Kenon Holdings Ltd. — 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS and presented in U.S. dollars. Comparatives were reclassified to present the Latin American and Caribbean Inkia businesses as discontinued operations.
Business context
Kenon is a holding company. At year-end, its principal continuing interests were a 76% stake in Israeli power generator OPC, a 50% interest in Chinese automaker Qoros (reduced to 24% in a January 2018 transaction), a 32% interest in shipping company ZIM, and a 91% interest in early-stage technology company Primus. OPC generated essentially all 2017 consolidated revenue. Inkia completed the sale of its Latin American and Caribbean power and distribution businesses on December 31, 2017.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue from continuing operations | $365.7 million | $324.3 million |
| Gross profit from continuing operations | $68.5 million | $45.9 million |
| Operating profit/(loss) from continuing operations | $42.3 million | $(70.9) million |
| Loss from continuing operations | $(208.4) million | $(429.2) million |
| Profit/(loss) for the year | $268.1 million | $(394.0) million |
| Net cash provided by operating activities | $391.9 million | $162.3 million |
| Net cash provided by/(used in) investing activities | $584.5 million | $(399.6) million |
| Net cash provided by financing activities | $97.1 million | $174.6 million |
| Cash and cash equivalents at year-end | $1,417.4 million | $326.6 million |
| Total assets / total liabilities at year-end | $2,525.9 million / $1,474.5 million | $5,137.8 million / $4,243.6 million |
2017 profit included $476.6 million of income from discontinued operations, comprising $79.1 million of operating income after tax and a net after-tax gain on the Inkia sale of approximately $397.4 million. The resulting full-year profit therefore differs materially from the continuing-operations loss. The cash increase also largely reflects the Inkia disposal; cash and debt figures at year-end preceded subsequent repayments and the March 2018 shareholder distribution.
Business performance and changes
- OPC: Revenue rose 13% to $365.4 million. Operating income was $69 million, with a 19% operating margin; net income was $14 million and non-IFRS EBITDA was $86 million, up from $67 million in 2016. Generation was 3,655 GWh, versus 3,510 GWh. Higher tariffs and sales volumes helped results; U.S.-dollar translation of OPC’s shekel results also increased reported revenue.
- OPC debt and liquidity: Outstanding debt was $618 million, cash and deposits were $223 million, and reported net debt was $395 million. OPC generated $114 million of operating cash flow. Its Hadera cogeneration project was 83% complete at year-end; completion cost was estimated at about $288 million, with commercial operation expected in the first half of 2019.
- Qoros: Revenue fell 25% to RMB1.886 billion and vehicle sales declined to about 15,000 from 24,000. Its net loss narrowed to RMB1.612 billion from RMB1.897 billion. Qoros had RMB4.8 billion of borrowings excluding shareholder loans, RMB77 million of cash, and RMB3.3 billion of current liabilities excluding shareholder loans.
- ZIM: It returned to profitability, reporting $11 million net income versus a $164 million loss in 2016, on revenue of $2.978 billion versus $2.539 billion. Kenon recorded approximately $10 million of ZIM-related equity-method income, compared with a loss in 2016, and reversed $29 million of its prior ZIM impairment.
- Primus: It generated no material operating revenue and had approximately $0.3 million cash at year-end. Kenon provided a further $3 million convertible-note investment in January 2018.
Liquidity, debt and material transactions
- The Inkia sale was reported at approximately $1.332 billion, including $222 million of cash retained in the business and a $175 million deferred payment obligation bearing 8% interest, payable in kind. The deferred payment was due in December 2021 and carries collection and subordination risk. Estimated transaction expenses, compensation and taxes were approximately $263 million.
- At Kenon’s standalone level, year-end cash was approximately $62 million and gross debt was $240 million. Kenon used sale proceeds in January 2018 to repay the IC credit facility, including interest and fees, and the Overseas Investment Peru facility. It distributed $665 million, or $12.35 per share, to shareholders in March 2018.
- Qoros’s January 2018 investment by the Baoneng-related investor gave it a 51% stake and reduced Kenon’s interest to 24%. The investment structure provided RMB6.63 billion of funding, including an equity capital increase, and contemplated repayment of RMB944 million of shareholder loans to each of Kenon and Chery. Kenon reported that it expected an approximately $286 million dilution gain in the first half of 2018. Kenon also holds a put option over some or all of its remaining Qoros stake, with stated maximum consideration of approximately RMB3.12 billion ($495 million), subject to terms and adjustments.
- Kenon’s Qoros back-to-back guarantees to Chery had been reduced to RMB320 million, relating to RMB288 million of principal, by year-end. Substantially all of Kenon’s Qoros interest remained pledged; additional releases depended in part on lender consent.
Outlook, risks and contingencies
- The filing provides no consolidated earnings or revenue guidance. Management’s stated strategy emphasizes developing and monetizing existing businesses, disciplined capital allocation and potential distributions or listings.
- OPC’s profitability is exposed to Israeli electricity tariffs, natural-gas pricing floors, exchange rates and inflation-linked debt. Its Tamar gas pricing dispute proceeded to arbitration; OPC-Rotem had deposited $21.75 million in escrow, and the Tamar parties sought $33 million plus interest. Outcome and final exposure were uncertain.
- OPC’s Hadera project faces construction, financing, customer and gas-supply execution risks. Tzomet, acquired in March 2018, still required regulatory approvals and a generation license; the filing describes concerns raised by the Israeli Concentration Committee.
- Qoros continued to incur losses and negative operating cash flow and depended on increased sales, refinancing and the new investor’s funding and purchase-order commitments. Its 2018 debt maturities, lender consents, guarantees and pledged assets were material risks. The filing noted that first-quarter 2018 sales included orders introduced by the new investor.
- ZIM remained highly leveraged, with approximately $1.5 billion of debt and liabilities and $313 million of principal scheduled for repayment in 2018. Covenant testing resumed in March 2018 after waivers; shipping rates, fuel costs, capacity oversupply and refinancing remained key uncertainties.
- Kenon retained indemnification obligations for the Inkia sale, supported by a pledge of 25% of OPC’s shares, the deferred payment obligation and a three-year Kenon guarantee. Enforcement or set-off could reduce proceeds or liquidity. Other retained claims include a Peru investment-treaty claim exceeding $150 million and Guatemala tax-related claims; recovery was uncertain.
- The filing reports that management and the auditor considered Kenon’s disclosure controls and internal control over financial reporting effective at year-end, and the auditor issued an unqualified opinion on the financial statements. The filing also flags that audit work relating to Qoros in China was not subject to PCAOB inspection.
Most important facts for investors to verify
- Separate recurring continuing-operations performance from the Inkia sale gain and other discontinued-operations effects; confirm the final sale-price adjustments, taxes and expenses.
- Track receipt and credit quality of the $175 million deferred sale consideration, accrued in-kind interest, and any indemnity claims or OPC-share pledge enforcement.
- Confirm Qoros’s actual capital contributions, shareholder-loan repayments, put-option valuation and exercise terms, lender consents, guarantee releases and sales excluding investor-introduced orders.
- Monitor OPC’s Hadera completion, cost and commercial-operation timing; Tzomet licensing; and resolution of the Tamar arbitration and escrow.
- Assess ZIM’s 2018 debt repayments, covenant compliance, liquidity and refinancing progress, and distinguish ZIM’s debt from Kenon’s consolidated liabilities.
- Review Kenon’s cash and obligations after the January 2018 debt repayments and March 2018 distribution; year-end cash is not a post-distribution liquidity figure.