only permitted if expressly
authorized in a corporation’s certificate of incorporation. |
|
The constitution of companies will typically state the minimum and maximum number
of directors as well as provide that the number of directors may be increased or reduced by shareholders via ordinary resolution passed
at a general meeting, provided that the number of directors following such increase or reduction is within the maximum and minimum number
of directors provided in the constitution and the Singapore Companies Act, respectively. Our constitution provides that, unless otherwise
determined by a general meeting, the minimum number of directors is five and the maximum number is 12. |
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Limitation on Personal Liability of Directors |
A typical certificate of incorporation provides for the elimination of personal monetary
liability of directors for breach of fiduciary duties as directors to the fullest extent permissible under the laws of Delaware, except
for liability (i) for any breach of a director’s loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation
Law (relating to the liability of directors for unlawful payment of a dividend or an unlawful stock purchase or redemption) or (iv) for
any transaction from which the director derived an improper personal benefit. A typical certificate of incorporation would also provide
that if the Delaware General Corporation Law is amended so as to allow further elimination of, or limitations on, director liability,
then the liability of directors will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law
as so amended. |
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Pursuant to the Singapore Companies Act,
any provision (whether in the constitution, contract or otherwise) purporting to exempt a director (to any extent) from any liability
attaching in connection with any negligence, default, breach of duty or breach of trust in relation to Kenon will be void except as permitted
under the Singapore Companies Act. Nevertheless, a director can be released by the shareholders of Kenon for breaches of duty to Kenon,
except in the case of fraud, illegality, insolvency and oppression or disregard of minority interests.
Our constitution currently provides that,
subject to the provisions of the Singapore Companies Act and every other act for the time being in force concerning companies and affecting
Kenon, every director, auditor, secretary or other officer of Kenon and its subsidiaries and affiliates shall be entitled to be indemnified
by Kenon against all liabilities incurred by him in the execution and discharge of his duties and where he serves at the request of Kenon
as a director, officer, employee or agent of any subsidiary or affiliate of Kenon or in relation thereto, including any liability incurred
by him in defending any proceedings, whether civil or criminal, which relate to anything done or omitted or alleged to have been done
or omitted by him as an officer or employee of Kenon, and in which judgment is given in his favor (or the proceedings otherwise disposed
of without any finding or admission of any material breach of duty on his part) or in which he is acquitted, or in connection with an
application under statute in respect of such act or omission in which relief is granted to him by the court. |
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Interested Shareholders |
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Section 203 of the Delaware General Corporation
Law generally prohibits a Delaware corporation from engaging in specified corporate transactions (such as mergers, stock and asset sales,
and loans) with an “interested stockholder” for three years following the time that the stockholder becomes an interested
stockholder. Subject to specified exceptions, an “interested stockholder” is a person or group that owns 15% or more of the
corporation’s outstanding voting stock (including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the person has voting rights
only), or is an affiliate or associate of the corporation and was the owner of 15% or more of the voting stock at any time within the
previous three years.
A Delaware corporation may elect to “opt
out” of, and not be governed by, Section 203 through a provision in either its original certificate of incorporation, or an amendment
to its original certificate or bylaws that was approved by majority stockholder vote. With a limited exception, this amendment would not
become effective until 12 months following its adoption. |
|
There are no comparable provisions in Singapore with respect to public companies which
are not listed on the Singapore Exchange Securities Trading Limited. |
|
Delaware |
|
Singapore—Kenon Holdings Ltd. |
|
Removal of Directors |
A typical certificate of incorporation and bylaws provide that, subject to the rights
of holders of any preferred stock, directors may be removed at any time by the affirmative vote of the holders of at least a majority,
or in some instances a supermajority, of the voting power of all of the then outstanding shares entitled to vote generally in the election
of directors, voting together as a single class. A certificate of incorporation could also provide that such a right is only exercisable
when a director is being removed for cause (removal of a director only for cause is the default rule in the case of a classified board). |
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According to the Singapore Companies Act,
directors of a public company may be removed before expiration of their term of office with or without cause by ordinary resolution (i.e.,
a resolution which is passed by a simple majority of those shareholders present and voting in person or by proxy). Notice of the intention
to move such a resolution has to be given to Kenon not less than 28 days before the meeting at which it is moved. Kenon shall then give
notice of such resolution to its shareholders not less than 14 days before the meeting. Where any director removed in this manner was
appointed to represent the interests of any particular class of shareholders or debenture holders, the resolution to remove such director
will not take effect until such director’s successor has been appointed.
Our constitution provides that Kenon may
by ordinary resolution of which special notice has been given, remove any director before the expiration of his period of office, notwithstanding
anything in our constitution or in any agreement between Kenon and such director and appoint another person in place of the director so
removed. |
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Filling Vacancies on the Board of Directors |
A typical certificate of incorporation and bylaws provide that, subject to the rights
of the holders of any preferred stock, any vacancy, whether arising through death, resignation, retirement, disqualification, removal,
an increase in the number of directors or any other reason, may be filled by a majority vote of the remaining directors, even if such
directors remaining in office constitute less than a quorum, or by the sole remaining director. Any newly elected director usually holds
office for the remainder of the full term expiring at the annual meeting of stockholders at which the term of the class of directors to
which the newly elected director has been elected expires. |
|
The constitution of a Singapore company typically provides that the directors have
the power to appoint any person to be a director, either to fill a vacancy or as an addition to the existing directors, but so that the
total number of directors will not at any time exceed the maximum number fixed in the constitution. Any newly elected director shall hold
office until the next following annual general meeting, where such director will then be eligible for re-election. Our constitution provides
that the shareholders may by ordinary resolution, or the directors may, appoint any person to be a director as an additional director
or to fill a vacancy provided that any person so appointed by the directors will only hold office until the next annual general meeting,
and will then be eligible for re-election. |
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Amendment of Governing Documents |
Under the Delaware General Corporation Law, amendments to a corporation’s certificate
of incorporation require the approval of stockholders holding a majority of the outstanding shares entitled to vote on the amendment.
If a class vote on the amendment is required by the Delaware General Corporation Law, a majority of the outstanding stock of the class
is required, unless a greater proportion is specified in the certificate of incorporation or by other provisions of the Delaware General
Corporation Law. Under the Delaware General Corporation Law, the board of directors may amend bylaws if so authorized in the charter.
The stockholders of a Delaware corporation also have the power to amend bylaws. |
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Our constitution may be altered by special resolution (i.e., a resolution passed by
at least a three-fourths majority of the shares entitled to vote, present in person or by proxy at a meeting for which not less than 21
days’ written notice is given). The board of directors has no right to amend the constitution. |
|
Delaware |
|
Singapore—Kenon Holdings Ltd. |
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Meetings of Shareholders |
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Annual and Special Meetings
Typical bylaws provide that annual meetings
of stockholders are to be held on a date and at a time fixed by the board of directors. Under the Delaware General Corporation Law, a
special meeting of stockholders may be called by the board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws.
Quorum Requirements
Under the Delaware General Corporation Law,
a corporation’s certificate of incorporation or bylaws can specify the number of shares which constitute the quorum required to
conduct business at a meeting, provided that in no event shall a quorum consist of less than one-third of the shares entitled to vote
at a meeting. |
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Annual General Meetings
All companies are required to hold an annual
general meeting once every calendar year. The first annual general meeting was required to be held within 18 months of Kenon’s incorporation
and subsequently, annual general meetings must be held within six months after Kenon’s financial year end.
Extraordinary General
Meetings
Any general meeting other than the annual
general meeting is called an “extraordinary general meeting.” Two or more members (shareholders) holding not less than 10%
of the total number of issued shares (excluding treasury shares) may call an extraordinary general meeting. In addition, the constitution
usually also provides that general meetings may be convened in accordance with the Singapore Companies Act by the directors.
Notwithstanding anything in the constitution,
the directors are required to convene a general meeting if required to do so by requisition (i.e., written notice to directors requiring
that a meeting be called) by shareholder(s) holding not less than 10% of the total number of paid-up shares of Kenon carrying voting rights.
Our constitution provides that the directors
may, whenever they think fit, convene an extraordinary general meeting.
Quorum Requirements
Our constitution provides that shareholders
entitled to vote holding 33 and 1/3% of our issued and paid-up shares, present in person or by proxy at a meeting, shall be a quorum.
In the event a quorum is not present, the meeting may be adjourned for one week. |
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Indemnification of Officers, Directors and Employers |
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Under the Delaware General Corporation Law,
subject to specified limitations in the case of derivative suits brought by a corporation’s stockholders in its name, a corporation
may indemnify any person who is made a party to any third-party action, suit or proceeding on account of being a director, officer, employee
or agent of the corporation (or was serving at the request of the corporation in such capacity for another corporation, partnership, joint
venture, trust or other enterprise) against expenses, including attorney’s fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with the action, suit or proceeding through, among other things, a majority
vote of a quorum consisting of directors who were not parties to the suit or proceeding, if the person:
•
acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation or,
in some circumstances, at least not opposed to its best interests; and
•
in a criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Delaware corporate law permits indemnification
by a corporation under similar circumstances for expenses (including attorneys’ fees) actually and reasonably incurred by such persons
in connection with the defense or settlement of a derivative action or suit, except that no indemnification may be made in respect of
any claim, issue or matter as to which the person is adjudged to be liable to the corporation unless the Delaware Court of Chancery or
the court in which the action or suit was brought determines upon application that the person is fairly and reasonably entitled to indemnity
for the expenses which the court deems to be proper.
To the extent a director, officer, employee
or agent is successful in the defense of such an action, suit or proceeding, the corporation is required by Delaware corporate law to
indemnify such person for expenses (including attorneys’ fees) actually and reasonably incurred thereby. Expenses (including attorneys’
fees) incurred by such persons in defending any action, suit or proceeding may be paid in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of that person to repay the amount if it is ultimately determined that
that person is not entitled to be so indemnified. |
|
The Singapore Companies Act specifically
provides that Kenon is allowed to:
•
purchase and maintain for any officer insurance against any liability attaching to such officer in respect of any negligence, default,
breach of duty or breach of trust in relation to Kenon;
•
indemnify such officer against liability incurred by a director to a person other than Kenon except when the indemnity is against (i)
any liability of the director to pay a fine in criminal proceedings or a sum payable to a regulatory authority by way of a penalty in
respect of non-compliance with any requirement of a regulatory nature (however arising); or (ii) any liability incurred by the officer
(1) in defending criminal proceedings in which he is convicted, (2) in defending civil proceedings brought by Kenon or a related company
of Kenon in which judgment is given against him or (3) in connection with an application for relief under specified sections of the Singapore
Companies Act in which the court refuses to grant him relief;
•
indemnify any auditor against any liability incurred or to be incurred by such auditor in defending any proceedings (whether civil or
criminal) in which judgment is given in such auditor’s favor or in which such auditor is acquitted; or
•
indemnify any auditor against any liability incurred by such auditor in connection with any application under specified sections of the
Singapore Companies Act in which relief is granted to such auditor by a court.
In cases where, inter alia, an officer is
sued by Kenon the Singapore Companies Act gives the court the power to relieve directors either wholly or partially from the consequences
of their negligence, default, breach of duty or breach of trust. However, Singapore case law has indicated that such relief will not be
granted to a director who has benefited as a result of his or her breach of trust. In order for relief to be obtained, it must be shown
that (i) the director acted reasonably; (ii) the director acted honestly; and (iii) it is fair, having regard to all the circumstances
of the case including those connected with such director’s appointment, to excuse the director.
Our constitution currently provides that,
subject to the provisions of the Singapore Companies Act and every other act for the time being in force concerning companies and affecting
Kenon, every director, auditor, secretary or other officer of Kenon and its subsidiaries and affiliates shall be entitled to be indemnified
by Kenon against all liabilities incurred by him in the execution and discharge of his duties and where he serves at the request of Kenon
as a director, officer, employee or agent of any subsidiary or affiliate of Kenon or in relation thereto, including any liability incurred
by him in defending any proceedings, whether civil or criminal, which relate to anything done or omitted or alleged to have been done
or omitted by him as an officer or employee of Kenon, and in which judgment is given in his favor (or the proceedings otherwise disposed
of without any finding or admission of any material breach of duty on his part) or in which he is acquitted, or in connection with an
application under statute in respect of such act or omission in which relief is granted to him by the court. |
|
Delaware |
|
Singapore—Kenon Holdings Ltd. |
|
Shareholder Approval of Business Combinations |
Generally, under the Delaware General Corporation
Law, completion of a merger, consolidation, or the sale, lease or exchange of substantially all of a corporation’s assets or dissolution
requires approval by the board of directors and by a majority (unless the certificate of incorporation requires a higher percentage) of
outstanding stock of the corporation entitled to vote. The Delaware General Corporation Law also
requires a special vote of stockholders in connection with a business combination with an “interested stockholder” as defined
in section 203 of the Delaware General Corporation Law. For further information on such provisions, see “—Interested
Shareholders” above. |
|
The Singapore Companies Act mandates that
specified corporate actions require approval by the shareholders in a general meeting, notably:
•
notwithstanding anything in Kenon’s constitution, directors are not permitted to carry into effect any proposals for disposing of
the whole or substantially the whole of Kenon’s undertaking or property unless those proposals have been approved by shareholders
in a general meeting;
•
subject to the constitution of each amalgamating company, an amalgamation proposal must be approved by the shareholders of each amalgamating
company via special resolution at a general meeting; and
•
notwithstanding anything in Kenon’s constitution, the directors may not, without the prior approval of shareholders, issue shares,
including shares being issued in connection with corporate actions. |
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Shareholder Action Without a Meeting |
Under the Delaware General Corporation Law, unless otherwise provided in a corporation’s
certificate of incorporation, any action that may be taken at a meeting of stockholders may be taken without a meeting, without prior
notice and without a vote if the holders of outstanding stock, having not less than the minimum number of votes that would be necessary
to authorize such action, consent in writing. It is not uncommon for a corporation’s certificate of incorporation to prohibit such
action. |
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There are no equivalent provisions under the Singapore Companies Act in respect of
passing shareholders’ resolutions by written means that apply to public companies listed on a securities exchange. |
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Shareholder Suits |
|
Under the Delaware General Corporation Law, a stockholder may bring a derivative action
on behalf of the corporation to enforce the rights of the corporation. An individual also may commence a class action suit on behalf of
himself or herself and other similarly situated stockholders where the requirements for maintaining a class action under the Delaware
General Corporation Law have been met. A person may institute and maintain such a suit only if such person was a stockholder at the time
of the transaction which is the subject of the suit or his or her shares thereafter devolved upon him or her by operation of law. Additionally,
under Delaware case law, the plaintiff generally must be a stockholder not only at the time of the transaction which is the subject of
the suit, but also through the duration of the derivative suit. Delaware Law also requires that the derivative plaintiff make a demand
on the directors of the corporation to assert the corporate claim before the suit may be prosecuted by the derivative plaintiff, unless
such demand would be futile. |
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Derivative actions
The Singapore Companies Act has a provision
which provides a mechanism enabling any registered shareholder to apply to the court for permission to bring a derivative action on behalf
of the company. In addition to registered shareholders,
courts are given the discretion to allow such persons as they deem proper to apply as well (e.g., beneficial owners of shares or individual
directors).
This provision of the Singapore Companies
Act is primarily used by minority shareholders to bring an action in the name and on behalf of the company or intervene in an action to
which the company is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the company.
Class actions
The concept of class action suits, which
allows individual shareholders to bring an action seeking to represent the class or classes of shareholders, generally does not exist
in Singapore. However, it is possible as a matter of procedure for a number of shareholders to lead an action and establish liability
on behalf of themselves and other shareholders who join in or who are made parties to the action.
Further, there are certain circumstances
in which shareholders may file and prove their claims for compensation in the event that Kenon has been convicted of a criminal offense
or has a court order for the payment of a civil penalty made against it.
Additionally, for as long as Kenon is listed
in the U.S. or in Israel, Kenon has undertaken not to claim that it is not subject to any derivative/class action that may be filed against
it in the U.S. or Israel, as applicable, solely on the basis that it is a Singapore company. |
|
Delaware |
|
Singapore—Kenon Holdings Ltd. |
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Dividends or Other Distributions; Repurchases and Redemptions
|
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The Delaware General Corporation Law permits
a corporation to declare and pay dividends out of statutory surplus or, if there is no surplus, out of net profits for the fiscal year
in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the
declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets.
Under the Delaware General Corporation Law,
any corporation may purchase or redeem its own shares, except that generally it may not purchase or redeem these shares if the capital
of the corporation is impaired at the time or would become impaired as a result of the redemption. A corporation may, however, purchase
or redeem out of capital shares that are entitled upon any distribution of its assets to a preference over another class or series of
its shares if the shares are to be retired and the capital reduced. |
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The Singapore Companies Act provides that
no dividends can be paid to shareholders except out of profits.
The Singapore Companies Act does not provide
a definition on when profits are deemed to be available for the purpose of paying dividends and this is accordingly governed by case law.
Our constitution provides that no dividend can be paid otherwise than out of profits of Kenon.
Acquisition of a company’s
own shares
The Singapore Companies Act generally prohibits
a company from acquiring its own shares subject to certain exceptions. Any contract or transaction by which a company acquires or transfers
its own shares is void. However, provided that it is expressly permitted to do so by its constitution and subject to the special conditions
of each permitted acquisition contained in the Singapore Companies Act, Kenon may:
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redeem redeemable preference shares (the redemption of these shares will not reduce the capital of Kenon). Preference shares may be redeemed
out of capital if all the directors make a solvency statement in relation to such redemption in accordance with the Singapore Companies
Act;
•
whether listed (on an approved exchange in Singapore or any securities exchange outside Singapore) or not, make an off-market purchase
of its own shares in accordance with an equal access scheme authorized in advance at a general meeting;
•
whether listed on a securities exchange (in Singapore or outside Singapore) or not, make a selective off-market purchase of its own shares
in accordance with an agreement authorized in advance at a general meeting by a special resolution where persons whose shares are to be
acquired and their associated persons have abstained from voting; and
•
whether listed (on an approved exchange in Singapore or any securities exchange outside Singapore) or not, make an acquisition of its
own shares under a contingent purchase contract which has been authorized in advance at a general meeting by a special resolution.
Kenon may also purchase its own shares by
an order of a Singapore court.
The total number of ordinary shares that
may be acquired by Kenon in a relevant period may not exceed 20% of the total number of ordinary shares in that class as of the date of
the resolution pursuant to the relevant share repurchase provisions under the Singapore Companies Act. Where, however, Kenon has reduced
its share capital by a special resolution or a Singapore court made an order to such effect, the total number of ordinary shares shall
be taken to be the total number of ordinary shares in that class as altered by the special resolution or the order of the court. Payment
must be made out of Kenon’s distributable profits or capital, provided that Kenon is solvent. Such payment may include any expenses
(including brokerage or commission) incurred directly in the purchase or acquisition by Kenon of its ordinary shares.
Financial assistance
for the acquisition of shares
Kenon may not give financial assistance
to any person whether directly or indirectly for the purpose of:
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the acquisition or proposed acquisition of shares in Kenon or units of such shares; or
•
the acquisition or proposed acquisition of shares in its holding company or ultimate holding company, as the case may be, or units of
such shares.
Financial assistance may take the form of
a loan, the giving of a guarantee, the provision of security, the release of an obligation, the release of a debt or otherwise.
However, Kenon may provide financial assistance
for the acquisition of its shares or shares in its holding company if it complies with the requirements (including, where applicable,
approval by the board of directors or by the passing of a special resolution by its shareholders) set out in the Singapore Companies Act.
Our constitution provides that subject to the provisions of the Singapore Companies Act, we may purchase or otherwise acquire our own
shares upon such terms and subject to such conditions as we may deem fit. These shares may be held as treasury shares or cancelled as
provided in the Singapore Companies Act or dealt with in such manner as may be permitted under the Singapore Companies Act. On cancellation
of the shares, the rights and privileges attached to those shares will expire. |
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Delaware |
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Singapore—Kenon Holdings Ltd. |
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Transactions with Officers and Directors |
Under the Delaware General Corporation Law, some contracts or transactions in which
one or more of a corporation’s directors has an interest are not void or voidable because of such interest provided that some conditions,
such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure, are met. Under the Delaware
General Corporation Law, either (i) the stockholders or the board of directors must approve in good faith any such contract or transaction
after full disclosure of the material facts or (ii) the contract or transaction must have been “fair” as to the corporation
at the time it was approved. If board approval is sought, the contract or transaction must be approved in good faith by a majority of
disinterested directors after full disclosure of material facts, even though less than a majority of a quorum. |
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Under the Singapore Companies Act, the chief
executive officer and directors are not prohibited from dealing with Kenon, but where they have an interest in a transaction with Kenon,
that interest must be disclosed to the board of directors. In particular, the chief executive officer and every director who is in any
way, whether directly or indirectly, interested in a transaction or proposed transaction with Kenon must, as soon as practicable after
the relevant facts have come to such officer or director’s knowledge, declare the nature of such officer or director’s interest
at a board of directors’ meeting or send a written notice to Kenon containing details on the nature, character and extent of his
interest in the transaction or proposed transaction with Kenon.
In addition, a director or chief executive
officer who holds any office or possesses any property which, directly or indirectly, duties or interests might be created in conflict
with such officer’s duties or interests as director or chief executive officer, is required to declare the fact and the nature,
character and extent of the conflict at a meeting of directors or send a written notice to Kenon containing details on the nature, character
and extent of the conflict.
The Singapore Companies Act extends the
scope of this statutory duty of a director or chief executive officer to disclose any interests by pronouncing that an interest of a member
of the director’s or, as the case may be, the chief executive officer’s family (including spouse, son, adopted son, step-son,
daughter, adopted daughter and step-daughter) will be treated as an interest of the director.
There is however no requirement for disclosure
where the interest of the director or chief executive officer (as the case may be) consists only of being a member or creditor of a corporation
which is interested in the proposed transaction with Kenon if the interest may properly be regarded as immaterial. Where the proposed
transaction relates to any loan to Kenon, no disclosure need be made where the director or chief executive officer has only guaranteed
or joined in guaranteeing the repayment of such loan, unless the constitution provides otherwise.
Further, where the proposed transaction
is to be made with or for the benefit of a related corporation (i.e., the holding company, subsidiary or subsidiary of a common holding
company) no disclosure need be made of the fact that the director or chief executive officer is also a director or chief executive officer
of that corporation, unless the constitution provides otherwise.
Subject to specified exceptions, including
a loan to a director for expenditure in defending criminal or civil proceedings, etc. or in connection with an investigation, or an action
proposed to be taken by a regulatory authority in connection with any alleged negligence, default, breach of duty or breach of trust by
him in relation to Kenon, the Singapore Companies Act prohibits Kenon from: (i) making a loan or quasi-loan to its directors or to directors
of a related corporation (each, a “relevant director”); (ii) giving a guarantee or security in connection with a loan or quasi-loan
made to a relevant director by any other person; (iii) entering into a credit transaction as creditor for the benefit of a relevant director;
(iv) giving a guarantee or security in connection with such credit transaction entered into by any person for the benefit of a relevant
director; (v) taking part in an arrangement where another person enters into any of the transactions in (i) to (iv) above or (vi) below
and such person obtains a benefit from Kenon or a related corporation; or (vi) arranging for the assignment to Kenon or assumption by
Kenon of any rights, obligations or liabilities under a transaction in (i) to (v) above. Kenon is also prohibited from entering into the
transactions in (i) to (vi) above with or for the benefit of a relevant director’s spouse or children (whether adopted or naturally
or step-children). |
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Delaware |
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Singapore—Kenon Holdings Ltd. |
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Dissenters’ Rights |
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Under the Delaware General Corporation Law, a stockholder of a corporation participating
in some types of major corporate transactions may, under varying circumstances, be entitled to appraisal rights pursuant to which the
stockholder may receive cash in the amount of the fair market value of his or her shares in lieu of the consideration he or she would
otherwise receive in the transaction. |
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There are no equivalent provisions under the Singapore Companies Act. |
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Cumulative Voting |
Under the Delaware General Corporation Law, a corporation may adopt in its bylaws
that its directors shall be elected by cumulative voting. When directors are elected by cumulative voting, a stockholder has the number
of votes equal to the number of shares held by such stockholder times the number of directors nominated for election. The stockholder
may cast all of such votes for one director or among the directors in any proportion. |
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There is no equivalent provision under the Singapore Companies Act in respect of companies
incorporated in Singapore. |
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Anti-Takeover Measures |
Under the Delaware General Corporation Law,
the certificate of incorporation of a corporation may give the board the right to issue new classes of preferred stock with voting, conversion,
dividend distribution, and other rights to be determined by the board at the time of issuance, which could prevent a takeover attempt
and thereby preclude shareholders from realizing a potential premium over the market value of their shares.
In addition, Delaware law does not prohibit
a corporation from adopting a stockholder rights plan, or “poison pill,” which could prevent a takeover attempt and also preclude
shareholders from realizing a potential premium over the market value of their shares. |
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The constitution of a Singapore company
typically provides that the company may allot and issue new shares of a different class with preferential, deferred, qualified or other
special rights as its board of directors may determine with the prior approval of the company’s shareholders in a general meeting.
Our constitution provides that our shareholders may grant to our board the general authority to issue such preference shares until the
next general meeting. For further information, see “ Item 3.D Risk Factors—Risks Relating
to Our Ordinary Shares—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” and “ —Preference Shares.”
Singapore law does not generally prohibit
a corporation from adopting “poison pill” arrangements which could prevent a takeover attempt and also preclude shareholders
from realizing a potential premium over the market value of their shares.
However, under the Singapore Code on Take-overs
and Mergers, if, in the course of an offer, or even before the date of the offer announcement, the board of the offeree company has reason
to believe that a bona fide offer is imminent, the board must not, except pursuant to a contract entered into earlier, take any action,
without the approval of shareholders at a general meeting, on the affairs of the offeree company that could effectively result in any
bona fide offer being frustrated or the shareholders being denied an opportunity to decide on its merits.
For further information on the Singapore
Code on Take-overs and Mergers, see “—Takeovers.” |
For information concerning our
material contracts,
see “
Item 4. Information on the Company” and
“Item 5.
Operating and Financial Review and Prospects.”
There are currently no exchange control restrictions
in effect in Singapore.
The following summary of the United States
federal income tax and Singapore tax considerations of ownership and disposition of our ordinary shares is based upon laws, regulations,
decrees, rulings, income tax conventions (treaties), administrative practice and judicial decisions in effect at the date of this annual
report. Legislative, judicial or administrative changes or interpretations may, however, be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or interpretations may be retroactive and could affect the tax consequences
to holders of our ordinary shares. This summary does not purport to be a legal opinion or to address all tax aspects that may be relevant
to a holder of our ordinary shares. Each prospective holder should consult its tax adviser as to the particular tax considerations to
such holder of the ownership and disposition of our ordinary shares, including the applicability and effect of any other tax laws or tax
treaties, of pending or proposed changes in applicable tax laws as of the date of this annual report, and of any actual changes in applicable
tax laws after such date.
U.S. Federal Income Tax
Considerations
The following summarizes U.S. federal income
tax considerations of owning and disposing of our ordinary shares. This summary applies only to U.S. Holders that hold our ordinary shares
as capital assets (generally, property held for investment) and that have the U.S. Dollar as its functional currency.
This summary is based on the Internal Revenue
Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder and on judicial and administrative interpretations
of the Code and the Treasury regulations, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive
effect and could affect the tax considerations described below. This summary does not purport to be a complete description of the consequences
of the transactions described in this annual report, nor does it address the application of estate, gift or other non-income U.S. federal
tax considerations or any state, local or foreign tax considerations. Moreover, this summary does not address all the tax considerations
that may be relevant to holders of our ordinary shares in light of its particular circumstances, including the alternative minimum tax,
the Medicare tax on certain investment income and special rules that apply to certain holders such as (but not limited to):
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persons that are not U.S. Holders; |
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persons that are subject to alternative minimum taxes; |
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regulated investment companies; |
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real estate investment trusts; |
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banks and other financial institutions; |
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persons that hold our ordinary shares through partnerships (or other entities classified as partnerships
for U.S. federal income tax purposes); |
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persons that acquire our ordinary shares through any employee share option or otherwise as compensation;
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persons that actually or constructively own 10% or more of the total combined voting power of all classes
of our voting stock or 10% or more of the total value of shares of all classes of our stock; |
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traders in securities that elect to apply a mark-to-market method of accounting; |
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investors that will hold our ordinary shares as part of a “hedge,” “straddle,”
“conversion,” “constructive sale” or other integrated transaction for U.S. federal income tax purposes;
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investors that have a functional currency other than the U.S. Dollar; and |
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individuals who receive our ordinary shares upon the exercise of compensatory options or otherwise as
compensation. |
Moreover, no advance rulings have been or
will be sought from the U.S. Internal Revenue Service, or IRS, regarding any matter discussed in this annual report, and counsel to Kenon
has not rendered any opinion with respect to any of the U.S. federal income tax considerations relating to the transactions addressed
herein. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the
tax aspects set forth below.
HOLDERS AND PROSPECTIVE INVESTORS SHOULD CONSULT
ITS TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO ITS PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL,
NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.
For purposes of this summary, a “U.S.
Holder” is a beneficial owner of our ordinary shares that is, for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States; |
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created
in, or organized under the laws of the United States or any state thereof or the District of Columbia; |
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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust that (i) is subject to the primary supervision of a U.S. court and which has one or more U.S.
persons who have the authority to control all substantial decisions of the trust or (ii) that has otherwise validly elected to be treated
as a U.S. person under the Code. |
If a partnership (or other entity taxable
as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ordinary shares, the tax treatment of a partner in
such partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our
ordinary shares and its partners should consult its tax advisors regarding an investment in our ordinary shares.
Taxation
of Dividends and Other Distributions on the Ordinary Shares
We were likely classified as a PFIC for the
taxable year ended
December 31, 2022 and could continue to be for foreseeable future taxable years. Accordingly, the most likely treatment
of a U.S. Holder is set forth below under “
—Passive Foreign Investment Company.”
If we were not a PFIC, the following rules would apply. The gross amount of any distribution made to a U.S. Holder with respect to our
ordinary shares, including the amount of any non-U.S. taxes withheld from the distribution, will generally be includible in income on
the day on which the distribution is actually or constructively received by a U.S. Holder as dividend income to the extent the distribution
is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. A distribution in excess
of our current and accumulated earnings and profits (as determined for U.S. federal income tax purposes), including the amount of any
non-U.S. taxes withheld from the distribution, will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s
adjusted basis in our ordinary shares and as a capital gain to the extent it exceeds the U.S. Holder’s basis. We do not expect to
maintain calculations of our earnings and profits under U.S. federal income tax principles; therefore, U.S. Holders should expect that
distributions will generally be treated as dividends for U.S. federal income tax purposes. Dividends received on our ordinary shares will
not be eligible for the dividends-received deduction generally allowed to corporations in respect of dividends received from U.S. corporations.
Distributions treated as dividends that are
received by individuals and other non-corporate U.S. Holders from “qualified foreign corporations” generally qualify for a
reduced maximum tax rate so long as certain holding period and other requirements are met. Dividends paid on our ordinary shares, should
qualify for the reduced rate if we are treated as a “qualified foreign corporation.” For this purpose, a qualified foreign
corporation means any foreign corporation provided that: (i) the corporation was not, in the year prior to the year in which the dividend
was paid, and is not, in the year in which the dividend is paid, a PFIC (as discussed below), (ii) certain holding period requirements
are met and (iii) either (A) the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States
that the IRS has approved for the purposes of the qualified dividend rules or (B) the stock with respect to which such dividend was paid
is readily tradable on an established securities market in the United States. The United States does not currently have a comprehensive
income tax treaty with Singapore. However, the ordinary shares should be considered to be readily tradable on established securities markets
in the United States if they are listed on the NYSE. Therefore, we expect that our ordinary shares should generally be considered to be
readily tradable on an established securities market in the United States, and we expect that dividends with respect to such ordinary
shares should qualify for the reduced rate. U.S. Holders should consult its tax advisors regarding the availability of the lower rate
for dividends paid with respect to our ordinary shares.
Dividends on our ordinary shares received
by a U.S. Holder will generally be treated as foreign source income for U.S. foreign tax credit purposes. The rules with respect to foreign
tax credits are complex and U.S. Holders should consult its tax advisors regarding the availability of the foreign tax credit in its particular
circumstances.
Taxation
of Dispositions of the Ordinary Shares
Subject to the discussion below under “—Passive
Foreign Investment Company,” a U.S. Holder will generally recognize gain or loss upon the sale or other taxable disposition
of our ordinary shares in an amount equal to the difference between the amount realized on such sale or other taxable disposition and
such U.S. Holder’s adjusted tax basis in our ordinary shares. Such gain or loss will generally be long-term capital gain (taxable
at a reduced rate for non-corporate U.S. Holders) or loss if, on the date of sale or disposition, such ordinary shares were held by such
U.S. Holder for more than one year. The deductibility of capital losses is subject to significant limitations. Any gain or loss recognized
by a U.S. Holder will generally be treated as U.S. source gain or loss, as the case may be, for foreign tax credit purposes, which will
generally limit the availability of foreign tax credits.
The amount realized on a sale or other taxable
disposition of our ordinary shares in exchange for foreign currency will generally equal the U.S. Dollar value of the foreign currency
at the spot exchange rate in effect on the date of sale or other taxable disposition or, if the ordinary shares are traded on an established
securities market (such as the NYSE or the TASE), in the case of a cash method or electing accrual method U.S. Holder of our ordinary
shares, the settlement date. A U.S. Holder will have a tax basis in the foreign currency received equal to the U.S. Dollar amount realized.
Any gain or loss realized by a U.S. Holder on a subsequent conversion or other disposition of the foreign currency will be foreign currency
gain or loss, which is treated as U.S. source ordinary income or loss for foreign tax credit purposes.
Passive
Foreign Investment Company
In general, a non-U.S. corporation, such as
our company, will be classified as a PFIC, for U.S. federal income tax purposes, 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 a taxable year) is attributable to assets that produce or are held for the production of passive income. For this
purpose, cash is categorized as a passive asset and our unbooked intangibles will be taken into account and generally treated as non-passive
assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, 25% or more (by value) of the shares.
Whether we are, or will be, classified as
a PFIC is a factual determination made annual that will depend, in part, upon composition of our income and assets in that year. The sale
of the Inkia Business, the investment in Qoros by the Majority Shareholder in Qoros in 2018 (which reduced our equity interest in Qoros
to 24%), the sale of half of our then remaining interest in Qoros to the Majority Shareholder in Qoros in April 2020 (which reduced our
equity interest in Qoros to 12%) and the sale of all of our remaining interest in Qoros to the Majority Shareholder in Qoros in April
2021 (which will eliminate our equity interest in Qoros) 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. Similarly,
after ZIM completed its initial public offering in February 2021 (which reduced our equity interest in ZIM to 28%) and after we completed
sales of our ZIM shares between September and November 2021 (which reduced our equity interest in ZIM to 26%) and in March 2022 (which
reduced our equity interest in ZIM to approximately 21%), our equity interest in ZIM fell below 25%. The reduction in our equity interest
in ZIM to below 25% limits our ability to treat our proportionate share of ZIM’s businesses and earnings as directly owned, which
increased the value of our assets that produce, or are held for the production of, passive income and/or our passive income, and likely
results in us becoming a PFIC for our current, and any foreseeable future taxable years.
Based upon our current and projected income
and assets, (including goodwill) and the market price of our ordinary shares, we believe that we were treated as a PFIC for the taxable
year ended
December 31, 2022. Depending upon the composition of our income and assets and the market price of our ordinary shares during
2023 and subsequent taxable years, we could continue to be classified as a PFIC for 2023 and any foreseeable future taxable years. Furthermore,
because there are uncertainties in the application of the relevant rules, it is possible that the IRS may challenge our classification
of certain income or assets as non-passive, or our valuation of our goodwill and other unbooked intangibles, each of which may increase
the likelihood of us being classified as a PFIC for the current or subsequent taxable years. Accordingly, U.S. Holders of our ordinary
shares should be willing to assume the risks of investing in a PFIC.
Further, if we are classified as a PFIC for
any taxable year during which a U.S. Holder holds our ordinary shares and any subsidiary we own is also classified as a PFIC, such U.S.
Holder would be treated as owning a proportionate amount (by value) of the shares of each such subsidiary, a lower tier PFIC, for purposes
of the application of these rules. Accordingly, U.S. Holders should be aware that they could be subject to tax under the PFIC rules even
if no distributions are received and no redemptions or other dispositions of the securities are made. U.S. Holders should consult their
tax advisors regarding the application of the PFIC rules to any subsidiary we own.
If we are classified as a PFIC for any taxable
year during which a U.S. Holder holds our ordinary shares, we will generally continue to be treated as a PFIC with respect to such U.S.
Holder for all succeeding years during which the holder holds our ordinary shares. However, if we cease to meet the threshold requirements
for PFIC status, provided that the U.S. Holder has not made a QEF Election or a Mark-to-Market Election, as described below, such holder
may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to our ordinary shares
held by such U.S. Holder. If such election is made, the U.S. Holder will be deemed to have sold our ordinary shares it holds on the last
day of the last taxable year in which we were classified as a PFIC at its fair market value and any gain from such deemed sale will be
taxed under the PFIC rules described above. After the deemed sale election, so long as we do not become classified as a PFIC in a subsequent
taxable year, the ordinary shares with respect to which such election was made will not be treated as shares in a PFIC and the U.S. Holder
will not be subject to the PFIC rules described above with respect to any “excess distribution” received from us or any gain
from an actual sale or other disposition of the ordinary shares. The rules dealing with deemed sale elections are very complex. U.S. Holders
of our ordinary shares should consult its tax advisors as to the possibility and consequences of making a deemed sale election if we cease
to be classified as a PFIC and such election becomes available.
If a U.S. Holder owns our ordinary shares
during any taxable year that we are a PFIC, such U.S. Holder may be subject to certain reporting obligations with respect to our ordinary
shares, including annual reporting on IRS Form 8621 regarding distributions received on, and any gain
realized on the disposition of, our ordinary shares. U.S. Holders should consult its
tax advisor regarding our PFIC status and the U.S. federal income tax consequences of owning and disposing
of our ordinary shares if we are, or become, classified as a PFIC, including the possibility of making a QEF Election, Mark-to-Market
Election or deemed sale election.
The PFIC rules are complex, and each U.S.
Holder should consult its own tax advisor regarding the PFIC rules (including the applicability and advisability of a QEF Election and
Mark-to-Market Election) and how the PFIC rules may affect the U.S. federal income tax consequences of the ownership, and disposition
of our ordinary shares.
If we are classified as a PFIC, the U.S. federal
income tax consequences to a U.S. Holder of the ownership, and disposition of our ordinary shares will depend on whether such U.S. Holder
makes a QEF election or makes a mark-to-market election with respect to our ordinary shares. A U.S. Holder that does not make either a
QEF Election or a Mark-to-Market Election (a “Non-Electing U.S. Holder”) will be taxable as described below.
A Non-Electing U.S. Holder will be subject
to the PFIC rules with respect to (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution
paid during a taxable year to a U.S. Holder that is greater than 125% of the average annual distributions paid in the three preceding
taxable years or, if shorter, the U.S. Holder’s holding period for the ordinary shares), and (ii) any gain realized on the sale
or other disposition of our ordinary shares. In addition, dividends paid in respect of our ordinary shares would not be eligible for the
lower tax rate described under “—Taxation of Dividends and Other Distributions on the Ordinary
Shares” above.
Under the PFIC rules:
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the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period
for the ordinary shares; |
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the amount allocated to the taxable year of the excess distribution, sale or other disposition and to
any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC (each,
a “pre-PFIC year”), will be taxable as ordinary income; |
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the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at
the highest tax rate in effect for individuals or corporations, as appropriate, for that year; and |
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the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable
to each prior taxable year, other than a pre-PFIC year. |
QEF Election
A U.S. Holder that makes a QEF Election for
the first tax year in which its holding period of its ordinary shares begins generally will not be subject to the adverse PFIC rules discussed
above with respect to its ordinary shares. However, a U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax
on such U.S. Holder’s pro rata share of (i) our net capital gain, which will be taxed as long-term capital gain to such U.S. Holder,
and (ii) our ordinary earnings, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain”
is the excess of (i) net long-term capital gain over (ii) net short-term capital loss, and “ordinary earnings” are the excess
of (i) “earnings and profits” over (ii) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S.
federal income tax on such amounts for each tax year in which we are a PFIC, regardless of whether such amounts are actually distributed
to such U.S. Holder by us. However, for any tax year in which we are a PFIC and have no net income or gain, U.S. Holders that have made
a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made a QEF Election has an
income inclusion, such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on
such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal
interest,” which is not deductible.
A U.S. Holder that makes a timely QEF Election
generally (i) may receive a tax-free distribution from us to the extent that such distribution represents “earnings and profits”
that were previously included in income by the U.S. Holder because of such QEF Election and (ii) will adjust such U.S. Holder’s
tax basis in the common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election.
In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition
of ordinary shares.
The procedure for making a QEF Election, and
the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election
will be treated as “timely” for purposes of avoiding the default PFIC rules discussed above if such QEF Election is made for
the first year in the U.S. Holder’s holding period for the ordinary shares in which we were a PFIC. The QEF Election is made on
a shareholder-by-shareholder basis and, once made, can only be revoked with the consent of the IRS. A U.S. Holder generally makes a QEF
Election by attaching a completed IRS Form 8621, including a PFIC Annual Information Statement, to a timely filed U.S. federal income
tax return for the year to which the election relates.
A QEF Election will apply to the tax year
for which such QEF Election is made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS
consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, we cease to be a PFIC,
the QEF Election will remain in effect (although it will not be applicable) during those tax years in which we are not a PFIC. Accordingly,
if we become a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF
rules described above during any subsequent tax year in which we qualify as a PFIC.
In order to comply with the requirements of a QEF
Election, a U.S. Holder must receive a PFIC annual information statement from us. We will endeavor to provide U.S. Holders with a PFIC
annual information statement for our 2022 taable year in order to enable U.S. Holders to make a QEF ElectionHowever, there is no assurance
that we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided. We have not determined
if we will provide U.S. Holders such information for any subsequent taxable year.
If we do not provide the required information
with regard to us or any of our Subsidiary PFICs for any taxable year, U.S. Holders will not be able to make or maintain a QEF Election
for such entity and will continue to be subject to the PFIC rules discussed above that apply to Non-Electing U.S. Holders with respect
to the taxation of gains and excess distributions.
Mark-to-Market Election
As an alternative to the foregoing rules,
a U.S. Holder of “marketable stock” in a PFIC may make a Mark-to-Market Election with respect to such stock. A Mark-to-Market
Election may be made with respect to our ordinary shares, provided they are actively traded, defined for this purpose as being traded
on a “qualified exchange,” other than in de minimis quantities, on at least 15 days during each calendar quarter. We anticipate
that our ordinary shares should qualify as being actively traded, but no assurances may be given in this regard. If a U.S. Holder of our
ordinary shares makes this election with respect to our ordinary shares, the U.S. Holder will generally (i) include as ordinary income
for each taxable year that we are classified as a PFIC the excess, if any, of the fair market value of our ordinary shares held at the
end of the taxable year over the adjusted tax basis of such ordinary shares and (ii) deduct as an ordinary loss in each such taxable year
the excess, if any, of the adjusted tax basis of our ordinary shares over the fair market value of such ordinary shares held at the end
of the taxable year, but such deduction will only be allowed to the extent of the net amount previously included in income as a result
of the Mark-to-Market Election. The U.S. Holder’s adjusted tax basis in our ordinary shares would be adjusted to reflect any income
or loss resulting from the Mark-to-Market Election. If a U.S. Holder makes a Mark-to-Market Election in respect of our ordinary shares
and we cease to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during
any period that we are not classified as a PFIC. In addition, any gain such U.S. Holder recognizes upon the sale or other taxable disposition
of our ordinary shares in a year when we are classified as a PFIC will be treated as ordinary income and any loss will be treated as ordinary
loss, but such loss will only be treated as ordinary loss to the extent of the net amount previously included in income as a result of
the Mark-to-Market Election. If a U.S. Holder makes a Mark-to-Market Election in respect of a corporation classified as a PFIC and such
corporation ceases to be classified as a PFIC, the U.S. Holder will not be required to take into account the gain or loss described above
during any period that such corporation is not classified as a PFIC. In the case of a U.S. Holder who has held our ordinary shares during
any taxable year in respect of which we were classified as a PFIC and continues to hold such ordinary shares (or any portion thereof)
and has not previously made a Mark-to-Market Election, and who is considering making a Mark-to-Market Election, special tax rules may
apply relating to purging the PFIC taint of such ordinary shares. Because a Mark-to-Market Election cannot technically be made for any
Subsidiary PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s
indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
A U.S. Holder makes a Mark-to-Market Election
by attaching a completed IRS Form 8621 to a timely filed U.S. federal income tax return. A timely Mark-to-Market Election applies to the
tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless the securities cease to be “marketable
stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the availability
of, and procedure for making, a Mark-to-Market Election.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSIDERATIONS SET OUT ABOVE
IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. YOU SHOULD CONSULT YOUR TAX ADVISOR ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO
YOUR PARTICULAR CIRCUMSTANCE AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES OF OWNING AND DISPOSING OF OUR ORDINARY
SHARES.
Material Singapore Tax
Considerations
The following discussion is a summary of Singapore
income tax, goods and services tax, or GST, stamp duty and estate duty considerations relevant to the ownership and disposition of our
ordinary shares by an investor who is not tax resident or domiciled in Singapore and who does not carry on business or otherwise have
a presence in Singapore. The statements made herein regarding taxation are general in nature and based upon certain aspects of the current
tax laws of Singapore and administrative guidelines issued by the relevant authorities in force as of the date hereof and are subject
to any changes in such laws or administrative guidelines or the interpretation of such laws or guidelines occurring after such date, which
changes could be made on a retrospective basis. The statements made herein do not purport to be a comprehensive or exhaustive description
of all of the tax considerations that may be relevant to a decision to own or dispose of our ordinary shares and do not purport to deal
with the tax considerations applicable to all categories of investors, some of which (such as dealers in securities) may be subject to
special rules. Prospective shareholders should consult its tax advisers as to the Singapore or other tax considerations of the ownership
or disposal of our ordinary shares, taking into account its own particular circumstances. The statements below are based upon the assumption
that Kenon is a tax resident in Singapore for Singapore income tax purposes. It is emphasized that neither Kenon nor any other persons
involved in this annual report accepts responsibility for any tax effects or liabilities resulting from the holding or disposal of our
ordinary shares.
Income
Taxation Under Singapore Law
Dividends or Other Distributions with Respect
to Ordinary Shares
Under the one-tier corporate tax system which
currently applies to all Singapore tax resident companies, tax on corporate profits is final, and dividends paid by a Singapore tax resident
company are not subject to withholding tax and will be tax exempt in the hands of a shareholder, whether or not the shareholder is a company
or an individual and whether or not the shareholder is a Singapore tax resident.
Capital Gains upon Disposition of Ordinary
Shares
Under current Singapore tax laws, there is
no tax on capital gains. There are no specific laws or regulations which deal with the characterization of whether a gain is income or
capital in nature. Gains arising from the disposal of our ordinary shares may be construed to be of an income nature and subject to Singapore
income tax, if they arise from activities which the Inland Revenue Authority of Singapore regards as the carrying on of a trade or business
in Singapore. However, under Singapore tax laws and subject to certain exceptions, any gains derived by a divesting company from its disposal
of ordinary shares in an investee company between
June 1, 2012 and
December 31, 2027 are generally not taxable if immediately prior to
the date of the relevant disposal, the investing company has held at least 20% of the ordinary shares in the investee company for a continuous
period of at least 24 months (
“safe harbor rule”).
Goods and Services Tax
The issue or transfer of ownership of our
ordinary shares should be exempt from Singapore GST. Hence, the holders would not incur any GST on the subscription or subsequent transfer
of the shares.
Stamp
Duty
Where our ordinary shares evidenced in certificated
forms are acquired in Singapore, stamp duty is payable on the instrument of their transfer at the rate of 0.2% of the consideration for
or market value of our ordinary shares, whichever is higher.
Where an instrument of transfer is executed
outside Singapore or no instrument of transfer is executed, no stamp duty is payable on the acquisition of our ordinary shares. However,
stamp duty may be payable if the instrument of transfer is executed outside Singapore and is received in Singapore. The stamp duty is
borne by the purchaser unless there is an agreement to the contrary.
On the basis that any transfer instruments
in respect of our ordinary shares traded on the NYSE and the TASE are executed outside Singapore through our transfer agent and share
registrar in the United States for registration in our branch share register maintained in the United States (without any transfer instruments
being received in Singapore), no stamp duty should be payable in Singapore on such transfers.
Tax
Treaties Regarding Withholding Taxes
There is no comprehensive avoidance of double
taxation agreement between the United States and Singapore which applies to withholding taxes on dividends or capital gains.
| F. |
Dividends and Paying Agents |
Not applicable.
Not applicable.
Our SEC filings are available to you on the
SEC’s
website at http://www.sec.gov. This site contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC. The information on that
website is not part of this registration statement. We also make
available on our
website free of charge, our annual reports on Form 20-F and the text of our reports on Form 6-K, including any amendments
to these reports, as well as certain other SEC filings, as soon as reasonably practicable after they are electronically filed with or
furnished to the SEC. We maintain a corporate
website at
http://www.kenon-holdings.com. Information contained on, or that can be accessed
through, our
website does not constitute a part of this annual report on Form 20-F. We have included our
website address in this annual
report solely as an inactive textual reference.
As a foreign private issuer, we will be exempt
from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal
shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with
the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, for so
long as we are listed on the NYSE, or any other U.S. exchange, and are registered with the SEC, we will file with the SEC, within 120
days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial
statements audited by an independent registered public accounting firm. We also submit to the SEC on Form 6-K the interim financial information
that we publish.
| I. |
Subsidiary Information |
Not applicable.
| ITEM 11. |
Quantitative and Qualitative Disclosures about Market Risk |
Our multinational operations expose us to
a variety of market risks, which embody the potential for changes in the fair value of the financial instruments or the cash flows deriving
from them. Our risk management policies and those of each of our businesses seek to limit the adverse effects of these market risks on
the financial performance of each of our businesses and, consequently, on our consolidated financial performance. Each of our businesses
bear responsibility for the establishment and oversight of their financial risk management framework and have adopted individualized risk
management policies to address those risks specific to their operations.
Our primary market risk exposures are to:
|
• |
currency risk, as a result of changes in the rates of exchange of various foreign currencies (in particular,
the Euro and the New Israeli Shekel) in relation to the U.S. Dollar, our functional currency and the currency against which we measure
our exposure; |
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• |
index risk, as a result of changes in the Consumer Price Index; |
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• |
interest rate risk, as a result of changes in the market interest rates affecting certain of our businesses’
issuance of debt and related financial instruments; and |
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• |
price risk, as a result of changes in market prices, such as the price of certain commodities (e.g.,
natural gas and heavy fuel oil). |
For further information on our market risks
and the sensitivity analyses of these risks, see Note 28—Financial Instruments to our financial statements included in this annual
report.
| ITEM 12. |
Description of Securities Other than Equity Securities |
Not applicable.
Not applicable.
Not applicable.
| D. |
American Depositary Shares |
Not applicable.
| ITEM 13. |
Defaults, Dividend Arrearages and Delinquencies |
None.
| ITEM 14. |
Material Modifications to the Rights of Security Holders and Use of Proceeds
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None.
| ITEM 15. |
Controls and Procedures |
Evaluation of Disclosure
Controls and Procedures
Our management, with the participation of
our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this annual report, as required
by Rule 13a-15(b) under the Exchange Act. Based upon this evaluation, our management, with the participation of our chief executive officer
and chief financial officer, has concluded that, as of the end of the period covered by this annual report, our disclosure controls and
procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in by the SEC’s rules and forms,
and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Management’s Report
on Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate
“internal control over financial reporting,” as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. These rules define internal control over financial reporting as a process designed by, or under the supervision of, a company’s
chief executive officer and chief financial officer and effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations
of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
Our management has assessed the design and
operating effectiveness of our internal control over financial reporting as of
December 31, 2022. This assessment was performed under
the direction and supervision of our chief executive officer and chief financial officer, and based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that
evaluation, management concluded that as of
December 31, 2022, our internal control over financial reporting was effective.
The effectiveness of our internal control
over financial reporting as of
December 31, 2022 has been audited by our independent registered public accounting firm and their report
thereon is included elsewhere in this annual report.
Changes in Internal Control
over Financial Reporting
During the year ended
December 31, 2022, there
have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations
of Disclosure Controls and Procedures in Internal Control over Financial Reporting
It should be noted that any system of controls,
however well-designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be
met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Projections
regarding the effectiveness of a system of controls in future periods are subject to the risk that such controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance with the policies or procedures.
| ITEM
16A. |
Audit Committee Financial Expert |
Our board of directors has determined that
Mr. Laurence N. Charney is an “audit committee financial expert” as defined in Item 16A of Form 20-F under the Exchange Act.
Our board of directors has also determined that Mr. Laurence N. Charney satisfies the NYSE’s listed company “independence”
requirements.
We have adopted a Code of Ethics that applies
to all our employees, officers and directors, including our chief executive officer and our chief financial officer. Our Code of Conduct
is available on our
website at
www.kenon-holdings.com.
| ITEM
16C. |
Principal Accountant Fees and Services |
KPMG LLP, a member firm of KPMG International,
is our independent registered public accounting firm for the audits of the years ending
December 31, 2022 and
2021.
Our audit committee charter requires that
all audit and non-audit services provided by our independent auditors are pre-approved by our audit committee. In particular, pursuant
to our audit committee charter, the chairman of the audit committee shall pre-approve all audit services to be provided to Kenon, whether
provided by our independent registered public accounting firm or other firms, and all other services (review, attest and non-audit) to
be provided to Kenon by the independent registered public accounting firm. Any decision of the chairman of the audit committee to pre-approve
audit or non-audit services shall be presented to the audit committee.
The following table sets forth the aggregate
fees by categories specified below in connection with certain professional services rendered by
KPMG LLP, and other member firms within
the KPMG network, for the years ended
December 31, 2022 and
2021 for Kenon and its consolidated entities. The figures below have been
updated from Kenon’s Annual Report on Form 20-F for the fiscal year ended
December 31, 2021 and in accordance with Section 14(a)
of the Exchange Act.
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(in thousands of USD) |
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Audit Fees(1)
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3,960 |
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3,054 |
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Audit-Related Fees
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2 |
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3 |
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Tax Fees(2)
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Total
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__________________________________________
| (1) |
Includes fees billed or accrued for professional services rendered by the principal accountant, and member firms in their respective
network, for the audit of our annual financial statements, and those of our consolidated subsidiaries, as well as additional services
that are normally provided by the accountant in connection with statutory and regulatory filings or engagements, except for those not
required by statute or regulation. |
| (2) |
Tax fees consist of fees for professional services rendered during the fiscal year by the principal accountant mainly for tax compliance
and assistance with tax audits and appeals. |
| ITEM
16D. |
Exemptions from the Listing Standards for Audit Committees |
None.
| ITEM
16E. |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
| ITEM
16F. |
Change in Registrant’s Certifying Accountant |
None.
| ITEM
16G. |
Corporate Governance |
There are no significant differences between
Kenon’s corporate governance practices and those followed by domestic companies under the listing standards of the NYSE.
| ITEM
16H. |
Mine Safety Disclosure |
Not applicable.
| ITEM 17. |
Financial Statements |
Not applicable.
| ITEM 18. |
Financial Statements |
The financial statements and the related notes
required by this Item 18 are included in this annual report beginning on page F-1. See Exhibit 15.4 of this annual report on Form 20-F
for the consolidated financial statements of ZIM,
incorporated by reference in this annual report on Form 20-F.
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Gas Sale
and Purchase Agreement, dated as of November 25, 2012, among Noble Energy Mediterranean Ltd., Delek Drilling Limited Partnership, Isramco
Negev 2 Limited Partnership, Avner Oil Exploration Limited Partnership, Dor Gas Exploration Limited Partnership, and O.P.C. Rotem Ltd.
(Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to IC Power Pte. Ltd.’s Form F-1, filed on November 2, 2015) (1)
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Share Purchase
Agreement, dated November 24, 2017, among Inkia Energy, Ltd., IC Power Distribution Holdings, PTE. LTD., Nautilus Inkia Holdings LLC,
Nautilus Distribution Holdings LLC and Nautilus Isthmus Holdings LLC (Incorporated by reference to Exhibit 4.14 to Kenon’s
Annual Report on Form 20-F for the fiscal year ended December 31, 2017, filed on April 9, 2018) |
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Qoros Automobile
Company Limited Investment Agreement, dated May 23, 2017, as amended, among Hangzhou Chengmao Investment Co., Ltd., Wuhu Chery Automobile
Investment Company Limited, Quantum (2007) LLC and Qoros Automobile Company Limited (Incorporated by reference to Exhibit 4.17 to
Kenon’s Annual Report on Form 20-F for the fiscal year ended December 31, 2017, filed on April 9, 2018) |
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101.INS* |
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Inline XBRL Instance Document |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104* |
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Inline XBRL for the cover page of this Annual Report on Form 20-F, included in the Exhibit 101 Inline XBRL
Document Set. |
____________________
| (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. |
