Business Context and Reporting Period
Company: Kenon Holdings Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2016
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: Kenon is a holding company formed in 2014 following a spin-off from Israel Corporation Ltd. (IC). Its primary assets include a 100% interest in IC Power (power generation and distribution in Latin America, the Caribbean, and Israel), a 50% interest in Qoros (Chinese automotive manufacturer), a 32% interest in ZIM (global container shipping), and a 91% interest in Primus (natural gas-to-liquids technology). Kenon sold its remaining interest in Tower Semiconductor in 2016.
Key Financial Metrics (Year Ended Dec 31, 2016)
| Metric | 2016 (USD Millions) | 2015 (USD Millions) |
|---|---|---|
| Revenues | $1,874 | $1,289 |
| Gross Profit | $355 | $315 |
| Operating Profit (Continuing Ops) | $152 | $456 |
| Net Loss (Continuing Ops) | $(394) | $96 |
| Net Loss (Total) | $(394) | $96 |
| Net Loss Attributable to Kenon Shareholders | $(412) | $73 |
| Adjusted EBITDA (Consolidated) | $396 | $373 |
| Net Cash Provided by Operating Activities | $162 | $290 |
| Total Assets | $5,138 | $4,483 |
| Total Liabilities | $4,244 | $3,219 |
| Equity Attributable to Owners | $681 | $1,061 |
Note: 2015 results included a one-time gain of $210 million from the distribution of a dividend in kind (Tower shares) and a gain of $609 million from the deconsolidation of ZIM. 2016 results were negatively impacted by a $72 million impairment of the ZIM investment and a $130 million provision for financial guarantees related to Qoros.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 45% to $1.874 billion, driven primarily by IC Power's acquisition of Energuate (Guatemalan distribution business) in January 2016 and increased generation capacity in Peru (Samay I and CDA plants).
- Profitability Decline: Despite revenue growth, the company reported a net loss of $394 million compared to a net profit of $96 million in 2015. This reversal was due to:
- Non-recurring gains in 2015 (Tower distribution and ZIM deconsolidation) not present in 2016.
- A $72 million impairment charge on the investment in ZIM.
- A $130 million provision for financial guarantees related to Qoros.
- Increased share of losses from associated companies (Qoros and ZIM).
- Debt and Liquidity: Total liabilities increased significantly to $4.244 billion. IC Power's net debt rose to $2.764 billion. Kenon's unconsolidated cash position was approximately $102 million as of year-end, with the IC Credit Facility fully drawn.
- Segment Performance: IC Power Generation remained the primary profit driver with Adjusted EBITDA of $343 million. IC Power Distribution (Energuate) contributed $77 million in Adjusted EBITDA. The "Other" segment (including Qoros and ZIM) reported a loss of $272 million.
Guidance, Outlook, and Risks
Management Commentary and Strategy:
- Capital Allocation: Kenon intends to refrain from "cross-allocating" proceeds between businesses. The strategy focuses on realizing value through potential listings, distributions, or monetization of subsidiaries (specifically IC Power and Qoros).
- IC Power IPO: IC Power commenced a roadshow for an IPO in January 2017 but withdrew it due to market conditions.
- Qoros Support: Kenon has provided shareholder loans to Qoros to reduce its back-to-back guarantee exposure. Qoros requires additional financing to meet operating expenses and debt service; failure to secure this could lead to default and enforcement of Kenon's guarantees.
Key Risks and Contingencies:
- Qoros Liquidity: Qoros is highly leveraged (RMB 5.5 billion debt) and cash-flow negative. Kenon faces potential liability under back-to-back guarantees to Chery (up to RMB 425 million) if Qoros defaults.
- IC Power Leverage: IC Power has $3.1 billion in outstanding indebtedness. It faces refinancing risks and is subject to strict covenants. Regulatory changes in Israel (tariff reductions) and Peru (oversupply of capacity) pose margin risks.
- ZIM Impairment: The container shipping industry is volatile. Kenon recognized a $72 million impairment in 2016; further impairments are possible if market conditions deteriorate.
- Legal and Tax: IC Power faces significant tax disputes in Guatemala (Energuate) and Peru (Kallpa import taxes), totaling over $100 million in potential exposures. There are also ongoing disputes regarding gas supply tariffs in Israel.
Investor Verification Checklist
- Qoros Solvency: Verify Qoros's ability to secure the additional financing required to meet debt service obligations and avoid triggering Kenon's guarantee liabilities.
- IC Power Refinancing: Monitor IC Power's ability to refinance maturing debt facilities (e.g., ICPDH Credit Agreement) and compliance with financial covenants given high leverage.
- Guatemalan Tax Dispute: Track the status of the $74 million tax payment made by Energuate to the Guatemalan Tax Administrator (SAT) and the likelihood of restitution.
- IC Power IPO Status: Confirm whether IC Power will re-attempt an IPO or pursue alternative monetization strategies given the withdrawal of the 2017 roadshow.
- ZIM Market Conditions: Assess the stability of global freight rates and bunker prices to determine the risk of further impairment charges on the ZIM investment.
- Regulatory Tariffs: Monitor updates to the Israeli Electricity Authority (EA) generation component tariffs and their impact on OPC-Rotem's margins.