Kenon Holdings Ltd. — FY2018 Form 20-F
Reporting period: Year ended December 31, 2018. Although the request refers to 2018 Q4, this filing is an annual report, not a quarterly filing. Financial statements are prepared under IFRS and presented in U.S. dollars.
Business context
Kenon is a holding company. OPC Energy, in which Kenon held 76%, generated virtually all consolidated revenue. Kenon also held 24% of Qoros, 32% of ZIM and 91% of Primus. The Latin American and Caribbean Inkia power business was sold in December 2017 and is reported as discontinued operations, affecting comparability with prior periods.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $364 million | $366 million |
| Gross profit | $75 million | $68 million |
| Profit from continuing operations | $450 million | Loss of $208 million |
| Net profit | $445 million | $268 million |
| Net cash from operating activities | $52 million | $392 million |
| Cash and cash equivalents at year-end | $131 million | $1.417 billion |
| Total assets | $1.455 billion | $2.526 billion |
| Total liabilities | $739 million | $1.475 billion |
| Total equity | $716 million | $1.051 billion |
- FY2018 net profit included a $504 million accounting gain on the third-party investment in Qoros, partly offset by a $40 million fair-value loss on the Qoros put option. The result is therefore not a straightforward measure of recurring earnings.
- Net cash used in investing activities was $113 million and net cash used in financing activities was $1.218 billion. The financing outflow included the $665 million capital distribution, $100 million dividend and repayment of $418 million of loans.
- Kenon distributed $765 million to shareholders in 2018. Cash fell substantially from year-end 2017, largely following these distributions and debt repayments.
- Kenon reported approximately $38 million of standalone cash and no material gross debt. Consolidated cash and debt figures include operating subsidiaries; consolidated debt was primarily OPC’s.
- OPC reported revenue of $363 million, net income of $26 million, EBITDA of $91 million and net debt of $401 million. Its reported operating margin increased to 21% from 19%. OPC’s $587 million gross debt is at the subsidiary level.
Changes versus prior comparable period
- Revenue was nearly flat year over year, while gross profit increased. Lower OPC cost of sales and lower group selling, general and administrative expenses contributed to improved continuing results.
- The prior-year cash balance included proceeds from the Inkia sale; 2017 cash from operating activities also included discontinued operations. The large reported year-over-year declines in cash and operating cash flow should be read in that context.
- OPC-Rotem completed a planned major overhaul in September–November 2018, halting generation for about 48 days. Lower generation reduced electricity generated for sale and increased purchases of replacement electricity.
- Qoros vehicle sales rose to approximately 62,000 from 15,000 in 2017, but Qoros’s net loss increased to approximately $330 million from $242 million. Kenon’s recognized share of associated-company losses was $78 million.
- ZIM moved from an $11 million net profit in 2017 to a $120 million net loss in 2018; Kenon recognized approximately $27 million of ZIM losses. ZIM revenue increased, but higher bunker, charter and cargo-handling costs contributed to the loss.
Outlook, risks and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. OPC-Hadera was expected to reach commercial operation in the third quarter of 2019 after construction delays. Tzomet’s planned 396 MW plant remained subject to approvals, interconnection and financing; a conditional license was announced in April 2019, subject to further conditions.
- In January 2019, Kenon agreed to sell 12% of Qoros for approximately $227 million, subject to consents and other closing conditions. If completed, Kenon would retain 12%; the filing estimated an approximately $133 million disposal gain for 2019 and a change from equity accounting to fair-value accounting.
- Qoros had RMB5.1 billion (approximately $742 million) of borrowings, negative operating cash flow and significant near-term financing needs. Kenon’s remaining back-to-back guarantee to Chery was RMB288 million (approximately $44 million), and substantially all of Kenon’s Qoros shares were pledged in connection with Qoros debt.
- ZIM had approximately $1.5 billion of debt, including $292 million of principal scheduled for repayment in 2019. Its financial covenants had been waived or amended through 2019, with certain requirements reinstating in 2020; minimum liquidity remained applicable.
- The $175 million deferred payment from the Inkia sale had grown to $189 million at year-end through 8% in-kind interest. It is subject to credit risk and may be offset against qualifying Inkia-sale indemnity claims. Kenon also guaranteed certain seller indemnification obligations, supported by a pledge of OPC shares.
- OPC’s Tamar gas-price dispute remained in arbitration. Approximately $22 million was held in escrow; the Tamar partners sought payment of about $33 million. The arbitrator’s decision was pending after a February 2019 hearing.
- Other material risks include OPC’s dependence on a sole current gas supplier and concentrated customers, Israeli tariff and regulatory changes, construction and licensing risks, and exposure to foreign exchange and CPI movements. ZIM faces volatile freight and bunker prices, industry overcapacity and the 2020 sulfur-emissions rules.
- The company reported effective disclosure controls and internal control over financial reporting. KPMG issued unqualified opinions on the consolidated financial statements and internal controls.
Most important facts for investors to verify
- How much of FY2018’s $445 million net profit reflects recurring operations versus the $504 million Qoros accounting gain and other non-recurring items.
- Kenon’s remaining unrestricted parent-company cash and ability to meet guarantees, indemnity commitments and any further support needs without relying on subsidiary distributions or asset sales.
- Completion, proceeds and guarantee/pledge releases associated with the proposed Qoros share sale; Qoros’s funding, covenant waivers, debt repayments and customer concentration.
- ZIM’s refinancing and covenant position, 2019 debt repayments, liquidity headroom and ability to recover margins as bunker and charter costs change.
- Outcome of the Tamar arbitration and any other indemnity claims relating to the Inkia sale, including potential recourse to pledged OPC shares and the deferred payment receivable.
- OPC-Hadera’s actual commissioning date and cost, Tzomet’s approvals and financing, and OPC’s performance against gas supply, tariff and customer concentration risks.